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Golden opportunities in the MINT - Mexico, Indonesia, Nigeria, Turkey

First publishedin GLOBAL REPORT Construction Equipment
2015
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Mexico congested city
Mexico City is one of the world's largest and most congested cities
Mexico, Indonesia, Nigeria, Turkey – Global Report offers up some food for thought about where smart money might be headed within the next several years – David Arminas writes

China’s rate of growth may be slowing down, but other South East Asian companies are being quick to offer alternate investment opportunities, notably Indonesia.

Nigeria, too, has had issues with security of investment. But there are signs that the government may be getting serious at last about tightening up rules and regulations to attract more money into one of Africa’s largest and most dynamic economies. Turkey has long been a favoured place for foreign capital investment, as well as a dynamic staging post for investment by Turkish subsidiaries further afield in the Middle East.

Despite the war raging across its border into Syria, Turkey’s economy remains stable, a good sign for continued investment in a region where security is often a deciding factor for foreign companies.

MEXICO

Mexico recently kicked off a major transportation infrastructure construction programme with the announcement of a new airport for the capital Mexico City. The $9.2 billion three-runway airport - expandable to six runways - will handle up to 50 million passengers annually, well above the current airport that handles around 32 million a year.

The announcement was greeted with enthusiasm by the construction industry. “The fact that the government is talking about projects of this size is good news. It means public investment is going to go up,” Alonso Quintana, chief executive officer of Empresas ICA SAB, Mexico’s largest construction company, told Bloomberg news agency.

President Enrique Peña Nieto, who made the announcement last year, indicated that his government priority is building infrastructure “so that the benefits can be seen and felt in the daily lives of Mexicans”.

When it comes to infrastructure development, Mexico lags behind other parts of the world and even some Latin American countries. A World Economic Forum competitiveness index ranked Mexico 61 out of 144 countries. Peurto Rico was ranked 32, Chile was 33, Panama was ranked 48, Costa Rica was 51 and Brazil was 57.

The airport is only the tip of the construction iceberg expected to result from the government’s four-year plan to invest $590 billion in infrastructure. Poor infrastructure has held back the economy and the programme’s 743 projects in areas such as energy, land development, transport and communications, health and tourism should correct this deficiency, according to the US-based industry think tank Council of the Americas. A lot is already planned or in the construction phase, especially around Mexico City.

The capital will also get a second 13.3km level to the Mexico-Puebla highway, due for completion in July 2016. A second 7.7km level to the highway to Cuernavaca should be finished in 2018.

Rail projects include a Mexico City- Querétaro high-speed train along a 210km track where trains will touch around 300kph – a price tag of $3.3 billion. A Mexico City- Toluca interurban train project involves nearly 58km of new track from Mexico City to Toluca, at a cost of $2.9 billion. A yet-to-be planned trans-peninsular train will run from Merida to Playa del Carmen via Cancún, costing around $2.4 billion to build.

According to the infrastructure plan, the government will cover 63% of the costs and the rest will come from private investment. A federal public-private partnership law was enacted in December 2013 that was designed to boost investor confidence that their investment is safe and payback times are not simply pie in the sky.
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new road links in Mexico
A series of new road links will help boost transportation right across Mexico
A major market for heavy construction equipment purchases and rentals has been, and will continue to be, the mining sector, according to the analysts Market-Intelligence. The mining sector in Mexico generates 328,000 direct jobs and around 1.5 million indirect jobs. Despite the weak global economy, Mexican and foreign investors are confident that the mining activity in the country will continue.

The Mexican mining industries have increased imports of highly specialised exploration equipment, heavy truck and machinery, material handling machinery and their parts. Caterpillar recently capitalised on this optimism in the mining sector by investing $500 million in a new plant at Cienega de Flores in Nuevo Leon, producing components for off-highway trucks, excavators and bulldozers.

