Construction recovery quickens

Johannesburg - A recovery in the construction sector gained momentum during the third quarter, First National Bank (FNB) and the Bureau for Economic Research (BER) said on Tuesday.

The FNB/BER construction confidence index rose to its highest level in three years during the third quarter, gaining four index points to reach 42.

"The rise in confidence was underpinned by improved activity levels. However, profitability came under renewed pressure," the organisations said in a statement.

There were definite signs that the construction recovery was gaining momentum.

Although construction activity had consistently improved over the past two years, the growth in activity ratcheted up more significantly over the last six months.

This higher growth came from a number of sources.

Provincial spending on capital projects - dominated by road and water infrastructure projects - remained on track.

Capital expenditure (capex) in KwaZulu-Natal, Gauteng and the Free State was growing robustly. But the Eastern Cape, Limpopo and the North West had struggled to complete projects.

According to the National Treasury, capex by provinces rose by 14.6% during the first quarter of the 2012/13 financial year, which ended in June.

Continued capital outlays by Eskom on the Medupi, Kusile and Ingula power stations as well as ongoing capex by Transnet also supported construction activity.

In contrast, municipalities continue to underspend on their capex budgets.

According to the National Treasury, municipalities spent R33.2bn on capex for the full 2011/2012 financial year which ended in June.

However, this represented only 72.5% of the total capital budget for the full year. There was therefore an underspend of R12.8bn.

The improvement in activity levels has led to some constraints within the construction sector, including a shortage of skilled labour.

In contrast, the shortage of building materials was less inhibiting to business operations during the third quarter compared to the previous quarter.

Thanks to the sustained rise in activity, construction firms had some additional room to increase tendering prices.

Competition for work also eased slightly during the period.

But despite the increase in activity and the more relaxed competitive environment, profitability came under renewed pressure.

"Input prices are rising faster than tendering prices and this has continued to squeeze profit margins during the third quarter," said FNB economist Cees Bruggemans.

The number of people employed by construction firms also rose in response to the rising activity levels.

The current reading of 42 indicated that 42% of respondents were satisfied with prevailing business conditions.

This compared with 38% in the previous quarter and a cyclical low of 21 during the first and third quarters of last year.

Conditions in the civil construction sector have improved significantly over the past few quarters. This was likely to continue as construction work increases.

But the pace of the recovery depended on the public sector's ability to realise spending on their capex budgets, both institutions warned.