The South African construction industry had a strong year in 2002, despite increasingly high interest rates, and analysts believe that the outlook for 2003 is even rosier.
The Building Construction and Engineering index outperformed the All Share index on the JSE Securities Exchange SA this year, showing interest rates had little impact on valuations. In Merrill Lynch’s latest review of the industry they revised sectoral investment from underweight to neutral.
While private sector spending may be maturing, analysts feel that recovery in government spending is likely to become a big feature in the next year. And an expected decrease in interest rates, by about 3% at the end of 2003, should help the private sector from sagging too much.
The Construction Industry Development Board (CIDB), which has been in existence for just over a year and a half, is focusing on helping governments improve and standardise tender processes in an effort to aid them in the spending process. This includes increasing co-operation between the private sector and government. Brian Bruce, Chief Executive at Murray & Roberts is chairman of the board and believes there is significant potential for the Board’s success.
The board is a statutory board established by Parliament in December 2000. It is by nature a public/private partnership and has a lot of support from both industry and government.
The Building Industries Federation of South Africa (BIFSA), says that some roleplayers in the industry feel that increasing intervention in the form of new laws and industry could have disastrous consequences. However, it is hoped that the CIDB will get involved and influence these effects.
Merrill Lynch analyst Peter Steyn says investors appear to be focusing on the longer-term structural recovery in infrastructure spending by government.
And with the construction industry worth between R50-billion to R55- billion in South Africa, this translates into a substantial amount of money.
BIFSA says that investment in construction is presently at R46,7-billion. About R30-billion annually (2001) is sitting in building with roughly equal amounts in residential and non-residential buildings.
“Competition and tendering is still fierce and coupled with low profitability, has led to the demise of many building firms over the years,” says BIFSA’s head Pierre Fourie.
Despite this, regional demand for work is being seen. Murray and Robert CE Brian Bruce says that demand for infrastructure and services exceeds the potential supply at the moment. Adding that there are constraints.
In the last three quarters of 2002 there was an increase in offshore work. Both Aveng and Murray & Roberts make nearly of their construction revenues outside South Africa. In the last year this was fueled by prospect of hard currency income. Some analysts believe that in the next few years these companies may reduce their foreign exposure, as more capacity is required in South Africa.
“Some of the major and medium sized contractors have gone into the overseas market and will not retreat from that environment just because there is opportunity back home. They have established a permanent presence there. New capacity is going to have to be brought into the industry to meet this demand,” Bruce says.
There is a great deal of work available in Africa, especially Angola and Nigeria. BIFSA says that the rebuilding of the infrastructure in Angola offers many opportunities, as does investment in industry in both these countries.
However, there are problems of local language barriers, local rules and regulations and unknown costs and delays.
On a more local level, several projects in the Gauteng province are on the horizon, and more are planned nationwide. Casino projects in Mossel Bay and George, the Berg Water project and new toll roads are a few. One project that has received a lot of media attention is Coega, being built just outside Port Elizabeth. Those in the industry believe that this project offers many opportunities for smaller contractors.
The East Cape Master Builders Association, a BIFSA member, is active in providing a number of related services, including Occupational Health and Safety related activities, which also creates more jobs locally.
Industry transformation has been slow, but BIFSA believes that organizations such as the Women in Housing and Construction, will add value to the industry.
Many training opportunities are also available, although in terms of tertiary education the system of grants is said to be cumbersome for most smaller levy payers.
“Unfortunately the Construction Education and Training Authority has not been able to put these in place at an early stage, although the process has gathered some momentum in recent months,” says Fourie.
The pending war in Iraq could have a positive impact on the industry, in that defensive stocks would show strength during wartime and once peace returns, cyclical stocks would outperform. In many ways the construction industry fits both these bills.
An exception may be with Murray and Roberts, who have about 37% of their order book focused in the Middle East. While the analysts have shown concern over this, Bruce dismisses the supposed threat.
“Always when there is a war in a region it does have an impact on a certain issues, but at this stage we are not seeing too much consequence of the threat of war in the Middle Eastern economy. And we are certainly not in the areas that are directly impacted by the conflict,” Bruce says.
With most of South Africa’s major players in the sector heavily involved overseas, the rand’s recent strength also has some impact on these companies. There is some concern that South Africa’s level of competitiveness may decline.
But Merrill lynch points out that every major listed contractor has experienced strong order books, indicating continued growth in 2003.
“This has been driven by far stronger markets, both in South Africa and abroad, assisting in the groups achieving significant growth in their order books,” says Steyn. – I-Net Bridge