http://www.engineeringnews.co.za
  SEARCH
Login
R/€ = 14.11Change: -0.09
R/$ = 10.74Change: -0.07
Au 1262.90 $/ozChange: -1.97
Pt 1410.00 $/ozChange: 1.00
 
 
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 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|Cement|CoAL|Coface South Africa|Education|Evraz Highveld Steel & Vanadium|Flow|Gas|Industrial|Industrial Development Corporation|PROJECT|Projects|Property Development|Resources|Scaw Metals|Systems|Africa|South Africa|While Building|Building|Cement Producers|Flow|Manufacturing|Materials Manufacturers|Power Generation|Power-generation|Products|Property Development|Steel|Steel Industry|Steel Output|Steel Producer|Systems|Business Confidence|Infrastructure|Iron Ore|Power|Pravin Gordhan|Saijil Singh
Construction|Engineering|Africa|Cement|CoAL|Education|Flow|Industrial|PROJECT|Projects|Property Development|Resources|Systems|Africa|||Building|Flow|Power Generation|Power-generation|Products|Property Development|Steel|Systems||Infrastructure|Iron Ore|Power|
construction|engineering|africa-company|cement-company|coal|coface-south-africa|education-company|evraz-highveld-steel-vanadium|flow-company|gas-company|industrial|industrial-development-corporation|project|projects|property-development-company|resources|scaw-metals|systems-company|africa|south-africa|while-building|building|cement-producers|flow-industry-term|manufacturing|materials-manufacturers|power-generation|power-generation-industry-term|products|property-development|steel|steel-industry|steel-output|steel-producer|systems|business-confidence|infrastructure|iron-ore|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
© Reuse this Comment Guidelines (150 word limit)
 
 
 
 
 
 
 
 
Other Construction Materials News
Wilson Bayly Holmes-Ovcon (WBHO) had delivered “a reasonable performance” for the financial year ended June 30, said CEO Louwtjie Nel on Monday. “We are getting through this tough period. It hasn’t really improved much over the past two, three years, even...
There is little opportunity for JSE-listed infrastructure company Group Five to grow shareholder value in the domestic market, says CEO Mike Upton. He says value can still be found in the private sector, in the renewable and industrial power sector, as well as in...
Murray & Roberts (M&R) has closed the book on its three-year recovery and growth phase and has now turned its focus to a longer-term “new strategic future” of “engineering excellence”. The past three years have seen the international engineering-led...
Article contains comments
More
 
 
Latest News
Updated 7 hours ago Despite various challenges related to the extraction of shale oil and gas, as countries grow accustomed to the idea, the use of shale as a form of energy will be more widely pursued, international oil and gas market analyst Michael Lynch said on Tuesday. Speaking at...
Updated 7 hours ago A consortium led by two Kenyan firms won a government tender to build a 1 000-MW, coal-fired power plant, company officials said on Tuesday, part of moves to satisfy rising demand for energy in East Africa's biggest economy. Kenya suffers from regular blackouts due...
TNPA CEO Tau Morwe
Updated 7 hours ago The announcement of the successful bidder for the construction of Durban’s long-awaited passenger cruise terminal was imminent, Transnet National Ports Authority (TNPA) CEO Tau Morwe told delegates at the African Ports Evolution Conference in Durban on Tuesday. ...
More
 
 
Recent Research Reports
Road and Rail 2014: A review of South Africa's road and rail infrastructure (PDF report)
Creamer Media’s Road and Rail 2014 report examines South Africa’s road and rail transport system, with particular focus on the size and state of the country’s road and rail network, the funding and maintenance of these respective networks, and the push to move...
Real Economy Year Book 2014 (PDF Report)
This edition drills down into the performance and outlook for a variety of sectors, including automotive, construction, electricity, transport, steel, water, coal, gold, iron-ore and platinum.
Real Economy Insight: Automotive 2014 (PDF Report)
This four-page brief covers key developments in the automotive industry over the past 12 months, including an overview of South Africa’s automotive market, trade figures, production and the policies influencing the sector.
Real Economy Insight: Construction 2014 (PDF Report)
This five-page brief covers key developments in the construction industry over the past 12 months. It provides an overview of the sector and includes details of employment in the sector, infrastructure and municipal spending, as well as insight into companies’...
Real Economy Insight: Electricity 2014 (PDF Report)
This five-page brief covers key developments in the electricity industry over the past 12 months, including details of State-owned power utility Eskom’s generation activities, funding and tariffs, independent power producers and prospects for the sector.
Real Economy Insight: Road and Rail 2014 (PDF Report)
This six-page brief covers key developments in the road and rail industries over the past 12 months, including details of South Africa’s road and rail network and prospects for both sectors.
 
 
 
 
 
This Week's Magazine
South African State-owned defence industrial group Denel has announced its fourth consecutive year of profits. The group's results for the financial year 2013/2014 were recently announced at its head office in Centurion, south of Pretoria. Revenues grew by 17%, net...
There is little opportunity for JSE-listed infrastructure company Group Five to grow shareholder value in the domestic market, says CEO Mike Upton. He says value can still be found in the private sector, in the renewable and industrial power sector, as well as in...
The National Association of Automobile Manufacturers of South Africa (Naamsa) has announced the event dates of the 2015 Johannesburg International Motor Show (JIMS). The event will take place from October 14 to October 25, 2015, at the Johannesburg Expo Centre, Nasrec.
UK engineering support services provider Babcock is set to deliver the largest order of global truck manufacturer DAF’s truck tractors in Southern Africa to bulk carrier road-based logistics company Ngululu Bulk Carriers (NBC), with 133 trucks to be delivered in...
Digital radio communications in the African local government space can open up the world, but have many challenges to overcome, notes integration and migration of legacy radio communications infrastructure with digital mobile radio company Emcom Wireless head of...
 
 
 
 
 
 
 
 
 
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