Capex costs coming back to earth

During the massive commodity price run-up of 2008, capital expenditure costs rose massively as well. Whether it was steel or house-sized mining tires or oilfield drilling services, the rush to build new supply created vast bottlenecks and scarcity for many inputs and resulted in huge inflation.

Now, we can see that unwinding. Oil and gas drilling rates are way down, and prices have cratered. And on the capex side, major projects are renegotiating contracts and bringing down their costs. In one dramatic example, the Dow/Aramco petrochemical JV just announced expected savings of $4 billion:

Saudi Aramco and Dow Chemical (expect to save around $4 billion on their joint petrochemical complex as slowing economic activity cuts project costs, the al-Hayat newspaper reported on Wednesday.

The estimated cost of the plant was at least $20 billion before reduction, al-Hayat said. The fall was due the global economic situation, the newspaper reported sources as saying.

This is not an isolated example - another big Aramco project also appears to have sliced off ~20%:

Oil majors have pressed oil and gas services groups to cut prices as the economic downturn has pushed steel and labor costs lower and contractors compete for fewer projects.

This was the case for Aramco's joint-venture refinery project with Total, which delayed their investment decision until contractors trimmed total costs to $9.6 billion from a previous top estimate of $12 billion.

This is good news for the long term - higher capex costs were an obstacle to bringing new capacity online in many industries, and some day (fingers crossed) economic growth will resume, driving growth and supply tightness along with it. So anything that brings new supply is, economically speaking, a good thing.