Expect Capital Budgets to Rise
Between inflation and delayed shipments, expect capital budgets to rise.
To be clear, I am not talking about an addition of new capital projects, I am talking about the budgets on projects already approved and in construction.
We really don't know where inflation is going to plateau, we have no idea when the shipping congestion will stop. These both mean big problems for projects caught in the status of already started, not completed.
For the recently completed, owners should breath a sigh of relief--you have currently up-to-date assets at a lower price than will likely ever be available again. For those not started, you should be able to redo your budgets and make a decent projection of the costs. I know we did it in the high inflation times of the '70's and '80's and survived. It is the ones underway that are problematic.
Inflation is insidious. One of the mills I worked in early in my career is always illustrative of this. The mill was Westvaco at Wickliffe, Kentucky. This fully integrated pulp and paper mill was built in 1969 for approximately $25 million. A fair price at the time. In 1984, we did an extensive rebuild on the paper machine alone for $40 million, which was considered a bargain then. That rebuild would be close to $200 million today and the entire mill would likely cost close to $1 billion.
As an analyst it is important that you understand the physical assets as well as the markets.
You might want to pick up this book.
