Building sector in 68% fall since 2009

THE CONSTRUCTION and materials index on the JSE has slumped 68 percent since peaking in September 2009 while the JSE all share index has grow by 129 percent in the same period, according to latest report on the construction industry compiled by PwC.

The report said the marginal recovery in the construction and materials index since June was encouraging but it was too early to start predicting a resurgence in the industry.

“Construction is generally a lagging industry and will require general economic growth to show a substantial recovery, before one can expect any real growth in the construction sector. A good indicator of industry performance is public sector infrastructure expenditure,” it said.

The report added that the negative real growth in public expenditure had impacted the industry, especially in regard to large scale civil engineering projects.

It said the actual capital expenditure incurred by the public sector related to new construction, development of properties and major rejuvenation projects for last year was R32 billion below the forecast expenditure for that year and indicative of the challenges faced by the industry.

The majority of public sector capital expenditure was undertaken by Eskom, Transnet and the SA National Roads Agency Limited (Sanral) but total capital expenditure by these three state-owned enterprises decreased by 14 percent this year to R98bn.

Reduced spending The report said the bulk of this decrease was attributable to the 19 percent decline in capital expenditure by Eskom to R57.3bn. Sanral’s expenditure also declined this year while the bulk of Transnet’s capital expenditure related to rolling stock purchases and therefore did not necessarily support the construction industry.

PwC said the private sector was also a significant contributor to capital expenditure in the construction industry, with the mining sector one of the biggest players.

However, PwC said there had been a decline in demand from the mining sector because of severe pressure, with shrinking margins attributed to volatile commodity prices, exchange rate fluctuations and labour unrest.

It said mining companies had reduced their capital expenditure by 31 percent or R22bn over the past three years to the lowest level since 2007.

The report said indications were that capital expenditure in the mining sector might decline further over the next few years as mining companies struggled for survival in the lower commodity price cycle.

“The lack of mining capital expenditure at the bottom of the cycle will create significant development opportunities once prices start increasing, as mining companies will have to catch up to increase production,” it said.

“Murray & Roberts’ core focus on the resources sector, as well as other construction companies with significant exposure to the mining sector, positions them well to benefit from an upswing in the sector,” it said.

PwC said this year was a challenging year for South Africa’s construction industry with ongoing pressure on margins, lower revenue and smaller order books.