http://www.engineeringnews.co.za
  SEARCH
Login
R/€ = 17.88Change: -0.10
R/$ = 15.88Change: -0.04
Au 1237.82 $/ozChange: 0.47
Pt 955.50 $/ozChange: -4.00
 
 
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 About Us
 
 
 
RSS Feed
Article   Comments   Other News   Research   Magazine  
 
 
Aug 17, 2012

Construction slowdown continues to impact on steel construction sector

Back
Construction|Africa|Building|Cement|CoAL|Coface South Africa|commercial property|Cutting|Education|Engineering|Environment|Evraz Highveld Steel & Vanadium|Flow|Gas|Industrial|Industrial Development Corporation|Power|PROJECT|Projects|Property Development|Resources|Scaw Metals|Systems|Technology|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|Pravin Gordhan|Saijil Singh
Construction|Africa|Building|Cement|CoAL|commercial property|Cutting|Education|Engineering|Environment|Flow|Gas|Industrial|Power|PROJECT|Projects|Property Development|Resources|Systems|Technology|Africa|||Flow|Manufacturing|Power Generation|Power-generation|Products|Property Development|Solutions|Steel|Systems||Infrastructure|Iron Ore|Iron-ore|
construction|africa-company|building|cement|coal|coface-south-africa|commercial-property|cutting|education-company|engineering|environment|evraz-highveld-steel-vanadium|flow-company|gas|industrial|industrial-development-corporation|power|project|projects|property-development-company|resources|scaw-metals|systems-company|technology|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|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

To subscribe email subscriptions@creamermedia.co.za or click here
To advertise email advertising@creamermedia.co.za or click here
 
Comment Guidelines (150 word limit)
 
 
 
 
 
 
 
 
Other Construction News
Kelibone Masiyane has been appointed the new MD of PPC Zimbabwe, succeeding Njombo Lekula, who had recently been redeployed as MD of PPC’s international operations. Masiyane would be supported by new PPC commercial director Iain Sheasby and new PPC GM of finance...
The Western Cape Department of Transport and Public Works has started work on Phase 1 of a R487-million upgrade to the N1 freeway around Cape Town. The main contractor is Martin & East.
More
 
 
Latest News
The Competition Tribunal on Friday gave a conditional go-ahead for mobile operators Cell C, MTN and Vodacom to buy out their respective subscriber bases, as South Africa’s last independent service provider Altech Autopage calls it a day. The Allied Electronics...
The drought in Southern Africa could become one of the worst on record should the current below-normal rainfall continue, the United Nations (UN) World Food Programme said this week. The El Niño conditions presently being experienced in the region had resulted in a...
Kelibone Masiyane has been appointed the new MD of PPC Zimbabwe, succeeding Njombo Lekula, who had recently been redeployed as MD of PPC’s international operations. Masiyane would be supported by new PPC commercial director Iain Sheasby and new PPC GM of finance...
More
 
 
Recent Research Reports
Construction 2016: A review of South Africa's construction industry (PDF Report)
Creamer Media’s Construction 2016 Report examines South Africa’s construction industry over the past 12 months. The report provides insight into the business environment; key participants; local demand; geographic diversification; corporate activity; black economic...
Energy Roundup – February 2016 (PDF Report)
The February 2016 roundup covers activities across South Africa for December 2015 and January 2016 and includes details of a Government Gazette notice that confirms Cabinet’s decision to move ahead with the 9 600 MW nuclear procurement programme; State-owned power...
Energy Roundup - December 2015 (PDF Report)
The December 2015 roundup includes details of State-owned utility Eskom’s application to claw back R22.8-billion; South Africa’s ranking as an investment destination for renewable energy; and a nuclear expert’s thoughts on reactor designs for South Africa’s nuclear...
Water 2015: A review of South Africa's water sector (PDF Report)
Creamer Media’s Water 2015 Report considers the aforementioned issues, not only in the South African context but also in the African and global context in terms of supply and demand, water stress and insecurity, and access to water and sanitation, besides others.
Input Sector Review: Pumps 2015 (PDF Report)
Creamer Media’s 2015 Input Sector Review on Pumps provides an overview of South Africa’s pumps industry with particular focus on pump manufacture and supply, aftermarket services, marketing strategies, local and export demand, imports, sector support, investment...
Liquid Fuels 2015: A review of South Africa's liquid fuels sector (PDF Report)
Creamer Media’s Liquid Fuels 2015 Report examines these issues in the context of South Africa’s business environment; oil and gas exploration; fuel pricing; the development of the country’s biofuels industry; the logistics of transporting liquid fuels; and...
 
 
 
 
 
This Week's Magazine
WIDENING FLEXIBILITY The trailers have a 3-m-wide (2-file) and 4.3-m-wide (2-file) configuration
Lifting, transporting, installing and ballasting solutions provider Ale has expanded its global fleet of trailers and invested in the latest range of widening trailers that can be mechanically widened from 3 m to the desired width for any project. Ale ordered 48 axle...
The market for the BMW 7 Series in South Africa differs quite significantly from the rest of the world. China, the US and the Middle East almost exclusively buy the long-wheel-base version, using the German manufacturer’s luxury high-end sedan as a chaffeur-driven...
January new-vehicle sales fell by 6.9%, to 48 615 units, compared with the same month last year. Statistics released by the Department of Trade and Industry show that the domestic new passenger-car market declined by 6.1%, to 34 936 units, compared with 12 months ago.
Information technology (IT) equipment and infrastructure multinational Dell is providing open infrastructure systems for clients so that they can use any systems, including innovative new systems, that suit their business needs, says Dell Europe, Middle East and...
South Africa’s State-owned defence industrial group, Denel, has set up another international partnership, based in Hong Kong. This new subsidiary is Denel Asia and it is a joint venture (JV) with South African private sector company VR Laser.
 
 
 
 
 
 
 
 
 
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 $149 Close
Subscribe Now for $149