CONSTRUCTION companies' profits are expected to be hit hard by the effects of the rand's strength and new legislation on the mining sector, which is a major market for them.
It is feared that mining projects could be delayed, or worse, cancelled. This concerns was highlighted by diamond giant De Beers' comment last week that SA's monetary policy, together with a proposed mine tax, had led the company to reconsider a R7bn expansion at its Premier mine in SA. Rand strength, among other factors, rendered the project uneconomic.
Murray & Roberts CE Brian Bruce says there were already delays in projects, but these were expected right now, "a very volatile time for companies to make decisions on large capital expenditure programmes". His and other companies were eagerly awaiting interest rate cuts, which would bring some relief.
"Interest rates are critical for our sector. I believe there is room for a reduction," says Bruce.
Construction group Concor, which derives about half its revenue from mining activities, expected delays throughout the mining sector, where profits were being slashed as a result of the rand's gains.
"We are very concerned over the effect of the rand's strength on our resource-based customers," says Concor CE John Willmott.
Carl Grim, CE of Aveng, which is SA's largest construction group, says there were "quite a number" of mining projects just waiting to get the final go-ahead. The hiatus resulted mostly from mining companies trying to understand the implications of new mining legislation.
Aveng depends on the mining sector for about half of its construction revenue.
Anglo Coal said this week that it was reviewing all capital expenditure plans and extending cost-cutting initiatives mainly as a result of the rand-dollar exchange rate and coal prices. This announcement followed a statement by BHP Billiton last week that it was reviewing its SA coal operations partly as a result of the strong rand.
Construction and related companies such as steel suppliers had also been licking their lips at the prospect of gold projects that became viable last year.
A gold analyst says, however, most of these projects were viable only at a price of about R100000/kg. The rand price was now down to about R82000/kg.
"It is pretty inevitable that some projects will be put back in the bottom drawer again in current conditions," says the analyst.
A construction analyst expected a decline in construction companies profits this year. In addition to the effects of the rand on the construction sector's areas of activity, construction companies would also suffer the effects of unrealised currency translation losses, he says.
Concor said high interest rates also had a considerable effect on commercial and homes building. "These activities are dead, but the effect has already been absorbed," says Willmott.
While things looked bleak at the moment, members of the R50bn a year construction industry had earlier raised concern about a potential lack of capacity that might arise as a result of expected increases in public and private capital spending in the longer term.
May 16 2003 07:10:59:000AM Carli Lourens Business Day 1st Edition
Publisher: Business Day
Source: Business Day
Construction sector braces for effect of strong rand and mining legislation
Posted On Friday, 16 May 2003 02:00 Published by eProperty News
Projects put on ice as resources-based customers see currency strength hit profit.
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