According to business analysts Timetric, commercial construction has a positive outlook, supported by tourism-related construction and heightened demand for office space, particularly class-A buildings. Timetric’s report Road Infrastructure Construction in Mexico to 2018: Market Data-book suggests that rising income and a growing young population will also incentivise retail space expansion. The industrial sector has grown in part due to access to the United States, prompting the emergence of industrial parks in the north and central regions. But future investment, both foreign and domestic, hinges on Mexico’s new public-private partnership law, according to a report by the international law firm White & Case. “It is likely that Mexico will become a significant infrastructure market in the next five years,” the report says. “Any uncertainties around this untested federal PPP framework are balanced by the fact that the framework is well-structured, based on proven models from other jurisdictions and there is m
omentum and appetite to ensure the success of this new regime.”

The maximum term of a PPP is 40 years. The law stipulates that the project company is entitled to request a revision of the PPP contract if there is an anticipated substantial increase in project costs or a substantial reduction of the benefits of the project.

A big change is the move toward the project company having the right to arbitration or judicial review if contracting authority terminates. This was not set out in law before. Also, in the case of a dispute, a neutral country may be selected to host the arbitration.

Projects underway include 110 of the country’s 128 planned bridges. Other projects on schedule include construction of the 90km Ayutla-Colotlipa road, the Acapulco- Zihuatanejo road and the 43km Libramiento Nor-Poniente ring road in Acapulco, all due for completion in 2017. Construction of the Izucar de Matamoros-Tlapa road will start this year, as will work on the 300km Camino Filo Mayor road.

INDONESIA

Within Asia, China remains a massive market for equipment manufacturers but there are concerns over the slowing growth rate of its economy. Indonesia, on the other hand, is fast becoming a major focus for global construction companies, although with some rejoinders.

The latest Asia region review by consultancy AECOM shows the largest Asian economies grew by around 6% in 2013, but this was slightly less than 2012.

Over the longer term, AECOM’s research showed the strongest construction spending growth will continue to be in China but include India, Vietnam and Indonesia to at least the end of the decade. Importantly, “the near term focus is on Indonesia and China,” the report noted.

Construction spending in Asia accounted for 44% of global spend in 2013. Within Asia, China was the giant, spending $1,800 billion. Second was Japan at $742 billion, with India third at $427 billion. Indonesia had the fourth largest spend, at $267 billion, having moved past Korea whose $154 billion makes it the fifth largest by spend.
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Construction activity in Thailand
Construction activity is strong in Thailand, fuelling demand for locally sourced aggregates
Indonesia is among the countries whose construction spending is forecast to grow at above the regional average of 4.4%. The other countries are China, Vietnam, India, Bangladesh and Thailand over the coming five years. But throughout the region there is an increasing investment risk because of rising debt levels at government and corporate level. Projects could stall and payments delayed if there is a withdrawal of credit facilities, nationally or regionally, warns AECOM.

There has also been some concern over the profitability of operating within Indonesia’s high-inflation economy, as well as that of Thailand, during 2014. Indonesia’s central bank, Bank of Indonesia, had targeted an inflation rate of 4.5%, with a 1% deviation for 2013. But the actual rate was almost 8.4%. The target for 2014 also was 4.5% and again, this could be missed. In November 2014 it was 6.3%, which could be the average for the year, according to figures from Statistics Indonesia.

But a closer look at Indonesia’s economy shows exchange rate issues. According to Indonesia Investments, part of financial consultancy Van der Schaar Investments in Delft, the Netherlands, the Indonesian rupiah exchange rate devalued to break through the “psychological boundary” of 12,000 per US dollar in mid-2013.

Significantly in 2014, the new Indonesian government shelved construction of the 30km Sunda Strait Bridge that would have connected the islands of Sumatra and Java – a $23 billion project. The structure, a dream of Indonesia’s political elite since the 1960s, was to have had three lanes of traffic in each direction, twin rail tracks and cabling for telecommunications and

telecommunications and electricity. Recently elected President Joko Widodo reportedly said that a Sunda Bridge would benefit only middle class Indonesians. Other options to better connect the two islands will be explored, including buying more ferry ships and upgrading shipping freight ports. The production of heavy equipment in Indonesia in the first half of 2014 fell by 25% year-on-year to 2,292 units, Indonesian Investments reported last July.

