eNews July 26, 2018
In the News
July 26, 2018
Airlines Combat Late Payments Amid Lagging Production
A supply chain must operate like a well-oiled machine, each part running in conjunction with the next. When a valve becomes loose or a bolt goes missing, it’s only a matter of time before the entire operation falls out of sync. In recent weeks, the airline industry has been scrambling to address problems in its supply chain, most notably production and payment delays, which have trickled down to its customers.
Earlier this month, CNBC reported a rift between European airplane manufacturer and seller Airbus SE and Chinese aviation-to-finance conglomerate HNA Group, as Airbus was withholding its customer’s A330 jets because of late payments. Shortly after the announcement, five A330 aircraft, Airbus’ smallest new jet, were spotted at the manufacturer’s delivery center, with a sixth nearby—a total of $1.6 billion. The jet’s design indicated they were purchased for Hainan Airlines, Beijing Capital Airlines and Tianjin Airlines.
According to an aircraft finance source cited in the article, CNBC stated Airbus could face costs of up to $10,000 per plane per day for storage and maintenance. On July 12, one day after the withholding was reported, Reuters noted a negotiation between Airbus and HNA was underway to “allow at least some of the parked aircraft to be delivered.”
HNA made headlines in January for reportedly missing payments to its lessors and banks; HNA’s Hainan Airlines, Lucky Air and Capital Airlines were among the late payers. Reuters stated on July 11 that HNA was several months behind on payments to Airbus.
Tensions are also rising in other areas of the Airbus supply chain. Demand for flights is increasing at the same time as oil prices rise, leading airlines to update their equipment for gas efficiency. With the growing demand for new aircraft, Airbus is finding it hard to keep up with its deliveries because of slow production from its engine supplier, CFM International. In an interview with The Wall Street Journal (WSJ), CFM Executive Vice President Sébastien Imbourg said CFM will be back on schedule before the end of 2018 after falling behind nearly two months.
“Engine-production delays have been among the most painful,” the article added on July 15. “At one point this year, Airbus had more than 100 nearly finished planes waiting on the tarmac for their engines. In the first six months, the company delivered 303 jetliners against a full-year target of 800 deliveries, mostly because of late engines.” The production of wing components was behind as well.
Although it hasn’t missed any deliveries, Boeing is facing similar struggles to stay on top of new orders. In the first six months of 2018, the WSJ stated, Boeing was falling behind its goal to deliver between 810 and 815 planes, having already made 378. And the orders just keep rolling in, another WSJ article reported on July 16, when it was announced that more than $43 billion in airline orders were made to Boeing and Airbus.
—Andrew Michaels, editorial associate
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North American Construction Contract Disputes Leave Room for Improvement
Know the contract, read the fine print. Pretty simple, right? Whether you’re an owner, contractor or subcontractor in the construction industry, the contract lays the foundation for the project before any actual construction begins and outlines details, such as the scope of work, cost and payment terms, and who has final authority over decisions.
Alternative dispute resolution (ADR) strategies and the sector’s constant evolution require the attention of key players, who experts say showed progress yet experienced pitfalls over the past year. Global design and consultancy firm for natural and built assets Arcadis completed an in-depth analysis of construction contract disputes worldwide in its recently released Global Construction Disputes Report 2018, where there was a steep increase in the global average dispute value, but only a slight gain in the global average length of disputes. Global averages were calculated between North America, the United Kingdom (U.K.), continental Europe and the Middle East.
According to the analysis, dispute values reflected the additional entitlement sought for extra work on a project, while the average length began when the formal dispute was submitted and ended with its resolution. North America was the only region to show a declining dispute value at $19 million in 2017, well below the global average of $43.4 million. However, the average length of disputes in the region increased to about a year and a half—two months longer than the global average.
“Some more proactive owners are employing risk management techniques early to avoid disputes,” the report stated. “Many in the industry are familiar with completing a risk register, but the most effective methods of risk management dive deeper than simply completing the risk register form.” These forms document the possible risks of a project as well as how to handle them if, or when, they happen.
Disputes, listed from most to least common, included: errors and/or omissions in the contract document; failure to properly administer the contract; and the owner, contractor or subcontractor failing to understand and/or comply with its contractual obligation. Errors and omissions was also the most common in 2016. Failure to properly administer the contract fell from second to third, switching rankings with failing to understand or comply with the contract. The most common ADR tactic last year remained party-to-party negotiation, followed by mediation and arbitration.
