The number of cranes visible on the skylines of some South African cities should not be taken as an indication of an upswing in the sector, with most crane manufacturers and suppliers expressing caution about the prospects for recovery in the building sector, while warning that growth opportunities are extremely uncertain.

Crane companies in South Africa have in recent years benefited from the construction of support structures for the 2010 FIFA World Cup, and from the building of shopping centres, airports and government's public infrastructure programme.

However, these same manufacturers and distributors report that these large spends, such as on the nearly R500-billion that State-owned power utility Eskom is spending on new power stations, are insufficient to support the growth of the craning and construction industry.

The head of integrated heavy lifting and rigging services company Sarens says that, in general, the visibility of cranes is not always a good predictor of economic recovery. MD Lance Strachan says that, while there are signs of recovery in demand in the mining sector, this growth has not reached pre-recession levels, while the civils market is simply "quiet". The petrochemicals industry is also starting to spend again, but at a far more muted pace, having been bitten by the shocks of 2008/9.

Liebherr director Arthur Lightfoot agrees, saying that that there has been a definite dip in construction and notes that enquiries for cranes are decreasing.

"After the 2010 FIFA World Cup many contracts are ending. About 25% to 40% of tower cranes that were used three years ago, are still up at this stage, and 60% to 75% of cranes will be on the ground in the next six months," Lightfoot, whose company manufactures construction machinery, laments.

The chairperson of tower cranes and lifting solutions distributor SA French, Quentin van Breda, concurs, noting that there were a lot a positive sentiments in construction industry when the hype for building stadiums was at its peak. "Companies were putting out profitable figures and most contractors bought new cranes and started retiring old ones. This cycle was 50% to 70% of the way when the economy collapsed," Van Breda asserts.

Boom to Gloom
Van Breda notes that the number of tower cranes visible throughout South Africa started declining in mid-2008, initially owing to Eskom's power cuts, which caused many approved projects in Gauteng to be postponed. However, weak building market fundamentals and funding is currently an even bigger challenge to sustaining even current levels of crane erection and operation.

"If you put a quotation in on a contract ten years ago, you could assume that the contract was going ahead. Now, new projects are stopped easily, with many developers in cash-preservation mode," he asserts.

Sarens currently has 75 cranes erected across the country, some of which are still the legacy of the 200/7 boom period, which had been followed by a period of slack demand. "However, two years ago, contracts were still awarded, the lead time just became longer. Last year, was the biggest crisis, and the industry is only now starting to recover," Strachan notes.

He adds that 2010 has seen a slight but not significant upturn in construction. The market for big capital spends on construction is, currently, notably conservative and is not expected to return soon to 2008 levels.

Liebherr director Geoff Hunt adds that, in 2007, the global demand for the company's mobile cranes exceeded the supply. This trend continued in 2008; and South Africa suffered because only second hand cranes were available to the local market. New cranes only became available in 2009.

To local manufacturer of overhead cranes and hoists Condra, 2008 was a financially good year and the downturn only affected the company from October 2009, reaching its lowest point in January this year. "Enquiries have increased steadily since March, but we are still only operating at about 60% of our capacity, which is mostly owing to contracts in Africa and South America," Condra GM Mark Kleiner notes.

He does not believe that the gloomy situation in the crane industry will change soon. "Controlling costs is a significant challenge and I do not think this will change until the fundamental economic problems have been solved," he adds.

Although the activity in the nonresidential building industry increased by 12,9% in 2007 and by 15,2% in 2008, owing to construction surrounding the 2010 FIFA World Cup, Statistics South Africa (StatsSA) reported in January 2010 that the total value of building plans passed by South Africa's larger municipalities declined by 23,1%, or R17,4-billion, during the first 11 months of 2009.

Challenging Times
While South Africa and the African continent are still an attractive market for global investment because of the available resources, bureaucracies and governments are limiting factors. Governments are expected to fund at least 40% of a country's construction activity, but this has not happened in South Africa.

In his 2010 Budget speech, Finance Minister Pravin Gordhan outlined plans to spend R846-billion on infrastructure over the next three years. Of this amount, R160-billion to R220-billion is expected to trickle down to the construction industry.

However, Lightfoot notes that most of that money will be spent on energy generation and oil and gas expansion, which places the responsibility of funding civils construction on the private sector.

"Private investment is needed for sustainability in construction. However, Africa is seen as a risky investment because of unstable currencies and governments," he asserts.

Van Breda points out that there is a significant resistance from banks to provide finance for smaller contractors and some clients that had prequalified for funds, have had those funds withdrawn because of the risk factor.

Further, Kleiner remarks that local manufacturers are suffering under the pressure of rising component prices, such has steel and energy, while import costs are going down, owing to the stronger rand creating a favourable climate for importing companies.

Inflation is a challenge brought about by the 2010 FIFA World Cup, as everything became more expensive in anticipation of the influx of foreign visitors. "The possibility that prices may not go down significantly after the World Cup is a reality that we must face," Kleiner asserts.