The drop is due to the still weak state of the mining and construction sectors. Main reasons being the implementation of the mineral ore export ban in January 2014 and low commodity prices, for example coal.

Limited construction projects have been undertaken in the first half of 2014 as investors wanted to wait for the results of Indonesia’s legislative and presidential elections first. Most of the heavy equipment sold in the first half of 2014 was bought by companies engaged in forestry.

Komatsu sole distributor United Tractors, Indonesia’s largest distributor of heavy equipment, controls a market share between 40-45%. In September the company revised its annual sales target from 4,500 units down to 4,000, a decline of 5% on 2013 numbers. In 2011, United sold nearly 8,500 units.

A report by the Nikkei Asian Review said United blamed the continuing slump on the weak demand from mining companies, the main buyers of dump trucks and excavators. Coal mines in particular, who saw their profits plunge due to declining selling prices, cut back on equipment orders. The new mining law implemented by the Indonesian government in January, which banned nickel and iron ore exports, also slowed sales, United said.

The market for heavy equipment in Indonesia has never been driven by public sector infrastructure investment. Many of the machines operate in the resources sectors of coal mining, forestry, plantation agriculture, especially that for palm oil, according to UK-based Off Highway Research. Before 2011, public works were noticeable by their absence, with the exception of some housing and commercial office development.

The crawler excavator has traditionally been the machine of choice as an all-purpose vehicle. In 2011 they accounted for 56% of all heavy equipment units sold. Crawler dozers were in second place, accounting for nearly 70% of all mobile construction equipment sold that year. But mini excavators sales are miniscule, thanks to the country’s abundance of cheap labour, Off Highway reported. Crawler dozer sales are linked to demand within the coal mining industry, notably on the island of Sumatra and Kalimantan, the Indonesian area of the island of Borneo.

Also, the humble agriculture tractor is making inroads as agricultural prices rise and owners of established plantations need reliable but strong all-round maintenance vehicles for often rough terrain.

Import tariffs have declined to around 5% on most items but global manufactures continue to expand production within Indonesia. Among them are Komatsu, Caterpillar, Hitachi, Sakai and Sumitomo. Chinese manufacturers, while not yet producing in Indonesia, continue to be highly competitive. However, last September Chinese heavy equipment maker SANY Group said it has earmarked around $200 million to build an Indonesian plant in an effort to crack the South East Asian market, including Australia and Japan. SANY will work through its Indonesian subsidiary SANY Heavy Industry to build the plant in the Cikarang Industrial Zone in West Java. SANY would produce up to 1,000 heavy equipment units a year.
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Lagos, Nigeria’s economic centre
Nigeria's economic centre still focuses on Lagos, although the city is no longer the country's capital

NIGERIA

Nigeria is Africa’s most populous country, accounting for approximately one-fifth of its people and 2.4% of world population. Nigeria’s road network, nearly 195,000km, is the largest in West Africa and the second largest south of the Sahara. Around a third, 64,000km, are federal and state roads, while two thirds are local and rural.

Road transportation accounts for more than 80% of passenger and freight movement in the country. However, “a huge proportion of this network is buckling under the strain”, according to the Nigerian Investment Promotion Commission, a federal government agency that promotes and coordinates investment in Nigeria. The agency also grants business entry permits, licenses and authorisations.

To manage private public partnership projects – a major investment opportunity for road construction and maintenance – the government also set up the Infrastructure Concession and Regulatory Commission. There also is a heavy emphasis on the building of toll roads, notes the Nigerian Investment Promotion Commission. PPP is also being used to construct and upgrade rail, maritime and air transport infrastructure. Financial investment is encouraged by allowing 20% of the cost of providing basic infrastructures such as roads, water, electricity, where they do not exist, as tax deductible.

