Is the weaker rand bad for construction?

Many have pointed to the domestic construction sector and the boom within it as a type of guardian angel for South Africa in a global economy that is facing a potentially severe recession.But, the recent weakness in the rand has caused some to question whether or not many of the planned projects are still viable.

Speaking on SAFM Market update with Moneyweb, independent construction analyst Mark Ingham, said, that the construction story remains strong even if the market overshot somewhat recently.

"What should be borne in mind is that the construction industry as a whole is not particularly import-intensive," he says.

"Infrastructure spend as a proportion of the economy has gone up since 2002, 2003, and there's no indication that that's going to slow down anytime soon, particularly on the civils front. We are seeing it in residential, we are seeing it in commercial too. Construction is very good at creating jobs, and in fact a lot of the job creation we've seen of late has come from that sector. But, going forward, there's the roads programme, the earthworks that go with that. There's significant spend - not only by the private sector, but also by the state."

Asked about the impact of the currency, Ingham says he does not believe that the rand will stay at these levels for too long but adds, "take Gautrain, for instance, much of the currency sort of exposure has gone away. It's been built in a very much stronger exchange rate. There's only about R3bn worth of exposure left to currency fluctuations. Bear in mind, of course, with the Eskom programme only about 15-20% of value added accrues to domestic contractors. That programme particularly is import-intensive. But if I look at the industry generally, there is not too much to worry about.

Murray and Roberts CEO, Brain Bruce agrees that the sector will not be too badly affected.

But says the residential sector has already slowed.

"We know that when interest rates go up, residential and commercial building stops," Bruce told Bloomberg. "But the government is rebuilding a nation's asset base, and that generally happens regardless.''

"We're not going to stop building power stations, water projects and roads," Bruce said. "The next few years are more a question of how government will prioritise spending. This will be a period of caution, but our order book is strong."

While Ingham agrees with the sentiment, he adds, "I do however think expectations need to be tempered. We did run away with ourselves. We've seen quite dramatic price falls in construction stocks. But certainly margins have increased. I think they are reaching a plateau, however. I think going forward one should anticipate that profit growth will be more in line with top-line growth, and of course it's a very risky industry, relatively low margin overall, and we could be in for the odd nasty surprise. But I think that big profit upsurge is behind us now."

RMB Asset Management's Wayne McCurrie, speaking on the same programme, told Moneyweb, "The big construction spend has not disappeared. But understand, we are going to get huge amounts of news releases - this person has cancelled that project, this mine has cancelled this shaft, this construction company had its contract cancelled in Dubai - because understand the massive explosion of building and construction in the Middle East was on the back of [oil] averaging $120 or $140/barrel. At $60/barrel there is just half the amount of money around that was there. So of course it's going to slow down."

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