We are the largest engineering and construction
company in Southeast Asia, with core capabilities in process engineering
and design, civil engineering and building construction.
Review | Outlook
Contracts in Orderbook
2004 saw a strong inflow of new contracts for SembCorp
Engineers and Constructors (SembE&C) – a result of concerted
efforts to re-focus on overseas contracts and to secure more profitable
process engineering projects. We also further strengthened our management
of construction risks for our existing projects.
During the year, we also reinforced our risk management processes and
implemented ways to hedge against fluctuations in the pricing of materials.
We will continue to pursue this strategy in 2005, and to focus on the
profitable execution of all our projects in our orderbook.
In 2004, SembE&C recorded turnover of S$824.2 million, up from S$817.8
million the previous year. During the year, the division contributed a
higher Profit After Tax and Minority Interest (PATMI) of S$1.1 million
to the Group, from S$0.6 million in 2003.
The year saw us intensifying our marketing efforts overseas, and as a
result we secured new orders totalling S$2.0 billion, double our original
target. The bulk of the new orders was process engineering-based, and
by end-2004 such projects accounted for 67% of our orderbook, up from
59% a year before. As of December 31, 2004, our orderbook stood at S$2.6
billion, of which 59% of our orders were from overseas as compared to
20% at the beginning of 2004.
Our overseas drive was fuelled by strong growth in construction spending
internationally, and the stagnant market domestically. By end-2004, we
had been awarded contracts in China, India, Indonesia, Iran and the United
Arab Emirates totalling more than S$1.4 billion.
Some of the overseas projects we were awarded in 2004 include:
||the S$640.0 million restart of the Essar oil refinery
in Gujarat, India, which is the country’s largest;
||EPC contracts totalling S$320.0 million for two petrochemical facilities
in Iran, marking our first involvement in state-owned National Petrochemical
Company’s extensive capital investment programme;
||a S$220.0 million building contract for high-end residential apartments
in Dubai; and
||a S$110.0 million contract to build gas production facilities
in East Kalimantan, Indonesia.
In 2004, however, our profits continued to be pressured
by high costs of construction materials. One example was the spike in
global steel prices, which at its peak caused local market prices to rise
above S$950/tonne. While global steel prices softened in mid-2004 following
Chinese intervention measures, local steel prices stayed volatile in the
second and third quarters, reflecting supply concerns following the decision
by Singapore’s Natsteel group to divest its steel business.
To mitigate against other significant cost increases, we have intensified
our build up of global sourcing capabilities, and continued to strengthen
our management of other construction risks. We have put in place more
stringent cost control systems and risk management systems. In addition,
we have been very selective of the projects that we pursue, and have only
undertaken those which we are confident of implementing profitably.
In 2004, we also continued to refine our organisation structure and business
model in order to address longer term challenges. To further reduce our
risk exposure in unfamiliar markets, we have explored and pursued a cooperative
framework with key contractors within the region to allow us to tap on
each company’s strengths and expertise.
We have also continued to enhance our capabilities and resources in terms
of conceptualisation, design and construction financing.
To capitalise on stronger growth prospects in regional and international
markets, we will continue to broaden our reach and extent of our overseas
contracts, while focusing on the profitable execution of our existing
We are optimistic of further enhancing our focus on process engineering
projects by capitalising on our reputation as the global leader in such
projects. We have started this year on a positive note – in January,
SembCorp Simon-Carves won a contract to design a petrochemical facility
in the UK for global chemical player Huntsman. This 400,000 tonne/year
Low Density Polyethylene (LDPE) plant will be the world’s largest
single-stream facility for this product. SembCorp Simon-Carves has supplied
six of the world’s eleven most recently commissioned facilities
for this product.
We plan to continue to seek opportunities in the oil and gas industry,
where we are witnessing a resurgence on the back of sustained high oil
prices. In addition, we will be evaluating prospects in upstream petrochemical
projects, and continue to pursue contracts for downstream chemical facilities.
We see positive prospects particularly in Asia and the Middle East.
At the same time, we will continue to selectively pursue civil engineering
and construction projects overseas, by building on our expertise in master
planning and design, the development and construction of housing townships,
commuter rail systems and tourism-related infrastructure.
We see markets such as China, India, and Southeast Asia and the Middle
East as having strong growth potential. Industry expectations are for
regional construction spending to reach US$1,500 billion in 2005 –
of this amount, China is expected to account for up to 35%. We are confident
of leveraging on our reputation and track record in the process engineering
sectors, and in delivering advanced construction methods in these markets.
Domestically, we do not expect substantial or broad-based improvement in construction demand, and foresee total construction demand to continue
to level at S$10 to S$11 billion this year. Furthermore, we see civil engineering construction demand further softening in 2005 as all major
contracts for the MRT Circle Line have already been awarded.
In terms of construction material costs, we expect these to remain firm
in spite of the projected contraction of local construction volume during
the year. Steel prices are expected to be sustained by strong global demand
and high freight costs, while cement prices are likely to remain high
in line with international prices.