FEBRUARY 2009

Construction of environmental infrastructures least likely to be affected
Environment and building technologies industry outlook for 2009

The global environment market has generated $650 million in 2008 and the market is growing by double digits. From 2002 to 2015, market growth will likely measure up to 45 percent. While there are niches where the growth is higher than the rest, the environmental sector has demonstrated overall resilience to the global economic slowdown so far.

According to Frost & Sullivan Asia Pacific consulting head of environmental and building technologies practice Sapan Agarwal, the first half of 2009 may be slightly grimmer than average given that companies are cautious in spending. Nonetheless, this phenomenon is likely to fade away beyond the first half of the year.

He added that business in Asia has been on the growth trend mainly because of rising consumer awareness and an ever increasing population. Urbanization has also been a key contributor to the industry growth. While the timing and speed of urbanization has varied and is varying between countries in Asia, on average, an additional 48 million people will have migrated to Asian cities in 2008. This directly translates into intense pressure on urban infrastructure and also rising demands for equipment and services such as water and waste management. The global environment market is 47 percent water, 39 percent waste, 9 percent air and 5 percent others.

“Greening of technologies and processes is a strong trend in most of the industries today and with a shift in confidence later in 2009, businesses in the environment sector may see steeper growth rates that may have dipped slightly during the first 6 months of the year,” Agarwal said.

He continued to say that businesses within the environment sector that are mass consumer centric such as residential water filters, air filters, etc. have been buoyed by the growing health and wellness sentiments among Asians, although the average spending power of the consumer has stayed with caution.

According to Agarwal, “Exchange rate fluctuations in some countries in Asia have lately been quite rough and this may hurt companies, especially multinationals, who tend to lose anywhere from 5 percent up to as high as 20 percent owing to dipping exchange rates.”

Businesses that are related to infrastructure projects have been more or less insulated from the state of economy in the United States with the ongoing projects. However, the planned projects may see some delays, albeit nothing alarming, mainly owing to factors such as uncertain oil and commodity prices.

“There have been no cuts in budgets related to environments and we do not foresee that happening either,” he said. “Contractors and service providers may see some shrinking margins, though, given the volatile costs of logistics and materials. Environment businesses related to manufacturing and industries have been the ones that have started to witness dipping business as a result of industries conserving cash and suspending expenditures and investments.”

Overall, Asia’s economy will continue to be driven by the growth engines of China, India, and Southeast Asia, where environmental market opportunities are vast, in tandem with its socioeconomic growth. However, with Japan currently declaring an economic recession, Japan’s environmental revenues are expected to further decline in the already saturated marketplace.

In terms of industry specifics, Agarwal said that the volatile economic times may spur mergers and acquisitions in the region. “Opportunistic technology providers/manufacturers from Europe, United States, and even Japan may invest with Asian companies that suffer from lack of funds,” he added.

He went on to say that construction of environmental infrastructure is least likely to be affected though cost-cutting measures being considered at many sites in the form of compact construction schedules and locking prices of materials and equipment to cushion the rising energy costs.

“Overall growth is likely to be between 7 to 10 percent. The Middle East is expected to witness better growth due to its ever higher demand for water and waste management. Desalination technology and its projects are one of the more potent markets emerging and will hold its ground for stable growth,” Agarwal said.

He continued to say that the environmental outlook in 2009 will most likely be focused on retrofits, service contracts, and implementation of approved new infrastructure projects prior to 2008-2009.

“Contractors and suppliers involved with approved projects in 2009 are expected to witness tighter margins as a result of volatile energy cost,” he added.

Factors that may impede growth and profitability, as identified by Agarwal, include: increasing electricity tariffs, uncertain oil prices and subsidies and finance interest rates – all of which have a domino effect on support services such as cost of materials, logistics, and labor.

“The municipal sector will stand a better chance over the industrial sector – reduction of plant production capacity due to the economy may reduce dependency on new installations and upgrades of process treatments with regard to the environment as less water usage means less waste generation and less air pollution.”

“This will be more apparent in Southeast Asia,” he added. “Continuous industrialization and urbanization in India and China will boost demand for environmental services and products.”

Agarwal expects the demand for water to increase with or without the negative impact of the United States economy, as environmental companies should now focus on the development of products with energy saving features and high efficiency.

Continuous pressure from developed nations for environmental protection in Asia will also serve as an industry driver.