If all contract parties want to keep the North American dispute values on a downward track, the report indicates they must first learn more about the ins and outs of the contract to develop a better understanding of how it works. Claims professionals are resourceful, but contractors have certain duties only they can handle. These will likely increase with the wave of large construction projects anticipated in 2018 and the years ahead.
“Best practices include … forming strong relationships between the project participants to improve the rate of success, or at the very least, improve the early dispute resolution process,” the study noted. This can be accomplished using advanced technology, such as drones or augmented reality, to improve accuracy, in addition to agreeing to a platform where parties can discuss issues in a timely fashion.
FCIB’s International Credit and Collections surveys broaden the scope of disputes to various sectors, including the construction industry. About 22% of respondents in the June 2018 surveys for the U.S., Canada and Mexico said billing disputes was the main cause of payment delays, with about 3.5% attributing other disputes to these delays.
“Construction accounts pay mostly when paid,” noted a respondent in the January 2017 U.S. survey. “Larger commercial and industrial accounts are unilaterally requiring extended payment terms, which we do not wish to provide.”
—Andrew Michaels, editorial associate
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The Future of the International and Domestic Steel Market
The U.S. threat and eventual promise to tariff Chinese steel shook up the market the past few months, and it isn’t just the U.S. that will see changes to the steel market in the near future. As the winter months approach, China will slow down steel production amid environmental concerns, while other countries in the European Union prepare their market and tariffs.
China remains the No. 1 producer of steel in the world, creating 80.2 million tonnes of steel just last month, compared to the 81.6 million tonnes produced by the U.S. in all of 2017, according to a recent Reuters article. China reached yet another record output of steel in June, making it the third month in a row China has bested itself in amount of tonnes outputted.
This comes during the summer months, a time when the risk of pollution from steel manufacturing remains lower than usual in China. When winter begins, so do environmental crackdowns on steel production in the country.
Legislation in China passed in 2017 aims to cut crude steel capacity down 100-150 million tonnes annually over the next five years, with the biggest cutbacks beginning in the winter. Steel accounts for 95% of all metals used and is responsible for 6.5% of CO2 emissions, according to Greenspec. Just over the course of 10 years (2001 to 2010), steel use per capita increased from 150kg to 220kg. The use of steel is on the rise, and China aims to keep up, while also being conscious of its smog-filled skies. In the beginning of 2018, the skies of Beijing returned to a blue color, seeing a 53% decrease of pollution, according to the New York Times.
Along with slower production in China, the EU has also implemented tariffs on Chinese steel. The EU announced tariff rate quotas July 20 on 23 types of steel, serving as a response to the U.S. Section 232 tariffs, according to a recent article in Hellenic Shipping News. The tariff will affect imported steel that goes beyond the average volumes. Anything above average will see a 25% tariff.
This surge of protectionism in both the U.S. and the EU has caused countries to panic, resulting in a high volume of import activity before the tariffs go into effect. A few mills in Italy took precautions by reducing their prices to prevent steel imports, according to Hellenic Shipping News.
The demand for domestic steel—especially after tariffs—has risen throughout the past couple of years. With export barriers and import tariffs high among several world powers, domestic steel has become more attractive to suppliers. According to a National Review article, China isn’t even the country the U.S. imports from the most—it ranks No. 11. About one-fourth of imported steel comes from NAFTA partners, primarily Canada, while South Korea remains the largest trading partner in Asia for the U.S.
With the combination of environmental crackdowns in China and import tariffs, the steel market in the upcoming months will likely be complicated for suppliers. Being mindful of these crackdowns and expenses early will keep suppliers on their toes moving forward.
—Christie Citranglo, editorial associate
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Contractor Ordered to Pay for Sub’s Violations
Nonpayment, slow payment and the skilled labor shortage are among the major issues in the U.S. construction industry. All are well documented through studies and surveys. Often, they become intertwined as was the case at a residential high-rise project in San Jose, California, in August 2017.
The Department of Labor announced earlier this month the prime contractor for the project, Full Power Properties LLC, paid $250,000 to nearly two dozen employees of one unlicensed subcontractor to settle Fair Labor Standards Act violations. Job Torres, who was doing business as Nobilis Construction, was arrested for forcing employees to work without pay and holding them in captivity at a rundown warehouse.
