Afrimat Construction Index continues to outperform general economy

Despite negative perceptions, South Africa’s economy remains resilient, while the construction industry remains healthy and continues to perform well, says Afrimat CEO Andries van Heerden.

This is evident in the Afrimat Construction Index (ACI) having expanded by 22.7% between the third quarter of 2010 (the base period) and the first quarter of this year, which is more than double the rate of growth in the economy as a whole (in real terms).

After reaching an eight-quarter high of 127 in the fourth quarter of last year, the ACI decreased to 122.7 in the first quarter of this year; however, the construction sector at large, remains on a stronger footing than seven years ago.

The ACI, which is released quarterly, is a composite index of the level of activity within the building and construction sectors and is compiled by economist Dr Roelof Botha on behalf of Afrimat.

At the quarterly release of the index, Botha reiterated that the composite index provides a balanced and realistic view of the level of activity in the construction sector, as it evens out the contradictory trends apparent in the construction sector that are often portrayed individually by other indexes.

IMPACTED INDEX
The ACI index trend has not escaped the negative impact of recent events, which include the dismissal of Pravin Gordhan as Finance Minister in March; increasing evidence of State capture; a ratings downgrade of sovereign bonds to junk status by two influential credit ratings agencies and a downgrade by another; and a return to a technical recession.

These developments have added to the decline in business and consumer confidence, as seen by the latest Rand Merchant Bank and Bureau for Economic Research Business (BER) Business Confidence Index, which has slipped to levels last witnessed during the 2009 recession.

The ACI is calculated from nine different constituent indicators: the volume of building materials produced; the sales value of building materials; the value of buildings completed within larger municipalities; the value of building plans passed by larger municipalities; the First National Bank (FNB)/BER building confidence index; the FNB/BER civil construction index; retail trade sales of hardware, paint and glass; formal employment in construction; and the value added by the construction sector.

The expansion in construction activity up to the first quarter of 2017, as indicated by the ACI has been driven mainly by improved retail sales values for hardware, glass and paint and the volume of mined building materials.

Confidence levels in the construction sector were also considerably higher in the first quarter of this year than in 2010, with more than 400 000 additional formal sector jobs created in construction since the base period.

However, the value of building plans approved by the larger municipalities was the worst performing indicator in the period.

Botha noted that the ACI is likely to remain under pressure during the second quarter, owing to the declining trend in overall business confidence, sociopolitical unrest and a delay by the South African Reserve Bank in adopting a more accommodating approach towards monetary policy. 

Further, the real value of outstanding mortgage loans has not yet recovered from the previous recession in 2009 and this traditional source of funding for a significant portion of construction sector activity remains expensive, according to Botha.

“Hopefully, the Monetary Policy Committee will acknowledge the realities of a lethargic economy, including the absence of demand inflation, and start lowering interest rates in July,” he suggested.

Botha added that the industry would, nevertheless, continue to be boosted by government expenditure programmes in economic and municipal infrastructure and human settlements, which are collectively valued at more than R285-billion in the current fiscal year. 

ADAPTATION
Meanwhile, activity in the construction sector, as indicated by the ACI, bodes well for the economy and players that are able to adapt and embrace circumstances, Van Heerden stressed.

“The Afrimat strategy is supported by our experience over the past six years.  Companies involved in the construction sector had to box cleverly to source projects or supply product to the sector. Our research showed that several smaller projects were available and one simply had to adapt the model a little to be successful,” he said.

Van Heerden noted that Afrimat, which is active in many of the rural areas of the country, is an example of a successful adaption.

He suggested that the results of this study are showing that construction is a sector in which government spend is still taking place. Given economic constraints, it is natural for the sector to come off slightly, Van Heerden said.

“However, if companies position themselves correctly on product quality, price and service delivery, they should be able to make a decent return for shareholders,” he concluded.