Dead stop on the road to recovery
The construction industry's woes go much further than a housing slump. Tom Stevenson reports
Wednesday 26 July 1995
Worryingly, with many of the biggest construction and especially building material companies heavily dependent on Europe and the US, those two markets are also under the cosh. In America destocking is aggravating already weak trading.
What is really surprising about Williams' comments is not that they were made but that they were made so late. Many analysts have been downgrading profit forecasts in the sector since the spring and a steady drip of figures from trade organisations has underlined the parlous state of the industry.
Latest figures from the National Council of Building Materials Producers (BMP) forecast no improvement in infrastructure work and a further slump in the housing market, where a 13 per cent decline in output will be compounded by less repair and maintenance work.
The industry is suffering across the spectrum, with declining house sales matching a fall in housing starts, cuts in the government's road building programme and a failure of the Private Finance Initiative (PFI) to make up the difference.
Critics of PFI say the Government's promise that privately financed projects would supplement existing government spending has been reneged on. Private finance is being used as a substitute for government spending.
That would be all right, groups such as the BMP claim, if the initiative was up and running. But contractors and the materials producers that supply them are having to suffer the double blow of no government work and, because of bureaucratic log-jams, no privately financed projects.
One of the main problems with PFI is the insistence by government that all capital expenditure projects are pushed through the initiative to see if it makes sense to try to raise funds via the private sector.
That has created a backlog of projects, with the four road schemes so far put out to tender still struggling through the process. The costs of tendering are high and contractors are proving unwilling to take on "high risk" infrastructure projects without an acceptable return.
Delays and cuts in road building tend to hit contractors and producers of the heavier building materials such as cement. At the other end of the scale, however, things are no better.
The slump in the housing market, where analysts expect to see a fall in starts from 157,000 last year to 145,000 this time, is hitting what the industry calls light-side products such as boilers, radiators and doors.
The housing market looks likely to remain in the doldrums for the rest of the year. The prime selling season of September and October may be scuppered by potential buyers holding fire to see what the Budget brings.
As the chart below shows, building activity generally, not just housing, tends to track consumer confidence. New house purchases and repair and maintenance accounts for 37 per cent of all building work, with a further 29 per cent attributable to commercial investment, which is governed by spending on general goods and services. Given the close correlation, it is hardly surprising that the absence of the feel-good factor is being reflected in the construction market.
Equally unsurprising, the stream of bad news from the industry has hit shares. The two building sectors have both performed extremely poorly against the rest of the market over the past year, with construction (a 25 per cent underperformance) faring even worse than materials (16 per cent down against the market). It is hard to see the shares bouncing soon.
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