Meanwhile, Nobilis Construction was among the subcontractors to file a mechanic’s lien against Full Power Properties. All told, the liens were valued at $1.8 million, including one for nearly $900,000 filed by Nobilis Construction, according to the Mercury News. All liens have been released.
Often, construction firms and others will try to cut corners to gain the most profit on the job. This is one case where an unlicensed subcontractor did not succeed. "The U.S. Department of Labor will do everything in its power to stop employers who violate the law from gaining an unfair competitive advantage over those who play by the rules," said Wage and Hour Division District Director Susana Blanco in San Francisco in the Department’s release.
According to the latest report from the National Federation of Independent Business, more than a third of small and independent businesses have job openings they cannot fill, which matches a survey high set in November 2000. Just under a third of respondents have job openings for skilled workers, while 13% have openings for unskilled labor.
The shortage in California’s Bay Area is so bad, workers are being brought in from Texas, according to NBC Bay Area. “You may have to wait a few months because of the labor shortage,” said local Building and Trades Council Head Josue Garcia to NBC. "Qualified labor shortage. There’s plenty of people who want to work with no experience," he added.
In Tennessee, “the lack of skilled labor is lengthening the time it takes to complete projects and driving up costs,” said the Memphis Daily News. “It takes a good 30 days more than it used to take to finish the homes, which results in being able to build fewer homes,” said one local developer.
Many schools, communities and construction firms offer education training to help fight the skilled labor shortage.
“These companies that are looking for skilled technicians are willing to take on people who have a good work ethic and are willing to work and learn, so they can get on-the-job training at the same time,” said Donald Glays, West Tennessee Home Builders Association executive director, in the article.
—Michael Miller, managing editor
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Chemicals/Pharma Sector Could Be Affected by Trade Wars
The overall chemical industry across the globe has fared well compared to other industries for a number of reasons. According to Atradius, they include solid payment performance, low insolvency rates and robust business financials. The credit insurer also predicts mergers and acquisitions (M&A) will continue throughout the rest of the year.
Despite the positive outlook, there are some drawbacks noted by Atradius in its market monitor on chemicals and pharmaceuticals. Commodity prices and potential trade wars are a major risk to the chemical industry. Pharmaceuticals sales are expected to grow 3% in 2018; however, that is still slower than in years past.
Atradius reviewed a handful of countries and their chemicals/pharma credit risks, financing conditions and business conditions, including the United States, India and Italy.
Credit risk in the U.S. is stable with nonpayment and insolvency, both past and future, seeing no change. The sector is highly dependent on bank financing, and the banks are willing to provide credit. Payments, on average, take 30–90 days.
The increasing demand in chemicals coincides with the higher chemical production in the aftermath of Hurricane Harvey in 2017. However, tariffs have hampered the sector. “Should international trade disputes escalate, there is the immedeate [sic] risk that retaliatory measures by trade partners would hit the U.S. chemicals industry. At the same time, potential taxes on chemicals-related imports could find U.S. chemicals businesses paying more for feedstocks and would negatively impact supply chains,” said Atradius.
Despite the lengthy payment timetable in the U.S., it is not the longest. India, at 60–180 days, holds that title. This average depends on the position of the business. Chemical manufacturers purchasing raw materials allow for shorter credit terms, while pharmaceutical firms supplying generic drugs have longer terms due to higher competition, according to the report.
Italian payments in the industry take 60 days on average, and payment delays are still low, as are insolvencies. Furthermore, oil/fuel wholesalers will see nonpayment increase in part due to taxes and international competition.
Other countries surveyed by Atradius were the United Kingdom, Turkey, Poland, Mexico, Indonesia and Brazil.
Indian payments, at roughly half a year, showed the longest overall average, but Polish seasonal products, such as fertilizers, had payments take as long as 180–240 days. Poland’s typical payments took 30–60 days in the sector.
The U.K. is forecasted to see little change to the trend of low nonpayment and insolvencies this year, while Turkey is expected to have an increase in both areas in chemicals due to low sales and currency depreciation.
The report also gave an overview of more than a dozen industries across the world, rating them on a five-point scale from excellent to bleak. Belgium, France, Germany and the Netherlands were the only countries to have an excellent chemicals/pharma rating.
—Michael Miller, managing editor
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