http://www.engineeringnews.co.za
  SEARCH
Login
R/€ = 13.71Change: 0.00
R/$ = 12.46Change: 0.06
Au 1154.28 $/ozChange: -2.21
Pt 1027.00 $/ozChange: -16.00
 
 
Note: Search is limited to the most recent 250 articles. Set date range to access earlier articles.
Where? With... When?








Start
 
End
 
 
And must exclude these words...
Close Main Search
Close Main Login
My Profile News Alerts Newsletters Logout Close Main Profile
 
Agriculture   Automotive   Chemicals   Competition Policy   Construction   Defence   Economy   Electricity   Energy   Environment   ICT   Metals   Mining   Science and Technology   Services   Trade   Transport & Logistics   Water  
What's On Press Office Tenders Suppliers Directory Research Jobs Announcements Letters Contact Us
 
 
 
RSS Feed
Article   Comments   Other News   Research   Magazine  
 
 
Aug 17, 2012

Construction slowdown continues to impact on steel construction sector

Back
Construction|Engineering|Africa|Building|Cement|CoAL|Coface South Africa|Education|Environment|Evraz Highveld Steel & Vanadium|Flow|Gas|Industrial|Industrial Development Corporation|PROJECT|Projects|Property Development|Resources|Scaw Metals|Systems|Africa|South Africa|While Building|Cement Producers|Flow|Manufacturing|Materials Manufacturers|Power Generation|Power-generation|Products|Property Development|Solutions|Steel|Steel Industry|Steel Output|Steel Producer|Systems|Business Confidence|Infrastructure|Iron Ore|Iron-ore|Power|Pravin Gordhan|Saijil Singh
Construction|Engineering|Africa|Building|Cement|CoAL|Education|Environment|Flow|Gas|Industrial|PROJECT|Projects|Property Development|Resources|Systems|Africa|||Flow|Manufacturing|Power Generation|Power-generation|Products|Property Development|Solutions|Steel|Systems||Infrastructure|Iron Ore|Iron-ore|Power|
construction|engineering|africa-company|building|cement|coal|coface-south-africa|education-company|environment|evraz-highveld-steel-vanadium|flow-company|gas|industrial|industrial-development-corporation|project|projects|property-development-company|resources|scaw-metals|systems-company|africa|south-africa|while-building|cement-producers|flow-industry-term|manufacturing|materials-manufacturers|power-generation|power-generation-industry-term|products|property-development|solutions|steel|steel-industry|steel-output|steel-producer|systems|business-confidence|infrastructure|iron-ore|iron-ore-person|power|pravin-gordhan|saijil-singh
© Reuse this



While building confidence among contractors, materials manufacturers and quantity surveyors has increased marginally over the last two years, the immediate outlook for the South African construction industry remains challenging, says credit solutions provider Coface South Africa lead analyst Saijil Singh.

He notes that, although some companies are reflecting steady growth rates, the industry is still reeling from a three-year battle among companies competing to win contracts for projects with a lower profit margin.

“Currently, we are seeing a significant lack of demand on all construction bases – infrastructural, commercial and residential. “This results in an oversupply of workers and a sizeable portion of small and medium-size enterprises (SMEs) accepting contracts with minimal profit margins simply to cover expenses.”

This has led to increased competition among firms, which is unsustainable in the long term, says Singh. He adds that, although profit margins will remain low unless demand increases, this strategy will not benefit the construction sector.

Business Confidence Impacts On Construction

Cement producers and brick manufacturers experienced strains in working capital and cash flow this past year, which Singh attributes to the decrease in plans passed for nonresidential buildings, which was down by 22.8% in the first quarter of 2012, compared with the fourth quarter of 2011.

This decrease contributed significantly to the 4.5% drop in the total value of recorded building plans approved during that time.

“The reality is that commercial property development is directly proportional to the Business Confidence Index and indirectly proportional to the number of commercial liquidations, with a six-month lag effect,” he says.

In terms of commercial property development, space use in major urban areas is reported to be 80%, and in smaller metropolitan areas it is as low as 50%, says Singh. He explains that project volumes are influenced by private-sector commercial property developments and that new development is not as viable as it was before 2008, owing to a decrease in commercial property demand.

The construction industry will, however, benefit from government’s plans to increase local infrastructure spending, but only in the second half of 2013.

Singh attributes the delay in rolling these plans out to the nature of administrating and implementing them, which includes the national distribution to municipalities, the municipal tender processes, tiered production payment schemes and subcontractor reimbursements.

