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If you have been doing capital projects for only a few years, I think some surprises are just around the corner. Everything about capital projects is about to become more expensive. Money, equipment, labor, you name it.
This is Capital Project Month at Paperitalo Publications. I am old enough to have lived through the times when the prime interest rate in the United States exceeded 20%. In the last few years it has been near zero. The cost of money, coupled with investors' states of optimism, drastically affect capital project activity in the pulp and paper sector. Yes, in the end, it is all emotions-driven.
The incoming administration seems bullish on business. It also seems already to have affected some industrial factory expansion decisions in the United States. Here is my assessment of where we are headed, assuming some natural or human-caused cataclysmic event does not occur.
The tissue industry worldwide is already hotter than a firecracker. Did you know that 1,300 tissue machines have been constructed in the world in the last seven years and there is an expectation there will be 700 more in the next five years? I have this on good authority from studies by North Carolina State University. This will keep the equipment manufacturers busy and deliveries long.
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Packaging grades, all packaging grades, continue to be hot. Expect more new machines and machine conversions to be announced in the coming year. This will keep the equipment manufacturers busy and deliveries will be extended.
If the new administration is able to move toward further exploitation of fossil fuels, expect heavy construction activity in this area. This will keep skilled construction labor tight for everyone.
As I said earlier, the cost of money (interest rate) is clearly going up.
All of this means that the estimate you did for a pre-feasibility study last year is likely out the window. You will need to talk to equipment suppliers, contractors, ancillary equipment providers and judiciously update your estimate.
For years, the word escalation has been meaningless in capital project estimates. It will be time to re-introduce it.
If your company is gutsy and ready to move on a project, move now with all haste. You may be able to bind prices and schedules at levels you will never see again, at least in the next few years.
Join Jim Thompson on the 2nd Annual Papermakers Mission Trip to Guatemala, 22 - 29 July 17. Build houses, talk about the pulp and paper industry. For more information, email firstname.lastname@example.org with "Guatemala" in the subject line.
In my early days (early 1970's), I saw things like electric motor delivery move from "next day" to "six months" in a week. We build things differently today, so these sorts of extremes are unlikely. Yet, the whole process is somewhat akin to going into a popular restaurant. Go in at 5:30 and you can be seated immediately. Go in at 6:30 when the place is full, and the hostess will tell you there is a 45-minute wait. The hostess keeps up the 45-minute wait story all the way until 7:30. Except, if you come in at 7:30 and hear this number, don't be surprised if you are seated at 7:35 as the backlog suddenly disappears. Capital projects building works exactly the same way.
Right now, there are a couple of "early bird specials" (the seniors who come into the restaurant at 4:00 and eat at discount prices before the crowd arrives) still available. Old Jim predicts these will run out soon--be gutsy and grab them, for they can make your ROI look very good forever as compared to those of your competitors who decide to "eat their dinners at 6:30."
What do you think? Are you as bullish on the capital project projections as I am? Take our quiz here.
Capital projects bring out all sorts of abnormal safety issues. Make sure you recognize these and address them in a timely manner.
Be safe and we will talk next week.
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