FNB/BER survey says South African construction is recovering

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By Cees Bruggemans, Chief Economist of FNB.

  • Although the FNB/BER construction confidence index remained low at 21, construction activity picked up and tendering competition eased relative to the previous 6 months.
  • The short-term prospects for the civil construction are brighter given indications of recovery in activity, although a number of head winds may see the recovery not continue in a straight line.

The FNB/BER construction confidence index edged lower from 23 in 2Q11 to 21 in 3Q11. This is the same level as in 1Q11 and much lower compared to the average level of 84 in 2006.

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 21, therefore, indicates that the bulk of respondents remained dissatisfied with prevailing business conditions.

Although confidence remained low, other indicators show that the construction sector continued to improve.

  • Construction activity picked up relative to the first half of the year (see the attached chart). Although activity levels were still far from satisfactory in 3Q11, they were the best since 2Q09.
  • Construction activity flowed from a number of sectors.
    • Construction work at some public corporations (such as Eskom, Transnet, SANRAL and TCTA) continued on and off. For instance, work at the Medupi and Kuseli power stations have resumed since labour problems brought it to a halt in May.
    • The mining sector increased spending on construction works. This is more done to sustain than to expand existing capacity.
    • Little work continued to flow from the government. Some provinces awarded more tenders, but in others they were postponed due to investigations into their awarding.
  • Tendering competition also eased relative to the first half of the year (see the attached chart). Although it is still fierce relative to 2006 and 2007, it is slightly easier relative to 2009 and 2010.
  • Profitability also improved relative to the last 2½ years.
  • Insufficient demand for work became somewhat less of a constraining factor compared to the end of 2010.
  • Although an inadequate supply of construction materials did not hamper activity by much, it has become more of a factor than previously. The noticeably higher level in 3Q11 compared to 2010 could largely be attributed to supply problems of bitumen and certain types of steel.

In conclusion: A number of indicators showed that the recovery in the construction sector continued in the 3Q11. However, confidence remained low, as absolute activity levels remained unsatisfactory and uncertainty about prospects may have remained considerable.

Respondents expect the recovery to gain further momentum in 4Q11. More work is likely to flow from local governments, because it is easier to make decisions now that the local election is completed. National Treasury’s monitoring of local governments’ budgeted capital spending may also advance construction activity.

However, a number of developments may cause respondents’ optimistic expectations not to be fully realised and that the recovery does not continue in a straight line in the next 6 months or so.

  1. The spending by mines could be spread over a longer time period than initially planned should the present overseas financial turmoil usher in a period of even weaker global demand and lower commodity prices.
  2. Financing is likely to continue hampering some investment spending by public corporations. SANRAL is a new case in point.
  3. Construction work comes to an end as certain big projects, such as the power stations, progress and spending on machinery and equipment takes over.

In all, the short-term prospects for the civil construction are brighter given indications of recovery in activity, although a number of head winds may see the recovery not continue in a straight line.

Visit the FNB Economics website at www.fnb.co.za/economics and consider using our free e-mail service.

FNB/BER Civil Confidence Index

Percentage satisfied

Civil construction

Growth in construction activity

Civil construction

Tendering competition

Source: BER Stellenbosch

Source: Cees Bruggemans, FNB, October 11, 2011.

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