Meanwhile, there is a specified amount of money awarded to municipalities each year, according to the infrastructure roll-out programme.

However, as has occurred, if a municipality fails to spend that budget in the allocated period, the funds are returned to the National Treasury and, as the next period’s budget allocation is dependent on the previous spend, that municipality’s budget will be reduced for the next period – something which was emphasised by Finance Minister Pravin Gordhan during his 2012/13 Budget speech.

Knock-On Effect
The South African steel industry is suffering from the backlash caused by the struggling construction sector. Singh says there has been a recovery in domestic demand this year, albeit tentatively.

He states that if the country’s economic growth stagnates, the steel industry suffers first.

Nevertheless, Singh believes that stagnation is unlikely to occur, owing to the prediction of low but steady growth of the South African economy in general. Companies with sales-based models and poor efficiencies will be vulnerable, however, and will run the risk of failure unless effective measures are put in place beforehand, he warns.

Meanwhile, the World Steel Association has reported that South Africa’s steel output fell by 12.7% year-on-year to 6.7-million tons last year, while global production increased by 6.8% to 1.5-billion tons.

Singh highlights the significant downtime experienced by the country’s steel mills in 2011, with a furnace failure at ArcelorMittal South Africa impacting on an already subdued outlook for the JSE-listed steel producer.

He also points out that South Africa’s second-largest steel producer, Evraz Highveld Steel & Vanadium, experienced significant downtime while making improvements to its plant, and therefore contributed to the national decline in the 2011 steel production.

“With production under strain, the largest current constraint in the steel industry is a lack of demand. The construction sector’s share of the demand for steel and engineering products is in excess of 60%, while the share of basic iron, steel and metal products (exclud- ing machinery going into the construction sector) represented 33% of sales in 2011.”

Singh adds that local steel producers and exporters could, therefore, be cutting back on future investment plans. With high steel prices and margins squeezed to almost zero, there is little room for South African steel companies to recover from further interruptions, he states.

“This challenging environment mainly affects small and medium-size steel firms,” he says. “Larger firms are well capitalised and have sufficient equity reserves to cope with the current climate. As a result, we are likely to see an increase in the number of liquidations in smaller steel firms in South Africa.”

Additional Challenges

Singh attributes the South African steel industry’s lack of global competitiveness to the many producers using old, cost-intensive systems and processes to manufacture steel.

He cites electricity-powered-only smelters as one such example and highlights that the global trend is to use a combination of resources – gas, coal and electricity – for power generation.

“This was one of the factors identified by the Industrial Development Corporation in its decision to buy Scaw Metals and invest in upgrading the steel producer’s facilities.

“Further, South Africa’s manufacturing process is dependent on a more expensive and limited quantity of higher-grade iron-ore. Upgrading [manufacturing processes] would make it feasible to process less expensive, lower-grade iron-ore, which is more readily available,” explains Singh.

In addition to the industry’s use of outdated technology, he cites the unpredictability of the basic steel price, fluctuating currencies and rising labour costs as further challenges facing the industry.

He also includes the need for education and skills development, but says this does not relate directly to the steel industry.

“If the skills shortage problem is resolved in the construction sector, the steel industry would see improved demand and reduced costs,” he maintains.

Long-Term Prospects

While the immediate outlook for the steel construction sector is challenging, Singh offers some hope for the industry’s long-term prospects, but only as a direct benefit of South Africa’s logistical reach into nearby developing economies.

“Our large corporations have internal mechanisms to weather the storm and position themselves attractively for large tenders; however, the previous and current lack of profitability for shareholders would have to be compensated for,” he says.

For this reason, Singh expects subcontracting margins to be squeezed to ensure maximum profitability, resulting in SMEs entering a price war to secure business. Singh, therefore, is not optimistic about the outlook for SMEs.

“South African companies still need to be more innovative and need to invest in research to promote technological developments. Advances in our technology would give us the competitive edge we need, as we are no longer competitive by price, owing to labour costs.”

Singh warns that if this is not done, a positive shift towards global supply from Asian companies could become a reality.

