Construction Trends

Mon, 01 Dec 2008 12:52

In our second issue we ran an article by Cees Bruggemans, First National Bank’s Chief Economist, titled ‘The Greatest Boom of all Time’. It illustrates the explosive pace at which this world is growing, and the inherent opportunities deep within. He describes the massive structural shifts taking place in global society, most notably a population growth of seven billion people in a single generation, 1950 – 2050, which will never happen again.

Coupled with this growth is the fact that we have gone from minimal to full, to post-industrial existence in the same time frame, at income gains of unfathomable levels. Cees says that “the fruits of these times, and only once shall they come around, are for the picking”, and all we need to do is read the signs.

“It seems that many people still cannot comprehend the financial gains inherent in these structural shifts. It has always been easier for people to focus on the immediate realities, but it is important that we do not let them block the bigger picture.”

Placing this in context, South Africa is being pushed and pulled from every angle – politics, unemployment and poverty, interest rates and inflation, service delivery, trade deficits and more. As only a developing nation can be, this country is faced with enormous challenges and a wealth of inherent opportunities.

However, while we steadfastly weather these dark storms locally, South Africa is also at the mercy of global forces. Just as the infrastructure drive kicks into gear, and construction industry order books swelled to absolute capacity, an American credit crisis strikes the world like a reverberating bolt of lightning.

First & Foremost

The bigger picture, the one we cannot let out of our sights, is the sweeping development of critical infrastructure. Government has set aside around R630 billion to invest over five years, specifically for the construction and infrastructure sector. The strength of such a sign is difficult to miss, and it looks like this is the sector to carry South Africa’s torch.

Having achieved a compound growth rate of 10% each year since 2000, the construction industry has far surpassed the 4% GDP growth over the same period. Given the number and scale of projects still in the pipeline, and the consistency with which the top companies continue to fill their order books, many believe the momentum could chug away into 2015, and possibly beyond. Market indicators suggest that growth in civil engineering could exceed 13% per year moving forward.

• Coega: R21 billion
• Airports: R22 billion
• Gautrain: R25 billion
• Ports: R28 billion
• Sasol: R65 billion
• Transnet: R78 billion capital expenditure over five years
• Department of Transport: R92 billion for the FIFA 2010 World Cup™
• ESKOM: R300 billion over five years.

 

In a recent weekly column, Cees reported that employment in the industry, in the year through June 2008, increased by around 14% - to nearly 136 000. According to data compiled by the South African Federation of Civil Engineering Contractors (SAFCEC), the last time figures were this high was in 1980, when the numbers were estimated at 125 000.

In the second quarter of 2008, Statistics South Africa (StatsSA) reported that local output in the construction industry was up 13.5% than the same period last year. Real spending on construction works was up 28% for the second quarter of 2008 as well, and R17 billion in civil contracts were awarded in the same period. Cees went on to illustrate that while agriculture was the only sector outperforming construction this year, in the long term construction is going to be, by far, the fastest growing industry in this country.

As a developing nation, South Africa should consistently be spending around 25 to 30% on productive fixed capital, whereas current spending is sitting at about 20%. Indicators have shown that growth in GDP has surpassed the five-year moving average of investment in capital, meaning the country is running out of productive capacity. Therefore, the infrastructure market is in for a positive period over the coming years as we invest to add additional capacity for future growth.

The Credit Crunch

Beginning in August 2007, the “credit crunch” eventually grew into the “global financial crisis”, the effect of which has obviously rippled around the world. While the Rand has been relatively stable in comparison to other emerging markets around the world, it has still taken a heavy knock against a very strong US Dollar in particular. Down the line, this could have implications for the industry but the degree of impact depends on a number of issues.

Peter Steyn, General Manager of Construction and Infrastructure at Absa Corporate and Business Bank, says, “The global financial crisis has resulted in some as-yet-unquantifiable consequences for the South African infrastructure market. Essentially, the effect South Africa will feel revolves around the availability of funding to pay for these major infrastructure projects.

“Basically, international capital markets have become very illiquid. Parastatals such as ESKOM and Transnet, and to some extent, Government itself would have relied on international investors to buy long term debt instruments from them, the proceeds of which would have been used to complete major asset investments, and the investors would receive interest and their capital investment back over time.

“With the financial market crisis there is now a lot less money changing hands, and it seems a lot less likely that Eskom, Transnet and the Government at large would succeed at raising large amounts of money – at reasonable cost – in the international market in the near term.”

With that in mind, Trevor Manuel recently announced a rise in Government borrowing to fund these infrastructure projects, each of them aimed at attracting investment, reducing employment and, essentially, strengthening the bedrock of the country.

Despite the bleak outlook from the shoulders of this global crunch, Peter adds that renewed confidence could swing the view fairly quickly. However, we must remember, that as an emerging market economy, South Africa has to overcome the impact of poor sentiment on the part of global investors. In times like these risk aversion increases and the world’s money retreats to places of relative safety. It may take a little while before global money flows head back to emerging markets and the speed of this occurrence depends on how quickly confidence returns.

Adding charge to this electrical storm, have been the dramatic declines in commodity prices, which as Peter says, could impact on the feasibility of some planned mining expansions. This will obviously affect private sector investment in construction-related activity linked to these expansions, particularly in the platinum group metals industry.

A New Day

‘SA – The Good News’ recently reported that South Africa has, over the last few years, shifted from a consumer-led to investment-led growth, which is far more sustainable in the long term. While Britain enters a recession, after a falling GDP for two successive quarters, our economy is expected to continue growing at around 3.7% for 2008. Manuel expects growth of 3% in 2009, and further acceleration through 2010 and beyond.

Furthermore, Manuel also expects inflation to drop to 6.2% next year, 5.3% in 2010, and 4.7% in 2011, leading to lower interest rates over the next few years.

Brian Bruce, Chief Executive Officer of Murray & Roberts, also expects Government to keep up the pace of infrastructure spending even as credit markets fail. Illustrating that when interest rates go up, residential and commercial building stops, but the rebuilding of a nation’s asset base will forge ahead regardless. Bruce said that the years to follow, while being cautious, would be more a question of how Government prioritises its spending.

Peter adds, “It has been a tough year, and it will remain difficult for many but, in my view, there are already a very large number of projects underway, which will be very difficult to stop. What this short-term (12-18 month) problem affords us is an opportunity to digest the scale of investment that has already started to come through.

“Indeed, it will probably prolong the upswing in the infrastructure investment cycle as many of the investments planned are essential, not ‘nice-to-have’. It gives the contractors a chance to cope with some of the material cost increases they've had to deal with, and allows the opportunity to rebalance their capacity to deliver, which was becoming very stretched.”

As the storms continue to batter the “good sailing ship, SA (Pty) Ltd”, there are many reasons to hold fast and keep a steady beat. As we’ve all heard before, the darkest hour is before the dawn. As Cees says, we South Africans – this motley crew – cannot let these immediate and testing times get the better of us, for there is certainly a bigger and brighter picture. Everything in life runs in cycles, it ebbs and flows, every storm shall pass.

Written by Andrew Black