South Africa Construction Industry Struggling on JSE

Written by Makula Dunbar

Mar 04, 2014

Written by Mark Allix | From Business Day Live

South Africa’s construction industry is not out of the woods yet, despite data pointing to an upward trend.

In the fourth quarter of last year construction confidence rose to a new five-year high, with a recovery in construction activity and moderation in tendering competition.

However, the balance sheets of major JSE-listed construction and engineering groups are still showing strain.

Aveng’s Australasia and Asia segment is delivering four times the value of its home continent. The company says it has seen “no material improvement” in South African infrastructure spending.

The Asia-Pacific region has been a lifesaver for big South African construction firms, including Aveng and Murray & Roberts. Chinese demand for Australian minerals has complemented a boom in oil and gas projects in the region, despite the global recession.

But as China’s commodities demand tapers in favour of consumer-led economic growth, and major oil and gas projects near completion, Aveng is turning to countercyclical infrastructure spending in places such as Singapore and Australia.

Legacy issues at home and abroad still echo or remain, though Group Five says legacy costs in the Middle East that were once a heavy burden are now “really not material”. In the meanwhile, its transport investment and concession projects in Eastern Europe and Africa have come to exceed 25% of core group operating profit.

But Aveng’s Grinaker-LTA construction and engineering division in South Africa and the rest of Africa is still executing contracts at “inadequate margins”. It says fixed costs are still too high in the business, while there have been delays in the resolution of project claims. Labour disruptions in South Africa directly cost the group R96m in the past six months.

Meanwhile, the roll-out of big projects in the government’s R4-trillion infrastructure plan has largely stalled, as major construction and engineering work on Eskom’s new Medupi and Kusile coal-fired mega power stations comes to a close.