Edited by: Chanel de Bruyn
Creamer Media Senior Deputy Editor Online
© Reuse this Comment Guidelines (150 word limit)
 
 
 
 
 
 
 
 
Other Construction News
The South African market has been included as one of Spain’s 16 “priority markets” as the European country intensifies its efforts to raise exports in the wake of the global economic crisis and as its companies move to diversify their foreign direct investments to...
Sphere Holdings CEO Itumeleng Kgaboesele
Black-owned investment holding company Sphere Holdings plans to raise a further R1-billion in the coming months in support of its strategy of becoming a leading black industrial enterprise, which could ultimately seek a listing on the JSE. CEO Itumeleng Kgaboesele,...
This eight-page brief is a synopsis of key developments in the construction industry over the past 12 months. It provides an overview of South Africa’s construction sector and includes details thereof in the public and private sectors, as well as labour and skills...
More
 
 
Latest News
The South African market has been included as one of Spain’s 16 “priority markets” as the European country intensifies its efforts to raise exports in the wake of the global economic crisis and as its companies move to diversify their foreign direct investments to...
Advisors to Nigerian President Muhammadu Buhari have recommended a root and branch overhaul of Africa's biggest oil industry and increased borrowing to help pay off $20-billion of government arrears, a reform proposal document shows. Buhari, who won a shock election...
Finance Minister Nhlanhla Nene
Following its submission to Finance Minister Nhlanhla Nene in December, the Davis Tax Committee (DTC) on Tuesday publicly released its first interim report on value-added tax (VAT) for public comment. Interested parties had until September 30 to comment on the report...
More
 
 
Recent Research Reports
Real Economy Year Book 2015 (PDF Report)
There are very few beacons of hope on South Africa’s economic horizon. Economic growth is weak, unemployment is rising, electricity supply is insufficient to meet demand and/or spur growth, with poor prospects for many of the commodities mined and exported. However,...
Real Economy Insight: Automotive 2015 (PDF Report)
Creamer Media’s Real Economy Year Book comprises separate reports under the banner Real Economy Insight and investigates key developments in the automotive, construction, electricity, road and rail, steel, water, gold, iron-ore and platinum sectors.
Real Economy Insight: Water 2015 (PDF Report)
Creamer Media’s Real Economy Year Book has been divided into individual reports under the banner Real Economy Insight and investigates key developments in the automotive, construction, electricity, road and rail, steel, water, coal, gold, iron-ore and platinum sectors.
Real Economy Insight: Construction 2015 (PDF Report)
Creamer Media’s Real Economy Year Book has been divided into individual reports under the banner Real Economy Insight and investigates key developments in the automotive, construction, electricity, road and rail, steel, water, coal, gold, iron-ore and platinum sectors.
Real Economy Insight: Electricity 2015 (PDF Report)
Creamer Media’s Real Economy Year Book has been divided into individual reports under the banner Real Economy Insight and investigates key developments in the automotive, construction, electricity, road and rail, steel, water, coal, gold, iron-ore and platinum sectors.
Real Economy Insight: Road and Rail 2015 (PDF Report)
Creamer Media’s Real Economy Year Book has been divided into individual reports under the banner Real Economy Insight and investigates key developments in the automotive, construction, electricity, road and rail, steel, water, coal, gold, iron-ore and platinum sectors.
 
 
 
 
 
This Week's Magazine
NHLANHLA NENE The main constraints to economic growth are domestic
Finance Minister Nhlanhla Nene earlier this month stated that, while South Africa’s 2015 economic growth target of 2% was achievable, it was not enough to deliver the tax revenue needed to combat the country’s challenges.
The World Steel Association has published the 2015 edition of the World Steel in Figures report, which shows an increase in steel production as well as provides an overview of steel industry activities from crude steel production to apparent steel use.
The 25-year master plan for Gauteng’s Aerotropolis project will go through a process of approval and adoption during June and July, says Aerotroplis project manager Jack van der Merwe. “We are also in the process of putting together a special purpose vehicle (SPV) to...
SOLAR PANELS The existing buildings in the Coega Industrial Development Zone lent themselves well to rooftop solar panel installations
The Coega Development Corporation (CDC) plans to fit 15 of its buildings, totalling 127 000 m2 of roof space, in the Coega Industrial Development Zone (IDZ), in the Eastern Cape, with solar panels.
The Supreme Court of Appeal’s (SCA’s) November 2014 judgment, ordering steel producer ArcelorMittal South Africa (AMSA) to hand over the 2003 Environmental Master Plan for its Vanderbijlpark steel plant to environmental pressure groups, confirmed the right of civil...
 
 
 
 
 
 
 
 
 
Alert Close
Embed Code Close
content
Research Reports Close
Research Reports are a product of the
Research Channel Africa. Reports can be bought individually or you can gain full access to all reports as part of a Research Channel Africa subscription.
Find Out More Buy Report
 
 
Close
Engineering News
Completely Re-Engineered
Experience it now. Click here
*website to launch in a few weeks
Subscribe Now for $96 Close
Subscribe Now for $96