View from Vox: Construction’s infrastructure salvation
It has not been an easy six months for the UK construction industry, which has found itself at the brunt of many of the economic challenges faced elsewhere in the economy, from labour and material shortages and the significant cost inflation that followed.
But a flurry of solid results from those supplying materials to the construction industry, in several cases well ahead of market expectations, suggest the sub-sector has responded well to the challenges.
Among them are brickmakers () and (), which both saw strong growth in sales and profits as they pushed through price increases – in industry speak, “dynamic pricing” - to offset serious capacity constraints and “severe” cost inflation (making bricks is hugely energy intensive). While both reported flat brick volumes, Forterra beat expectations delivering sales and pre-tax profit growth of 23% and 39.3%, respectively; Ibstock similarly grew sales 26% and PTP by 61%, back above pre-pandemic levels.
But could this be the calm before the storm?
Although prices rises have fallen back after last year’s spike, the government’s latest Building Materials and Components monthly statistics suggest materials inflation is still running hot in certain segments.
It said that overall materials prices increased 10.4% in January 2023 from a year earlier, following an increase of 11.2% in December. The greatest increases were seen in the prices of insulating materials, which rose 40.9%, aggregates (+28.5%), and cement (+24.8%) – although one glimmer of light came in the form of falling timber prices.
Housebuilding construction crunch
Along with broad inflationary pressures and worries about the economy, continuing materials price increases may have something to do with in falling levels of activity across the industry, with UK construction PMIs pointing to industry contraction more frequently than not over the past six months.
In fact, the government’s latest survey suggests that demand for key building materials is retreating – the data shows a 34.2% year-on-year drop in brick deliveries in January, a further deceleration from the 17.6% decrease seen in December. Sales of concrete blocks slipped 28.9% in January compared to the same period in 2021, while sales of ready-mixed concrete slipped 9.5% year-on-year in Q4 2022, while sales of sand and gravel fell 8.9%.
That clearly reflects recent news from the housebuilding sector, which pointed to much reduced output in the coming year – (), for example, expects to deliver 8-9,000 houses in 2023, well down on the 14,868 it sold in 2022.
And like the housebuilders, after a strong year the outlook is rather more subdued. Forterra said that its base case was a 20% drop in demand in 2023, noting that customers were reducing inventories. On the plus side, it said that it expected revenue and profits to be second-half weighted and that it had seen orders rising in the last three weeks.
But shareholders will be well aware that second-half scrambles often don’t end well. And should the downturn last longer than anticipated, continued investment in capacity may hold back the financial performance in the short term - Ibstock’s Atlas and Aldridge brick projects are expected to add 100 million bricks of lower-cost capacity by the end of the year, while Forterra is spending £30m redeveloping its Wilnecote brick factory. That bodes well for future growth - and both companies are extremely well capitalised - but a tougher trading environment could limit the scope for further dividend increases in the near term, after big jumps in payouts for 2022.
Infrastructure to the rescue
All hopes now appear to rest with civil and commercial construction, which was been behind a welcome expansion of construction PMIs in February. CRH, for example, said that while it expected further weakness in the residential new-build sector, government infrastructure plans around clean energy and the reshoring of critical industry in North America and the availability of EU infrastructure funds would keep trading steady.
UK Construction Purchasing Managers' Index
Source: S&P/Markit
Closer to home, () – which is moving from Aim to the main market - pointed to projects such as the National Highways Pavement Delivery Framework as a source of continued demand. () picked up new work with construction group Amey to be its sole supplier of suction excavator services to the National Highways Area 7 in the East Midlands. And structural steel specialist () saw its shares jump after it said pre-tax profits for 2022 would be above expectations, reflecting recent contract wins including two energy from waste facilities and ongoing work on rail projects.
Only yesterday, the UK government confirmed £40 billion of capital investment for transport projects over next 2 financial years. But with the all-important residential construction sector under pressure, and the UK’s competitive position at risk from massive tax breaks in the US and EU under their respective Inflation Reduction Act (worth $369bn) and the EU’s Critical Raw Materials Act, it seems that the UK government will be forced to further increase infrastructure investment in the country, particularly around green energy and regeneration. Investors should position their construction sector exposures accordingly.
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