Construction Confidence Index reaches 3 year high

South Africa: The Good News    Translate This Article
16 October 2012

The FNB/BER civil Construction Confidence Index (CCI) rose to its highest level in three years, gaining 4 index points to reach 42 during the third quarter of 2012. The rise in confidence shown in the index was underpinned by improved activity levels and there are signs that the construction recovery is gaining momentum.

Although construction activity has consistently improved over the past two years, the growth in activity ratcheted up more significantly over the last six months. This higher growth comes from a number of sources, such as:

Provincial spending on capital projects—which is dominated by road and water infrastructure projects—remains on track. However, there are differences among the provinces. Capital expenditure (capex) in KwaZulu-Natal, Gauteng and the Free State is growing robustly, while the Eastern Cape, Limpopo and the North West struggle to get projects off the ground/completed. According to the National Treasury, capex by provinces rose by 14.6% during the first quarter of the 2012/13 financial year ending June 2012.

Continued capital outlays by Eskom on the Medupi, Kusile and Ingula power stations as well as ongoing capex by Transnet also supported construction activity. In contrast, municipalities continue to underspend on their capex budgets. According to the National Treasury, municipalities spent R33.2 billion on capex for the full 2011/2012 financial year ending June 2012. However, this represents only 72.5% of the total capital budget for the full year. There was therefore an underspend of R12.8 billion. The improvement in activity levels has led to some constraints within the construction sector, most notably the shortage of skilled labour which is a concern for a number of firms. In contrast, the shortage of building materials was less inhibiting to business operations during 3Q2012 compared to 2Q2012.

Thanks to the sustained rise in activity, construction firms had some additional room to increase tendering prices. Competition for work also eased slightly during 3Q2012.

However, despite the increase in activity and the more relaxed competitive environment, profitability came under renewed pressure. 'Input prices are rising faster than tendering prices and this has continued to squeeze profit margins during the third quarter' said Cees Bruggemans, chief economist of FNB.

The number of people employed by construction firms also rose in response to the rising activity levels.

In conclusion, conditions in the civil construction sector have improved significantly over the past few quarters. This is likely to continue as construction work increases.

However, the pace of the recovery depends on the public sector's ability to realise spending on their capex budgets. Unfortunately in some spheres of government this remains a problem.

The CCI 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 42, therefore, indicates that 42% of respondents were satisfied with prevailing business conditions compared to 38% in the previous quarter and a cyclical low of 21 during 1Q2011 and 3Q2011.

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