Construction Product Sales Rise, But Uncertainty Ahead

Compared with last year, sales of construction products continued to rise during the third quarter of 2010 according to the latest Construction Activity Barometer from Ernst and Young and the Construction Products Association. However, although the indicator has fallen marginally from the previous quarter, a reading of 74 still suggests a healthy increase compared with last year.  In the Barometer a figure of 50 represents no change in sales compared to a year earlier with below 50 represents a fall in sales. Unfortunately, the buoyancy of the past six months is relative to the depressed state of the industry during 2009 when private sector demand contracted at an unprecedented rate. But the current cautious optimism is unsustainable in the longer term.  Commenting on the results, Noble Francis, Economics Director for the Construction Products Association said; ‘Sales of both heavy side products, typically used in the early stages of the construction process, and light side products, such as paints, heating and lighting products, were strong relative to 2009 Q3. From a level of 66 in 2010 Q2, the light side sales index climbed to 73, its highest level in three years and 54% of light side respondents reported that sales volumes were higher than in the same quarter 12 months ago. The heavy side sales index stood at 79 for the second consecutive quarter and a significant 71% of respondents reported that their sales rose. ‘Expectations about the future, however, were more subdued, particularly on the heavy side. From a peak of 81 in 2010 Q2, the expected heavy side sales index fell to 50, suggesting that sales volumes are anticipated to plateau in Q4. Light side respondents, however, continue to be optimistic about their sales over the short term and the light side expected sales index stood at 63, its highest level since the first quarter of 2008, for the second consecutive month. Respondents, however, did warn that recovery is unlikely to be sustained beyond 2010 and expressed concern about the pending Comprehensive Spending Review on 20 October. The Emergency Budget confirmed that government capital expenditure will reduce by nearly 40% between 2009/10 and 2013/14. The Association’s latest forecast expects that, despite a slight rise in construction output this year, the contraction in capital expenditure will be sufficient to send the industry back into recession in 2011.’ Dominic McAra, a Director in the Ernst & Young’s Construction Products team added; ‘The summer’s optimism reflected a period when a number of companies in the sector achieved better than expected results  – although these expectations may have been low based on a tough 2009.   ‘Caution appears understandable given the announced government capital expenditure cuts, which are likely to hit this sector harder than most.  The impact of the cold winters of the last two years is also likely to be front of mind as companies look to the final quarter of the year and to 2011.   ‘Many companies have managed to generate cash flows during the last two years despite lower profits, as a result of reduced capital expenditure and maximising working capital.  At some point this may cease to be sustainable without a longer term impact on business, but it may not be until beyond the winter period that there is confidence to invest.  This dilemma will leave companies with a difficult balancing act between their shorter term and longer term needs.’