Market Drivers
There are a number of infrastructure programmes that will drive the market after the 2010 FIFA World Cup, such as wind and solar energy generation. However, Strachan notes that these projects will only be realised in the longer term.

"There are construction opportunities in the mining sector, as well as in oil and gas expansion projects, such as Coega and Sasol 4. The biggest crane in the country currently is a 1 000-t unit at Medupi, but the crane will leave the country again after Medupi is completed," he notes.

Mines are expected to be the most significant offset points for most mobile cranes. Hunt says that mines are still developing and mining projects are planned well in advance, making these more sustainable projects.

Tower cranes were put to good use in building soccer stadiums and the Gautrain infrastructure, but Lightfoot asserts that there is not much of an appetite for these cranes locally after these projects have been completed, as 9 of the 15 tower cranes used on the Gautrain project will be sold off overseas.

Meanwhile, crane rental has increased because of the economic uncertainty. Van Breda says that rental was 10% of SA French's business in 2007. "By the end of March this year, rental is 44% of our business. We moved from being a net seller of equipment to being a renter in a short space of time," he says.

Strachan agrees that second-hand crane distributors and rentals are currently experiencing an upturn, while suppliers of new cranes are struggling. Kleiner adds that overhead cranes are a lagging indicator of economic movement and says that the second-hand crane market has seen definite growth from early last year.

However, Lightfoot believes that crane rentals will not grow significantly, as most construction companies have their own crane fleets and opt not to rent cranes.

Employment & Skills
The labour-intensity of construction makes it one of the most important sectors for South Africa's economic performance and growth. In recent years, government construction has become the main driver of employment in the sector.

In its ‘Quarterly Labour Force Survey' for the fourth quarter of 2009, StatsSA reported that around 1 085-million people were employed in formal and informal employment in the construction sector.

However, Strachan asserts that there are not enough skilled crane operators, particularly for the larger cranes. Sarens has a process of identifying operators with potential and trains them at an in-house training centre, as there are no formal training centres for large crane operators in the industry. The company employs about 80 crane operators.

Liebherr also trained crane operators for the stadiums and Gautrain project. However, Lightfoot opposes the view that there is a shortage of crane operators and explains that, as the large projects draw to a close, Liebherr's trained operators may be unemployed, as no new projects capable of absorbing as many workers are being planned.

Kleiner raises concerns about labour after the 2010 FIFA World Cup-driven projects are completed. "Unskilled labourers want more money, while skilled, motivated labour is scarce. Many skilled workers are still leaving the country, opting for contracts in countries that offer bigger salaries. This results in South Africa losing skills and income that would be circulating in the country," he notes.

Reality Check
The South African Federation of Civil Engineering Contractors (Safcec) expects the civil construction subsector to contract by 10% in 2010, with possible mitigation from existing projects.

Safcec says that the unwinding of projects awarded before the global financial crisis set in, in 2008, will cause the contraction. The federation predicts that the unwinding will extend throughout 2010 and the first half of 2011. It adds that the local government elections in 2011 could also be a destabilising factor for the subsector, adding uncertainty to the industry in terms of project pipelines.

In its ‘State of the Civil Industry' report, published in October last year, Safcec also says that, during 2010 and in early 2011, the subsector will face a market with fiercer competition for tenders and highly competitive pricing, owing to the limited number of big contracts available.

SA French doubts that the activity that the crane industry experienced in 2006 and 2007 will return within the next 10 years. "We are running a break-even type of business, which we do not predict will get better until this time next year. If there is growth, it will not be more than 2%," Van Breda asserts.

However, Strachan believes that the growth of the construction industry, which also significantly influences local economic growth, is sustainable in the long term. "Larger companies are particularly well positioned to weather the economic downturn and take part in the slow but sure economic recovery."

He asserts that the longer-term contract market is stable and balanced, although project work is slower with longer lead times. "Cranage is a symptom rather than predictive indicator of the recovering economy. The maintenance market is alive, but construction is, currently, a slow indicator," he points out.

Hunt is not expecting much growth in the mobile crane industry, although the potential for crane sales to wind farms in South Africa is good. However, mines remain the biggest potential market.

"If the world demand for minerals continues, which I believe it will, there will be a demand for cranes. Cranes symbolise work and progress, so it is not a bad thing to be optimistic when seeing cranes," he notes.

Although there is uncertainty about the prospects of the craning industry over the short to medium term, crane manufacturers and suppliers are cautiously optimistic about the future of the crane industry and construction in South Africa. "The country has gone through a bad cycle, which means that a good cycle must follow. There is work for cranes, we just have to work harder to find and secure it," Kleiner concludes.
Ends.

Story highlights:
•There has been a definite dip in construction and enquiries for cranes are decreasing
•About 25% to 40% of tower cranes that were used three years ago, are still up at this stage, and 60% to 75% of cranes will be on the ground in the next six months
•The total value of building plans passed by South Africa's larger municipalities declined by 23,1%, or R17,4-billion, during the first 11 months of 2009
•Private investment is needed for sustainability in construction
•The unwinding of projects awarded before the global financial crisis set in, in 2008, will cause contraction throughout 2010 and the first half of 2011