Construction upside

Posted On Friday, 04 September 2009 02:00 Published by eProp Commercial Property News
Rate this item
(0 votes)

Construction company results and higher steel demand show infrastructure is proceeding and will help the economy recover from the recession.

Infrastructure IndustryConstruction company results and higher steel demand show infrastructure is proceeding and will help the economy recover from the recession.

The journey has turned into a mind-numbing interruption that can last up to two hours — to cover roughly 10km! The drawn-out, inefficient, undermanned, badly planned road resurfacing now adds significantly to logistics times and costs around Cape Town.

While sitting in these interminable traffic jams it is easy to see why many have concerns that government’s much-vaunted infrastructure programme is being bogged down by obstacles and delays. Despite repeated government statements committing to the planned spend, construction stocks share prices have been moving sideways since April, badly lagging the resource and other domestic sectors on the JSE.

At first glance, electricity utility Eskom’s results last week provide another reason for concern. A R9,7bn loss marks the biggest ever recorded by an SA state-owned enterprise. But though much of the loss reflects poor management decisions, this result should not be repeated in this financial year.

Two-thirds of the losses were due to mark to-market losses associated with metal price linked contracts. This reduced the cash loss to R3,1bn. There was also a R7bn increase in coal costs as the utility scrambled to rebuild stockpiles after the January 2008 power shortages. More favourably priced coal contracts should save R4bn this year. The major weakness at Eskom is the lack of a chief financial officer. As it is compiling a long-term funding plan with help from national treasury, a competent CFO is critical. (Though Transnet is in better shape, the fact that both the CEO and CFO are “acting” is a problem.)

However, Eskom has offered reassurance on its expansion programme. The results confirm two coal power plants, Medupi and Kusile, and a planned hydro project. It has also secured the funding it needs for the current financial year. With that in mind, tender awards from Eskom could pick up in the coming months, after a 6-8-month delay in project awards while funding issues were resolved. This should be positive for the construction sector.

In fact there have been several promising signs in the sector in recent weeks. Of the big four construction companies, Group Five and Murray & Roberts reported better than expected results. Aveng released improved earnings guidance last week. And smaller Basil Read reported a strong increase in earnings in the first half of 2009.

There are also signs of improving steel demand. ArcelorMittal SA has experienced a sharp pick-up in orders, with its order book largely full until November. Though much of this is on the back of inventory restocking, it is confident enough in the improving demand to reopen its blast furnace C at Vanderbijlpark. Considering the cost, this signals improved expectations for demand in the second half of 2009 and into next year.

Though it’s easy to assume the worst, the disaster in Somerset West does not characterise the entire SA infrastructure programme. A short distance away, the more complex revamp of the Hospital Bend interchange has been handled so well that traffic disruptions have been minimal. The Durban and Cape Town stadiums look wonderful. And the Gautrain is on schedule.

The infrastructure programme does appear to be proceeding, and it will help the economy recover from the recession. The biggest risk is to extrapolate the awful data of the first half of 2009 into the second half and into 2010. Fortunately, the equity markets finally began to take an interest in the construction stocks late last week.

 

Last modified on Thursday, 31 October 2013 12:26

Most Popular

Empowering women in engineering through B-BBEE

Jan 13, 2020
Andrew Yorke
Working to embrace the spirit of transformation and developmen.

Repo rate cut by 25 basis points

Jan 16, 2020
Governor_Lesetja_Kganyago_SARB1
The Reserve Bank has reduced the repo rate by 25 basis points to 6.25% in line with…

Cheap cement imports crippling local industry

Jan 16, 2020
Databuild CEO Morag Evans
Local cement manufacturers are being severely undermined by cheap imports from countries…

Property in 2020 - here's what's happening

Jan 16, 2020
Carl Coetzee CEO of BetterBond
With the political, economic and social landscape in South Africa being what it is, i.e.…

The rising tide of the silver economy

Jan 16, 2020
Chris Cilliers
Whilst we may not yet have discovered the long-coveted elixir of eternal youth, the truth…

Please publish modules in offcanvas position.