It is critical for the sustainability of South Africa’s capital equipment suppliers that demand for equipment from the construction industry, which decreased in the last quarter of 2012, recovers rapidly, states financial services provider WesBank corporate division GM Gerald Burton.

Activity in the construction industry slumped after the 2010 FIFA World Cup, but it is showing some signs of recovery. Slow investment in infrastructure development in the public sector and significantly less private-sector investment have resulted in the industry showing little or no growth, he explains.

Therefore, construction companies are extending their current equipment-replace- ment cycle and not upgrading or investing in new equipment to counter the lack of demand for their services, Burton notes, adding that capital equipment suppliers also need to deal with exchange rate fluctuations, labour unrest and tough competition from other industry members fighting for a piece of the limited action.

“The construction industry is, traditionally, asset-hungry and companies need equipment that can meet the requirements of their contracts with reduced maintenance and downtime to ensure that projects are completed in the most efficient manner. Consequently, construction companies need to have strict maintenance and equipment-replacement programmes,” Burton points out.

Generally, construction companies use a combination of borrowed money and shareholder money to invest in new equipment. To borrow, they need to produce balance sheets that reflect the correct levels of gearing, income statements that show affordability and, in some cases, new contracts to support the level of borrowing required. “Therefore, balance sheet management according to investment requirements is critical for construction companies that rely on borrowed money for capital investment in equipment,” Burton states.

He notes, however, that WesBank does see growth opportunities in specific areas of the mining, construction, agriculture and manufacturing sectors, which are showing signs of improvement, amid current challenges. Trucks used in the construction industry are also supplied to all these industries and WesBank expects further growth opportunities in this asset class.

“Commercial trucking and passenger vehicle financing remains strong, with about 14% year-on-year growth in January, which also saw greater retail sales than those of December 2012. However, we do expect these sales figures to stabilise over the coming months to reflect overall growth in the commercial vehicle market of about 4%.”

With the repo rate remaining at its lowest level for many years, it remains a good time to invest in capital equipment, provided companies have the capacity to use the assets they obtain, states Burton. “Growing demand for rental solutions is also expected as a means to negate the capital requirements traditionally experienced in this industry.”