Construction industry recovery "hesitant", says FNB

Construction recovery gains traction in 2Q2012 but:

• The FNB/BER construction confidence index rose for the third consecutive quarter, from 34 index points to 38 during 2Q2012. This also marks the highest level of the index since the end of 2009
  
• The 2Q2012 results suggest that the recovery is gaining momentum with construction activity in particular picking up noticeably. Despite this, there is still reason to believe that this recovery remains fragile
  
• A number of constraints remain that could thwart the pace of the overall recovery going forward

An important feature of the recovery thus far has been the consistent rise in construction activity and during 2Q2012 activity accelerated more notably than in previous quarters. This activity stemmed from a number of sources:

• Capital expenditure (capex) from provincial governments remains robust. During the 2011/12 financial year (ended on 31 March, 2012) provincial capex was 21.7 percent higher year on year. This momentum likely continued with a number of projects focused on the health care sector and water waste management being initiated
  
• In contrast, municipalities continue to struggle. Only 41 percent of the total municipal capex budget had been spent during the first nine months of the financial year (until March, 2012). However, some work could have flowed from municipalities as they push to spend more in the last quarter
  
• Public corporations saw an increase in civil construction activity with new projects from the TCTA and ACSA in particular coming on line
  
• However, construction activity from the private sector likely contributed less with mining production slowing and some mining firms holding back on expansion plans

As a result of the uptick in activity, firms have been able to raise tendering prices further, providing additional relief to their balance sheets.

Construction employment levels increased modestly in 2Q2012.

Overall profitability also improved. However, the increase in profitability was lower than the higher prices and increased activity would have suggested. "This is indicative of the type of rising cost pressures civil contractors are faced with," said Cees Bruggemans, chief economist of FNB.

Part of the cost increases can be explained by the improved employment levels during 2Q2012.

Dissatisfied with work available

In addition to rising costs, respondents remained dissatisfied with the volume of new construction work available and they therefore still rate it as a significant constraint. Also, the lack of skilled labour is becoming even more of a concern and has increasingly been mentioned by the industry.

Regarding the construction survey's methodology, the confidence index can vary between a maximum of 100 (which indicates that all respondents were satisfied with prevailing business conditions) and a minimum of zero (indicating that all respondents were unsatisfied). A level of 50 indicates that the respondents are equally divided between those satisfied and dissatisfied. The current reading of 38, therefore, indicates that the majority of respondents remained dissatisfied with prevailing business conditions.

In conclusion, the recovery in the civil construction sector seems to have gained traction during 2Q2012 with activity levels increasing, however, rising costs, insufficient demand for new work and the shortage of skilled labour could hamper the pace of the recovery going forward. In other words, the recovery remains hesitant, potentially tempering confidence in future quarters.

Source: BER Stellenbosch

click to enlarge

Source: BER Stellenbosch

click to enlarge

Source: BER Stellenbosch

click to enlarge