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South Africa: Group Five, Basil Read and Aveng hit by contraction

By Xolisa Phillip, in Johannesburg
Posted on Tuesday, 10 December 2019 07:21

The large construction sites of South Africa are falling silent REUTERS/Siphiwe Sibeko

The construction sector has plunged deeper into recession. This is further indication of the slow pace of South Africa’s infrastructure programme

In the third quarter of 2019, construction recorded its fifth consecutive contraction, according to data from Statistics South Africa (Stats SA).

Other sectors badly hit:

  • Mining performed poorly and contracted 6.1%, dragged down by platinum group metals, coal and iron ore.
  • Manufacturing, one of the biggest sectors, contracted 3.9% because of “decreases in the manufacturing of basic iron, steel and machinery products”.

Cumulatively, the sectors contributed towards South Africa’s economy contracting 0.6% in the third quarter of 2019.

Earlier this year, the World Bank, the International Monetary Fund, National Treasury and the South African Reserve Bank all revised down their growth forecasts for the country.

Gloomy growth outlook

While Kenya and Ghana are projected to grow 5.6% and 7% respectively, South Africa’s GDP growth for 2019 has been pencilled at less than 1%.

  • International factors that pose downside risks to the South African economy include the US-China trade wars and swings in commodity prices.
  • Domestically, an unreliable power supply remains the greatest risk to the economy.

What’s killing construction

In construction, “decreases were reported for activities related to residential and non-residential buildings, as well as construction works. The industry contributed R106bn to total value added in the third quarter of 2019, lower than the R110bn high recorded in the fourth quarter of 2016,” according to Stats SA.

  • “Construction’s poor performance is mirrored in other data. Stats SA recently reported that public sector investment in fixed assets such as buildings, vehicles, land and equipment fell 8.2% between 2017 and 2018, while spending on new construction works dropped 11.3% over the same period,” Stats SA said.

Construction’s downward spiral has also been apparent in the performance of stocks listed on the Johannesburg Stock Exchange.

  • Group Five, Basil Read and Aveng have all experienced difficulties which have resulted in sharp declines in their share prices.

Each has been forced to institute drastic measures, including disposing of non-core assets, to beat the tough times.

One of the associated industries that has suffered as a result of the construction slump is the cement sector because of a drastic drop in demand for the commodity.

In September last year, President Cyril Ramaphosa announced an infrastructure programme as part of a suite of measures aimed at economic recovery. However, its implementation has been slow.

A heavy load

In recent weeks, Eskom has resumed load-shedding or scheduled power outages, citing a wet coal supply because of heavy downpours.

Analysts predict the recent wave of load-shedding will plunge the country’s economy deeper into crisis.
The power outages will not only undermine the festive season retail trade. Load-shedding will also put a damper on business confidence, as well as the performance of key sectors such as mining and manufacturing.

Mining and manufacturing are among Eskom’s biggest clients. However, they are increasingly exploring alternative sources of power other than Eskom.

This has resulted in the state-owned power utility facing a two-pronged problem: demand for its power has declined since its last crisis in 2008, while its customer base is dwindling.

But that has not stopped Eskom from applying for double-digit electricity tariff increases.

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