Tough times ahead for construction industry
Johannesburg - When Lionel Richie sings eighties hits like All Night Long to a packed Cape Town Stadium later this month, builders of the South African venue will be left wishing a construction boom had the same staying power.
The R4.5 billion ($287 million) arena was developed by Murray & Roberts and Wilson Bayly Holmes-Ovcon (WBHO) for the 2010 soccer World Cup, which triggered a building frenzy. Now, the Johannesburg-based companies are cutting jobs and battling depressed order books as President Jacob Zuma’s government awards fewer of the large-scale civil engineering and construction contracts that the big companies depend on.
A commodities price rout has also dried up engineering and mining contracts, and the country’s four largest construction companies have reduced headcount by more than 20 000 permanent and contract jobs in South Africa and other markets over the past two years, with executives saying more are likely amid a domestic economic slowdown.
“We can’t see it getting better in the short term,” WBHO Chief Executive Officer Louwtjie Nel said in an interview last week. “We think we’re going to be under pressure for another year or so, so we’ve just got to keep our heads down and do good projects.”
Construction companies Aveng, Group Five and Murray & Roberts have lost more than half their market value in the past two years as the outlook deteriorated. The industry is also trying to move on from a collusion scandal related to World Cup contracts that resulted in heavy fines for 15 companies and may yet lead to significant regulatory reforms for the industry, Competition Commissioner Tembinkosi Bonakele said in an interview last week.
“It’s tough and it’s going to be tough,” Roelof Brand, a Cape Town-based analyst at Avior Capital Markets, said of the outlook for the industry. “For things to change materially we need substantial infrastructure investment and we need the mining capital expenditure to restart.”
Abundance of work
After South Africa was awarded the World Cup, local construction and engineering companies benefited from an abundance of work unseen in the country since the late 1960s. The government invested billions of rand in infrastructure projects including new and upgraded roads, airports and the Gautrain high-speed rail link between Johannesburg and Pretoria. At the same time, higher commodity prices buoyed demand from mining and energy companies.
But by the time the new stadiums thronged with soccer fans from around the world, cracks had begun to show in the industry. South Africa’s competition authorities announced they were probing the industry for alleged collusion on projects including stadiums and the Gautrain.
South Africa’s economy has since struggled with power outages, a severe drought as well as the effects of plunging commodity prices. Finance Minister Pravin Gordhan last week predicted growth would be 0.9 percent this year, the slowest since a 2009 recession.
A large and growing part of South African infrastructure investment has been in equipment like locomotives, rather than civil construction, according to Marc Ter Mors, the head of equity research at Johannesburg-based SBG Securities. Also, projects are getting split into portions, allowing smaller construction companies to increasingly compete, he said.
Builders have also been hurt by labour strikes and cancelled mining contracts and companies have responded by cutting headcount and other costs, as well as getting stricter about which contracts they bid for to improve margins and profitability.
Not all companies have been affected to the same extent. WBHO shares have declined 6.2 percent in Johannesburg in the past two years, compared with 84 percent for Aveng and 59 percent by Murray & Roberts, as the company benefits from building activity in Australia and less exposure to the mining industry than some of its competitors. Global mining companies have slashed spending on projects to build and expand mines as metals prices slumped.
While industry order books have benefited from a boom in residential and commercial building in South Africa, that too may start to slow as interest rates rise, said Avior’s Brand. And new building projects alone aren’t enough to support the industry, Aveng Chief Executive Officer Kobus Verster told reporters after the company’s results presentation.
“We do not have mega projects that can keep thousands of people busy for multiple years,” Verster said. “To really get a step change we need to have a real roll out of the long awaited and promised infrastructure programme in the country.”
* With assistance from Franz Wild