The Afrimat Construction Index (ACI) declined marginally in the second quarter of 2017.
The ACI is released by JSE-listed industrial minerals and construction materials miner and supplier Afrimat. It is a composite index of the level of activity in the building and construction sectors, compiled by economist Dr Roelof Botha.
According to Botha, the index was impacted on by low levels of business and consumer confidence during the second quarter of the year.
Confidence levels were mainly influenced by a series of political shocks, including major changes to the executive leadership at the National Treasury and the fiscal threat posed by losses at a number of State-owned enterprises.
Botha adds that policy uncertainty is acting as a constraint to the expansion of productive capacity in the economy.
Durable consumption expenditure by households also continues to decline in real terms.
Despite these and other well-publicised obstacles to construction activity and the economy, in general, the ACI only declined marginally in the second quarter of 2017, says Botha.
After reaching an eight-quarter high of 127 in the fourth quarter of last year, the ACI has now declined for two successive quarters to reach a level of 117 in the second quarter of 2017.
However, the construction sector remains on a stronger footing than seven years ago, with the ACI having expanded by 17.7% since the third quarter of 2010 (the base period) – almost 50% higher than the rate of growth of the economy as a whole over this period (in real terms).
Botha says the composite index provides a balanced and realistic view of activity in the construction sector, as it evens out the contradictory trends and conditions often portrayed by the individual components that comprise the index.
The ACI is calculated from nine constituent indicators, including the FNB Bureau for Economic Research building confidence index.
Botha says the expansion in construction activity since the third quarter of 2010, as indicated by the ACI, has been driven mainly by strong increases in four key indicators, namely retail sales values for hardware, glass and paint; employment in construction; the volume of mined building materials; and the value of buildings completed in large municipalities.
It remains a point of concern that the value of building plans approved by the larger municipalities continues to perform poorly, while confidence levels in the construction sector declined dramatically in the second quarter of 2017.
Formal employment in the industry also took a knock between April and June 2017.
Botha believes that the tide may be turning for construction activity.
“Fortunately, the South African Reserve Bank decided to ease the debt servicing burden of South African households and businesses, with a marginal decline in the repo rate announced in July 2017. “Owing to a sharp retreat of inflationary pressures in the South African economy, further interest rate cuts are widely expected, which is likely to witness a return to a positive ACI trend before the end of the year”.
Botha also points out that the South African economy expanded by more than 1% during the first half of the year – the first time growth of this order has occurred since the beginning of 2015.
“Construction sector output is traditionally a lagged indicator of overall economic activity. Prospects are likely to improve into the second half of the year, as the country’s gross domestic product starts to build momentum on the back of higher world growth, lower interest rates and the recovery of several key export commodities.”
While activity in the construction sector has tightened, the sector remains attractive for companies such as Afrimat, being well diversified, nimble and positioned to work on medium to small projects, says Afrimat CEO Andries van Heerden.
“Granted, you have to remain on your toes and ever vigilant to opportunities,” he adds.
“The results of this study are showing that construction is a sector in which government spend is still taking place and, given economic constraints, it is natural for the sector to come off slightly.
“However, if companies position themselves correctly on product quality, price and service delivery, they should be able to make a decent return for shareholders.”
As December Looms
The results of the second-quarter ACI relate largely to the psychological effects of the Cabinet reshuffle during this period, notes Van Heerden.
“It was as if everything came to a complete standstill for six weeks.”
In addition, the number of public holidays in April, as well as the dates, reduced trading significantly, while the last heavy summer rains in Gauteng also played a role, notes Van Heerden.
July, August and September, however, look much stronger, which means that the third-quarter ACI should show some improvement.
Looking ahead to December, when the African National Congress elects its new president, Van Heerden believes that any negative news is already priced into the market, while he questions whether the industry is sufficiently geared to deal with the positive effects “of any good news”.