Gulf Coast Industrial Boom: High Expectations, but Will Labor Constrain It?

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Researched by Industrial Info Resources (Sugar Land, Texas)--At the beginning of the third quarter of 2014, Industrial Info was tracking 1,039 capital projects worth more than $245 billion that had begun construction or were planned to begin construction between 2013 and 2018 in the Texas, Louisiana and Mississippi Gulf Coast region. This is an increase of more than 40 projects and $11.98 billion in total investment value from the second quarter. The expectations are high!

A substantial amount of this growth in planned project spending occurred in the Greater Houston area, which added $4.22 billion in planned projects during the quarter, as well as in Greater New Orleans, which added $3.2 billion. Planned spending in the Gulf Coast region's most active metropolitan region, Lake Charles, remained relatively flat between quarters, at $70.1 billion in planned spending.

Strained Craft Labor Market
As industrial project activity grows, the area's labor market continues to tighten. In 2012, 104 million craft labor hours were worked in the region, and with current project schedules, labor demand is expected to peak in 2016, rising more than 75% to 185 million hours required. Planned maintenance activity at operating plants in the heavily industrialized area is an existing, substantial pull on the Gulf Coast region's skilled craft labor force.

The region is already experiencing labor shortages, and with the potential rise in labor demand being planned, Industrial Info expects to see a larger population of projects be canceled or moved into the future due to the lack of a skilled labor force. Although recruitment efforts are stepping up and training facilities are being built, these efforts will not completely fill the void of what's needed to build out the planned projects.

In an already tight labor market, how will the Gulf Coast region cope with the substantial amount of project activity on the horizon?

Our expectation is that labor will come from all parts of the country, especially metropolitan regions where IIR has identified high decreases in demand. As project activity peaks out across other areas of the country, labor from these regions will gravitate toward the Gulf Coast, particularly areas such as Houston, Lake Charles and Corpus Christi, which show substantial growth in labor demand, but the region still faces a substantial labor deficit. Secondly, we expect that a higher number of projects will be awarded to union contractors.

Industrial Info is already observing delays and outright cancelations of major capital projects in the region, as project owners re-evaluate projects' economic feasibility due to escalating labor and equipment costs.

In the most recent quarterly update of our Gulf Coast Region Labor Market Analysis, Industrial Info saw $8.9 billion of projects that were moved to an on-hold or canceled status. Even as new projects are planned for the area, we expect increasing numbers of these projects to be put on hold, pushed out to a later date, or canceled--what Industrial Info refers to as project fallout.

Increased Project Fallout
One of the most telling signs of a potential increase in delayed and canceled projects in the Gulf Coast region is the low rate of project fallout. In the 12 months from July 2013 to June 2014, Industrial Info recorded a project fallout rate of 46% for the entire U.S.--that is, 46% of the total value of planned projects fell out because projects were delayed, put on hold, or canceled. However, in the 11 metropolitan areas covered in the Gulf Coast Labor Analysis, project fallout was a very low 15.4%, a significant difference compared to the rest of the U.S. However, as we move closer to this peak construction period, further delays and cancelations will occur, particularly as the region's labor market grows ever tighter.

The potential rise in labor rates will be the reason why some owners cancel projects. The multibillion-dollar LNG plants can sustain an increase in labor costs, due to the longer payback period on investment. These projects are more likely to be delayed because of funding and permitting issues.

Knowledge at Your Fingertips
Industrial Info's unique research methodology allows us to track existing and planned capital and maintenance projects closely, giving first-hand knowledge of which projects are likely to move forward and which will not--an extremely important variable when forecasting labor supply, demand and wage rates.

Our Gulf Coast Region Labor Market Analysis provides subscribers detailed insight into the craft labor market for 11 metropolitan regions along the Gulf Coast from Brownsville, Texas, to Pascagoula, Mississippi. Information regarding wages and capital and maintenance spending reaches back to 2012 and is forecast out to 2020, based on Industrial Info's extensive research into plant and project activity, and wage rates for 12 skilled craft trades.

Industrial Info's unique bottom-up research methodology builds upon verified information about the region's projects, plants and wages by our expert industry researchers, providing the most accurate, "on-the-ground" analysis available.

In the Gulf Coast Region Labor Market Analysis, Industrial Info quantifies the risks for each metropolitan area by year, and tracks and forecasts wage rate movement. The estimated deficits and surpluses by craft for each metropolitan area are reported for future years.

For additional information, please call or email Tony Salemme, vice president of Industrial Info's Craft Labor Group, at (209) 547-9878 or tsalemme@industrialinfo.com.

Industrial Info Resources (IIR), with global headquarters in Sugar Land, Texas, three offices in North America and ten international offices, is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy markets. Industrial Info's quality-assurance philosophy, the Living Forward Reporting Principle™, provides up-to-the-minute intelligence on what's happening now, while constantly keeping track of future opportunities.