Confidence in the building industry rose to its highest level since the first quarter of 2018 but masked the difficult overall environment in the sector.
The latest FNB-Bureau for Economic Research (BER) building confidence index released on Monday revealed that confidence improved to 39 index points in the second quarter of 2021 from 27 index points in the previous quarter.
Despite the improved confidence levels, more than 60% of industry respondents are still dissatisfied with current business conditions.
In addition, the improved confidence was driven largely by a sharp increase in sentiment among building material manufacturers and hardware retailers, whose confidence levels are being boosted by rising domestic sales.
FNB senior economist Siphamandla Mkhwanazi said the confidence of main contractors in particular is still quite depressed.
“The higher composite confidence index, and main contractor activity, hides how difficult conditions in the sector still are.
“If one were to recalculate the index without building material manufacturers and hardware retailers, confidence is at a lowly 25.
“As things stand, we are set to see the building sector once again far underperform the rest of the economy this year,” he said.
Read: GDP for first quarter up 1% (Jun 8)
The latest GDP figures released last week confirmed the continuing depressed conditions in the construction sector.
‘By far the worst performing sector of the economy’
Construction-listed market intelligence firm Industry Insight said the construction industry was again by far the worst performing sector in the economy in the first quarter of 2021.
It said according to Statistics South Africa (Stats SA), construction GDP was down “a staggering” 18.1% year on year in the first quarter of 2021.
Industry Insight said this data “certainly dents the narrative that the construction industry is seeing some sort of robust recovery, which has been pushed by those who think the performance of one company [Raubex] applies to an entire sector” and the data is somewhat worse than expected.
Industry Insight senior economist David Metelerkamp told Moneyweb last month they had noticed a relatively robust increase in the number of CIDB Grade 9 projects, the bigger projects, coming out to tender but fewer being awarded.
Read: Some segments of SA construction industry recovering well (May 17)
However, Metelerkamp said the building sector “is still in absolute disarray” while companies more involved in civils, such as Raubex, are benefitting from increased tender activity in the transport and logistics infrastructure space.
Industry Insight added that it noted in a breakdown of the gross fixed capital formation investment figures, which were released in conjunction with the GDP data, that investment/activity in the construction industry was down in every sector, including the civil construction industry.
The firm said it has been a lot more upbeat about the construction industry and this data “is certainly disappointing”.
It said investment/activity in civil construction was somehow worse than the building segments and down by “a very disappointing 19%” year-on-year seasonally adjusted basis in the first quarter of 2021, while investment/activity in the residential industry was down by 18% and in the non-residential industry by 16.3%, which “was more expected”.
Retail hardware resilience
Mkhwanazi said the resilience in demand for retail hardware in the second quarter of 2021 continues to surprise.
According to FNB-BER survey respondents, sales volumes remain well supported, resulting in hardware retailer confidence regaining the losses in the first quarter to reach 65 index points, the highest level since the fourth quarter of 2007.
In the first quarter, confidence of hardware retailers slumped to its long-term average of 49 from 64 in the fourth quarter of 2020.
“Retail sales have consistently outperformed in recent months, supporting hardware retailer confidence but also the composite confidence index,” said Mkhwanazi.
“However, the caveat is that this represents a small subset of the building sector, namely the DIY and informal markets.”
The biggest change in confidence was registered by manufacturers of building material, which improved by 31 index points to 67, which is also the highest of the sub-sectors surveyed.
Mkhwanazi said a strong rebound in domestic demand, reflected in both sales and prices, underpins the positive sentiment and expectations for the third quarter of 2021 are also upbeat.
The confidence of main contractors gained two points to 22 in the second quarter of 2021 although the improvement in activity levels was, as expected, more pronounced.
“The index measuring activity was noticeably better this quarter and understandably so. The question asks respondents to compare activity relative to the second quarter of 2020, a period when most building work was halted.
“As such, the improved activity is largely due to extremely low base effects and not suggestive of a vastly improved level of activity in the building sector,” he said.
Overall profitability remained weak, even relative to the second quarter of 2020, which highlighted the continued downbeat conditions in the sector.
Mkhwanazi said internationally building input prices rose dramatically over the past few months as global demand far outstrips supply.
“At the same time, domestic building demand remains too weak for contractors to fully pass these prices on to clients.
“As such, some contractors have had to resort to ‘suicide pricing’ to secure contracts,” he said.
With respect to the building pipeline, activity levels remained low but stable, with the confidence of architects increasing by two index points to 23 and that of quantity surveyors by nine index points to 26.
Mkhwanazi said the results from the building pipeline do not provide any indication that better demand for building work is in the offing.
“This further emphasises the likely temporary nature of the rise in main contractor activity seen this quarter.”