Sunday, July 5, 2020

Higher cement sales indicate construction activity rebound to pre-Covid-19 crisis levels

By on June 22, 2020

(Screen capture of www.flickr.com/photos/cemex)

Industry group: Increased building still falls short of expectations due to federal funding delays

SAN JUAN – Cement production and sales in Puerto Rico climbed to pre-Covid-19 crisis levels in May, suggesting that the construction industry on the island seems to have recovered from the abrupt halt in projects as a result of the government’s implementation of the curfew/lockdown in mid-March to control the spread of the potentially deadly virus.

Gov. Wanda Vázquez amended the lockdown order to allow construction activity related to critical infrastructure such as electricity and water utilities, telecommunications, solid waste and biomedical disposal systems, maritime ports, airports, and roads and bridges. The governor lifted restrictions on construction activity, albeit with safeguards against the spread of the novel coronavirus, on May 11.

Cement production plummeted 64.4 percent between February and April, according to Puerto Rico Economic Development Bank (EDB) statistics collected from CEMEX Puerto Rico and ARGOS San Juan Corp. cement companies. The data was published by the Puerto Rico Statistics Institute.

Production of 94-pound sacks of cement reached 1.03 million in February before falling to 493,300 bags in March and a year low of 377,200 bags in April, when the curfew/lockdown was fully in place. The April figure was 49.5 percent lower than the 746,700 bags produced in April of last year, and 71 percent lower than the 1.29 million bags produced in April 2018.

Cement production recovered lost ground in May, increasing to 1.034 million bags.

Moreover, cement sales plunged 58 percent between February and April, according to the EDB data, falling from 1.08 million bags in February to a year low of 451,300 bags in April. The April sales were 61 percent lower than the 1.15 million bags of cement sold in the year-ago month, and 66 percent lower than the 1.33 million sold in April of 2018.

Such sales not only were recouped in May but also exceeded February’s figure by 15.3 percent, climbing to 1.24 million bags of cement.

While these figures seem to indicate that the construction industry is in full recovery mode, the head of the Associated General Contractors of America Puerto Rico Chapter (AGC-PR), whose members carry out 80 percent of construction projects on the island, cautioned that the May figures likely show pent-up rather than sustained activity.

“At first glance, the numbers surprised me because they seemed not to be consonant with the movement in the streets. When you take a deeper look at these numbers, they could indicate a temporary effect due to backed-up construction activity that was halted by the March-15 Covid-19 executive order,” AGC-PR President Architect Umberto Donato told Caribbean Business. “So when the construction sector was allowed to resume a month ago the sales of cement and concrete increased due to pent up demand for road projects that had been halted.”

Donato said that cement sales were most likely boosted by the $1.3 billion in road projects that had begun and were halted by the virus emergency. The first projects to receive authorization to resume were related to infrastructure, including roads, aqueduct and sewer systems, and electric power systems, he said, noting that construction activity has “gradually” resumed as companies have complied with certification of Covid-19 safety protocols.

“If we talk about factors accelerating the sale of cement, you will find that infrastructure projects consume a lot of cement, particularly road projects,” he said.

Nevertheless, the construction industry has yet to get a boost from federal hurricane recovery funds for permanent reconstruction, specifically the $20 billion in Federal Emergency Management Agency (FEMA) and Federal Community Development Block Grant-Disaster Recovery (CDBG-DR) earmarked for Puerto Rico to be disbursed within the next decade, Donato said.  

“In view of the projects that have begun, we do not see a sustained upward trend, although we hope that in the medium and short term we will see the start of all of these planned construction projects as federal reconstruction funds become available,” the architect said.

As a result of the emergency construction and repairs in the aftermath of hurricanes Irma and Maria in 2017, the number of jobs in the industry rose to more than 40,000, Donato said. As the emergency repair projects culminated and federal permanent reconstruction funding was held up by bureaucratic issues between Washington, D.C., and San Juan, construction employment has dropped back to “between 25,000 and 30,000,” he noted.

The AGC-PR stressed that the construction industry has not recovered fully since Puerto Rico entered into its chronic recession in 2006 – the last time the industry employed more than 60,000 people in projects with investments of over $6 billion a year.

“Jobs in construction have continued to remain low and have not grown because we have not seen a lot of construction volume. We are waiting for projects like the R3 home reconstruction project, which was scheduled for a year ago but have yet to start. Many of the big reconstruction projects at Prepa [Puerto Rico Electric Power Authority] have not occurred; the same with FEMA [Federal Emergency Management Agency] projects,” Donato said. “The net result is we have not seen a sustained increase in construction activity. We are very confident that it will happen. We hope that from now until December we see that sustainable growth as a consequence of all of those projects that should start.”

The industry official said that while current projects “have not made a discernible impact,” bigger projects involving the Transportation and Highway Department, Prepa and Aqueduct and Sewer Authority should be starting in coming months. He said that while construction of multifamily homes for the elderly and low-income families had not taken off in the last few months, “there are signs that such construction will gain momentum in the next few months” with disbursement of federal funding.

Donato said that construction volume comparable to that of the early 2000s could be reached in the next few years with the combination of private sector and disaster reconstruction funding, including Opportunity Zone Program investments, adding that this could increase employment in the industry to between 60,000 and 80,000 workers.

“If these funds are invested wisely, the multiplier effect would be well above the $20 billion,” he said, noting another $3 billion is expected in private-sector construction, particularly hotels and inns.

“This depends on how quickly these funds come in. If they come in faster, let’s say in five years, you will need even more workers in construction,” he said. “As we have seen, these things take time, and [funds] will gradually be poured into the economy. I think this gradual growth could be good for Puerto Rico so that there is sustainable growth in employment.”

Thus far, Donato said that over 80 percent of construction workers have returned to work in an industry that has had to implement a new set of regulations to safeguard workers from Covid-19 contagion. He said that these new regulations have increased project costs anywhere between 10 percent and 15 percent, depending on the type of project involved.

“This is a significant amount because in most cases it could supersede any expected profits on a project,” he said.

“The first challenge was the change in the safety procedures. Construction has many safety protocols and regulations; it is regulated by OSHA [Occupational Safety and Health Administration] due to the natural risk of building,” Donato continued. “Now there are various additional protocols such as the masks, cleaning, social distancing, etc. That is flowing very well. We have not had any reported cases of Covid-19 in the industry, which is a good sign that we are doing it right.”

The construction industry also faces the challenge of the viability of several hotel construction projects as many restrictions still remain on the tourism industry, for fear that visitors could lead to increased coronavirus cases. While the governor is expected to lift the last restrictions on the sector next month, there is still uncertainty given the growing number of cases on the U.S. mainland, from where most local tourists originate.

“There were several hotel projects affected in the short term by the lockdown but also in the medium term because tourism has not reopened in Puerto Rico and the viability of those projects are cast in doubt until visits return to normal,” he said.