For manufactures, including heavy equipment makers, there is a 10% tax concession for five years to encourage local fabrication rather than just assembly of imported parts. A further 2% tax concession for five years is allowed for inplant training of employees. For some manufacturing companies, given a “Pioneer” status, there is a tax holiday of three to five years.

Nigeria also set up the Lekki Free Trade Zone programme in 2004, a series of low tax areas for businesses in the sectors of manufacturing, real estate and tourism. The largest zone, next to the port city of Lagos, is home to a $9 billion Dangote Group refinery. Nigeria’s imports are already dominated by machinery, transport equipment, manufactured goods, and commodities. The demand for heavy equipment looks set to continue, especially as less than 30% of roads are paved and all lack regular maintenance. Since 2013, Nigerian federal, state and local governments have focused on repairs and reconstruction of roads, building homes for Nigeria’s growing populace and beginning construction work on new towns and Lekki zones.

A report entitled Doing Business in Nigeria, by the US Commercial Service, part of the federal Department of Commerce, noted that the Federal Housing Authority and some state housing ministries are determined to build affordable homes for Nigeria’s rapidly growing population – already approaching 180 million. Nigeria’s federal government estimates that at least 800,000 housing units will be built in the next few years and charged the Federal Housing Authority to see it gets done. Key cities for home building are the capital Abuja, Lagos, Port-Harcourt, Ibadan, Uyo, Calabar, Asaba and Owerri. In Lagos, construction work is well underway on a new city being built on reclaimed land called Eko Atlantic City. Abuja, too, is expanding rapidly.

According to the US report, the government wants more private firms engaged in mining projects, which likely will translate into a need for more heavy construction machinery. The country does have considerable mineral reserves, with plenty of scope remaining for development. However, US manufacturers face stiff competition from Chinese and European firms who offer prospective buyers financial incentives in the form of cheap financing and often lower prices. But by the US Commercial Service offers a word of caution. Enforcement of intellectual property rights remains a problem in Nigeria, despite copyright laws and enforcement efforts. Also, clearance of equipment at ports of entry can be “slow, cumbersome and highly bureaucratic”. Corruption of officials and general congestion are significant issues at the ports. A report by the Lagosbased business publication Ships & Ports noted that the government continues to waive import duties on heavy equipment and spare parts used for all kinds of infrastructure work.

On top of this, last February president Goodluck Jonathan announced the National Integrated Infrastructure Master Plan that will see $2.9 trillion spent over the next 30 years.

Road projects include the construction of a second Lagos Outer Ring Road and Section V of the A121 East-West Highway. China Civil Engineering Construction picked up the Section V contract, worth around $1.07 billion. The work within Nigeria’s Niger Delta area is expected to take five years and includes design as well as construction.

When it is complete, the A121 will connect to Nigeria’s main North-South highway. Construction of this section of highway is of prime economic importance for Nigeria, as it will improve links to the oil producing region that provides the basis of much of the country’s economy. The East-West link is around 65% complete, according to reports from Nigeria.
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Third Bosporus Bridge in Turkey
The Third Bosporus Bridge is one of several major infrastructure projects underway in Turkey

TURKEY

Despite being a northern neighbour of Syria, a country wracked by civil war and religious extremism, Turkey remains politically and economically stable. This bodes well for foreign investment on infrastructure projects and resource development – key areas of heavy equipment use - and imports of such material.

Recep Tayyip Erdogan won the presidential election in 2014 after serving as prime minister since 2003. He has dealt with alleged challenges from the powerful, secularist military. The economy has enjoyed strong growth, fuelled by trade and foreign investment. Tourism, agriculture and manufacturing are key sectors.

In 2007 demand for new construction equipment reached its highest recorded level of nearly 12,000 units, equating to a fourfold increase within five years, according to Off Highway Research. Much government investment stimulated the construction industry, particularly house building and energy sectors.

