Tough times ahead for construction

IOL pic nov23 br STEEL10 BLOOMBERG Builders arrange steel reinforcement rods during the construction of the Mall of Africa retail space in this photograph taken in July. File picture: Waldo Swiegers

Johannesburg - Contract award delays, low work flow volumes and industry over capacity are likely to continue to hurt the performance of the construction sector this year.

With the government severely financially hamstrung, there also appears little prospect of government infrastructure projects giving the sector a boost.

This operating environment has placed the profitability of firms in the construction sector under pressure.

The FNB/Bureau for Economic Research civil construction index report for the third quarter, the most recent, said growth in construction activity remained weak and it was likely that the slowdown in construction activity would deepen for the rest of 2015 and into 2016 if the demand for new construction work remained poor.

The latest trading updates by firms in the listed construction sector are not encouraging on this score.

Group Five reported in December that its earnings in the six months to December had been negatively impacted by the performance of its engineering and construction sector, with the continued weak trading conditions placing pressure on the replenishment of the group’s contracting order book.

The group said short-term conditions were remaining weaker for longer than expected and it had incurred additional unplanned retrenchment and rationalisation costs in the six months to December following the retrenchment costs incurred in the previous financial year.

Dismal update

The group retrenched 2 500 employees to reduce its workforce, including limited duration contract employees, from 4 400 to about 1 900 in its financial year to June last year.

A trading update by Aveng in December was equally dismal, with the group stating that it anticipated reporting a headline loss for the six months to December, with its headline earnings a share reducing by at least 100 percent for this period.

Aveng attributed the reduced earnings to several factors, including the continued global economic slowdown that had resulted in a decrease in available contracts and associated revenue; severe weakness in steel demand and pricing, resulting in an operating loss at Aveng Steel; and significant pressure on commodity prices across the board translating into lower margins in Aveng Mining.

The group indicated there were ongoing initiatives to reduce overheads throughout the group, suggesting it was also retrenching further employees.

JP Labuschagne, the Africa Infrastructure and Capital Projects leader at Deloitte South Africa, said there had been a slowdown in the number of infrastructure projects in southern Africa despite the total value of projects remaining similar at about $140 billion (R2.16 trillion) in 2015 compared to $144bn in 2014.

However, Labuschagne said escalating prices for projects and changes in the value of currencies had to be taken into account. He said the number of new projects coming into the southern Africa market was also slowing down.

Under big pressure

Labuschagne said construction companies were facing increased competition because of the difficult environment, which had resulted in a shift by some contractors to offering a more engineering related service, while margins were under big pressure.

The entire construction sector had been forced to shift because of the slowdown in commodities and mining and look at different ways to play a significant role in the economies of southern Africa.

He said government expenditure on infrastructure in terms of the National Development Plan was set at R1 trillion, but questioned how much would be spent on pure construction.

 

Andries Rossouw, the energy and mining assurance partner at PricewaterhouseCoopers, said there was a R18.6bn shortfall in forecast public sector expenditure in 2014, the latest figures available.

Rossouw said there had been a 4 percent decline in the total secured order book of the nine listed South African construction companies in the year to June, which was first decrease in five years.

He said these companies had important decisions to make about rightsizing because they had been struggling in the past few years and would continue to experience challenges with margin pressure in the short term.

Neil Cloete, the president of Master Builders South Africa, said in the organisation’s latest annual report that the steel, mining and construction industries were in desperate need of an investment stimulus.

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