Afrimat Construction Index shows predicted modest recovery in Q3

Afrimat released the Q3 results for the Afrimat Construction Index
Image credit: Afrimat

Open pit mining company Afrimat, which provides industrial minerals and construction materials, has released the findings of the third Afrimat Construction Index (ACI) for the third quarter of 2017. The ACI is a composite index of the level of activity within the building and construction sectors, compiled by renowned economist Dr Roelof Botha on behalf of Afrimat, and calculated from nine different constituent indicators, including the FNB/BER building confidence index.

For the three months between July and September, the ACI trend managed to buck the trend of several other indicators of the level of economic activity in South Africa by notching up a modest improvement over the second quarter results.

The ACI is calculated from nine different constituent indicators: 
1. the volume of building materials produced; 
2. the sales value of building materials; 
3. the value of buildings completed within larger municipalities; 
4. the value of building plans passed by larger municipalities; 
5. the FNB/BER building confidence index; 
6. the FNB/BER civil construction index; 
7. retail trade sales of hardware, paint and glass; 
8. formal employment in construction; and 
9. the value added by the construction sector.

Despite a further marginal decline in the real value added by construction, the Index bounced back from a level of 117.7 in the second quarter of 2017 to 120.8 in the third quarter. The improvement was driven mainly by the value of building plans passed by major municipalities; retail sales values for hardware, glass and paint; FNB/BER building confidence index; and volume of building materials produced.

Significantly, six of the ACI’s nine indicators recorded improvements during the third quarter, with the only negative trends represented by the FNB/BER civil construction index, formal employment in construction, and value added by construction. However, in the national accounts, this last value only includes contractors and is therefore not representative of all building and construction-related activity.

The ACI is a composite index compiled by renowned economist Dr Roelof Botha on behalf of Afrimat.

Image credit: Afrimat

Botha also expresses some uncertainty as to whether the data accommodates the perceived shift in economic activity from larger companies to smaller companies. “If you look at the hardware sales and the building materials trends in South Africa,” he explains, “then the construction sector should still be growing in real terms, even if it’s at a marginal rate, but they tell us that in the 3rd quarter there was again a marginal decline in real terms.”

This, he explains, is the advantage of the ACI: it provides a balanced and realistic view of the level of activity in the construction sector by evening out the apparently contradictory trends that are often portrayed by the individual components that comprise the index. “I really believe that this Construction Index is a more accurate reflection of the activity in construction than any one of the individual indicators,” he says.

Proxies for the marginal improvement in the Afrimat Construction Index that fall outside of the scope of the indicators comprising the index are not too difficult to find. During the third quarter of 2017, the seasonally adjusted index of the volume of manufacturing production for divisions closely associated with construction activity increased by more than one percent over the previous quarter. These divisions include structural wood products, non-metallic minerals, and metal products and machinery.

Moving forward
While a number of surveys of confidence in the economy, in general, have slipped back to lows that were last recorded during the 2008/09 recession, the bulk of quantifiable data on the state of the economy supports the fact that South Africa’s GDP expanded by more than one percent, in real terms, during the third quarter of 2017 (year-on-year basis). And the construction sector at large continues to outperform the economy as a whole, with the ACI having expanded by 20.8% since the third quarter of 2010 (the base period), substantially higher than the rate of growth of 13.6% for the economy as a whole over this period (in real terms).

The positive movement in the ACI is a trend that Dr Botha expects to continue into next year. “Looking into the immediate future, the 4th quarter is never particularly good for construction because of the annual summer holidays, but several of the sub-indicators that we use are already seasonally adjusted, so it won’t have a terrible effect. However, we expect this to really improve dramatically next year,” he says. “If you look at the general trend of the index over the last 3–4 years, it’s been very subdued, along with the rest of the economy, because of a lack of confidence and a lot of policy uncertainty.”

The declining trend in overall business confidence – arising from factors including policy uncertainty and the South Africa Reserve Bank’s delay in adopting a more accommodating approach towards monetary policy – has negatively impacted the potential expansion of construction activity.

“Whoever wins the ANC leadership battle later this month will certainly clarify certain aspects of policy early in 2018, which will be good for construction,” Dr Botha adds. “And if there is, as is widely expected, a more business-friendly approach towards economic policy, then I believe that the construction sector will start responding to the huge latent demand in the country, and we could go back to 3% growth next year for the economy.”

Afrimat CEO Andries van Heerden.
Image credit: Afrimat

Andries van Heerden, Afrimat CEO, says the activity in the construction sector, as indicated by the ACI, bodes well for the economy and for players able to adapt and embrace circumstances. “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. Afrimat being in many of the rural areas of the country is an example of an adaption that paid off.”

The results of this study are showing that construction is a sector in which government spend is still taking place and, given economic constraints, it is natural for the sector to come off slightly. “However, if companies position themselves correctly on product quality, price and service delivery, they should be able to make a decent return for shareholders,” concluded van Heerden.


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07 Dec 2017

By Robyn Grimsley
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