During the first half of 2008, the market began slipping away. There was political uncertainty surrounding the left-leaning religious governing AKP party, a dramatic rise in the rate of VAT applied to leasing transactions and a sharp decline in foreign direct investments, new equipment volumes in most product sectors fell by up to 50%.

By 2009 new equipment demand was at its lowest level since 2003, just 4,300 units. Then, in the last quarter of 2009 and following strong growth in the domestic economy coupled with the start of many infrastructure projects, the market bounced back, posting growth of 83% in 2010. By 2012, sales in many product sectors rose another 10% over 2011. Many customers had postponed their purchases until a decrease in the VAT leasing rate from 8% to 1% in early 2012.

Turkey continues down a path of major infrastructure investment. In October 2013, Istanbul opened the Marmaray Rail Project, constructed by a Japanese-Turkish consortium led by Taisei Corporation, including Kumagai Gumi, Gama Endustri Tesisleri Imalat ve Montaj, Nurol Construction. Work involved a 13.6km tunnel beneath the Bosporus Strait and the upgrade of 63km of suburban rail lines to create a 76.3km high-capacity passenger line between the Europe and Asian sides. A major road infrastructure project is the so-called Third Bosporus Bridge, part of the projected 260km Northern Marmara Motorway which will bypass Istanbul’s northern urban areas. Construction of the $2.5 billion road and rail bridge is by a consortium of the Turkish company İçtaş and the Italian company Astaldi that won the bid on May 30, 2012.

But, as the UK’s Economist newspaper reported in October 2013, some projects may be a dream too far, such as President Erdogan’s desire to dig what he himself once called the “crazy canal”. The 50km canal on the European side would link the southern Sea of Marmara to the Black Sea in the north in an effort to divert tanker traffic away from the Bosporus and diminish pollution and the risk of collisions in the sinuous waterway. However, green and environmental activists – an increasingly vociferous and politicised group in the country -- say it could destroy entire ecosystems in the Black Sea and Marmara Sea.

Gathering speed is the construction phase of the Trans Anatolian Natural Gas Pipeline (TANAP) project, a major gas pipeline to be built from Azerbaijan’s Shah Deniz field through Turkey to the country’s border with Europe.

Last December the TANAP consortium announced the construction contractors are the Fernas Insaat, the Sicim-Yuksel-Akkord consortium and Tekfen Holding. They will build three sections running from the border with Georgia to the Turkish city of Erzurum, from Erzurum to the city of Sivas and from Sivas to the city of Eskisehir.

But losing momentum is construction of Istanbul’s third airport in a heavily forested area near Terkos Lake, 50km north of the city. Construction has stopped while a court reviews arguments by local residents and environmental groups that the project would cause serious damage to the environment. The Cengiz-Kolin-Limak-Mapa-Kalyon Consortium, a Turkish joint venture, won the build-operate tender after bidding $33 billion for a 25-year lease. The first stage of construction is set for completion in four years and the facility is projected to handle 150 million passengers a year when fully operational.

By heavy equipment market sector, mini excavators have not sold well because of cheap labour costs. But this has been changing because of more European-style labour restrictions and an increasing demand for faster and more efficient working on tight inner city projects such as cable laying and maintenance. Backhoe loaders have traditionally been the backbone of equipment sales, amounting to up to a third of all units. They are especially sought after by owner-users to ensure a steady income.

The demand for asphalt pavers has grown thanks to the release of government funds for road construction starting in 2011. But up to half of sales will be made to Turkish contractors with work in Iraq, Afghanistan, Ukraine and other countries, according to Of Highway Research. The market for new pavers in Turkey is also influenced to a significant extent by the import of second-hand units from Germany.

Manufacturers should not hold their collective breath over Turkey’s accession to the European Union, for which negotiations remain convoluted, thanks to human rights issues as well as disputes with Greece over a politically divided Cyprus. The previous close economic ties with Israel have deteriorated, too.

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