The end of 2011 saw the construction industry record its biggest improvement in activity in over a year and a half. The persistent recovery in activity has slowed retrenchments within the industry and employment has declined to its slowest pace in two years. Despite these improvements, work remains scarce and tender competition fierce, resulting in subdued profitability.
In its latest worldwide construction review, international credit insurer Coface says there is a glaring shortage of affordable housing in South Africa the Middle East (Saudi Arabia, Emirates, Israel, Egypt), Brazil, Indonesia, the Philippines, Turkey and the Maghreb, at least in the major urban centers.
In South Africa, the post-apartheid boom in residential construction ended with the advent of the financial crisis but there was a brief surge in 2010 in anticipation of the World Cup, before declining again in 2011. Banks are reluctant to grant credit to households with debt above 70% of their available income. Social housing construction is well below the needs of the many lower income households. 2012 will not be any different.
Although government is committed to investing heavily in the country’s infrastructure with long term projects, a few of the larger projects are now coming to an end. The largest contributors to government’s capital infrastructure expenditure over the recent past have been Eskom and Transnet.
Transnet’s multi-product pipeline from Durban to Heidelberg which boosted construction work over the past few years, was put into use at the beginning of this year. Similarly, expenditure on Eskom’s new power stations has largely shifted away from construction work towards the purchase and installation of machinery and equipment. The completion of these two major projects means that the market will be flooded with construction workers looking for work in 2012.
This increased supply of construction workers and the lack of demand for construction projects has resulted in greater competition between firms. Margins are being squeezed in order to be more competitive and attract more business, making it a challenge for construction companies to turn a profit.
The civil construction confidence index increased from 21 in the third quarter of 2011 to 26 in the fourth quarter. An index reading of 100 shows that all respondents are satisfied with the prevailing business conditions, while zero shows all respondents are unsatisfied.
A reading of 26 indicates that three quarters of respondents remained dissatisfied with prevailing business conditions, indicating the hard times are far from over. The majority of players in the industry feel that the insufficient demand for construction work is hampering their business greatly.
By Warrick Robertson, risk analyst, Coface South Africa Services