Price, Labor Cost and Labor Productivity Indices for PEP Cost Index China

Over the past two decades, rapid economic growth in China has brought about significant price and labor cost inflation (in comparison with the developed economies). In the meanwhile, the country’s labor productivity and manufacturing capability have been improving rapidly too. For typical chemical plant construction, China still needs to import a substantial portion of equipment, machinery, materials and some foreign engineering and technical services. As a result, chemical plant construction cost in China is affected by to the joint forces of both domestic and international price inflation, the factors of which include cost inflation within China, cost inflation in the exporting countries, labor productivity, as well as fluctuations in China’s foreign exchange rates.

In PEP Review 2006-1, we developed composite chemical plant investment cost-escalation indices for the East Coast of China. We also established time-series for relative cost parameters for the location.

In this report, we evaluate various price/cost indices that we believe are representative of the inflation indices for each of the plant construction cost components (as identified in PEP Review 2006-1) and applicable in the development of PEP Cost Index China. We also discuss the rationale behind the choice of the price indices and their limitations. The overall objectives of this study are: 1) to provide insights on various price/cost indices used in the construction of PEP Cost Index China, and; 2) to gain a better understanding of the key drivers behind the plant investment cost inflation in China.

The report should be of interest to planning and evaluation groups interested in investing and operating in China.