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Afrimat, the JSE-listed open pit mining company providing industrial minerals, bulk commodities and construction materials, has released the findings of the Afrimat Construction Index (ACI) for the third quarter of 2019. The ACI is a composite index of the level of activity in the building and construction sectors, compiled by renowned economist Dr Roelof Botha on behalf of Afrimat.

During the third quarter of 2019, the ACI outperformed total economic activity in the country, recording an increase of 5,1% quarter-on-quarter, compared to an increase in the Gross Domestic Product (GDP) of only 0,7% (in real terms). According to Botha, another encouraging feature of the latest index is the attainment of a higher level than a year ago.

           Andries van Heerden, CEO of Afrimat.

“Most important, however, is the continuation of a more stable trajectory, as measured by the four-quarter average for the ACI,” says Botha. “It is clear, therefore, that there is still some life in the construction sector, with improved levels of activity having been recorded since the first quarter of 2019 in the values of buildings completed, building plans passed and both the value and volume of building materials produced.” Botha nevertheless notes concern over the continued lethargy in construction sector value added and the decline in employment, albeit marginal.

“The declining trend in the ACI’s four-quarter average value that kicked in during the second quarter of 2017 has now been reversed, and the new growth phase should gain some momentum in 2020 as a result of the solid performance of capital formation growth over the last two quarters,” says Botha. “Interest rate relief is desperately needed in the economy, in general, and the construction sector, in particular, for growth to become sustained and to accelerate.”

According to Botha, it remains puzzling why the Monetary Policy Committee (“MPC”) of the SA Reserve Bank refuses to switch to a more accommodating monetary policy stance. Figures released by Statistics SA confirm the declining trend in South Africa’s inflation rate, as measured by the Consumer Price Index (“CPI”).

During the first ten months of the year, the CPI averaged 4,2%, the lowest rate in more than a decade. In real terms, adjusted for inflation, the prime overdraft rate, which is the benchmark commercial lending rate, has now increased by more than 100% from its average level during the tenure of the previous governor of the Reserve Bank, Gill Marcus.

“It stands to reason that high interest rates act as a disincentive for capital formation, especially in the residential property market, as it precludes many individuals from being able to afford the purchase of a home,” says Botha. “Ever since the 2008/09 recession, the residential property market has been in a slump (in real terms), which represents one of the major reasons for the poor growth in construction activity over the past decade”.

Botha is nevertheless confident that construction activity should be stimulated by the success attained with securing investment pledges during the second Presidential Investment Summit held in Sandton during November. President Cyril Ramaphosa was rewarded for his early efforts aimed at higher economic growth via market reforms when investment pledges worth R363-billion were made at the Summit, attended by more than 1 500 delegates. A total of 72 companies and organisations made investment commitments at the high-profile Conference, of which 39 represented a value of R1-billion or higher.

According to Botha, the new Infrastructure Fund, which is to be managed by the Development Bank of Southern Africa (DBSA), also represents good news for the construction sector in 2020 and beyond. The DBSA has announced that a project pipeline valued at more than R700-billion had already been identified by the Fund, one of the initiatives underpinning government’s new Economic Stimulus and Recovery Plan.

President Ramaphosa announced the formation of the Infrastructure Fund in 2018, which has been created to raise funding from both the public and private sectors in an attempt to reduce the country’s infrastructure backlog and contribute to the quest for higher economic growth. Botha is confident that the fund would draw lessons from South Africa’s successful renewable energy procurement programme, through which approximately R200-billion of private electricity investment had been facilitated since 2011.

“Because Afrimat has a well-diversified portfolio and footprint, generating a balanced, consistent income stream, we’ve been less exposed to the construction sector than others. The uptick in the ACI is welcome and we have ourselves seen some evidence of renewed activity, particularly with respect to SANRAL tenders becoming available again, which is encouraging for many in the sector. However, we remain cognisant of the latest statistics released by Stats SA, according to which the construction industry as a whole registered its fifth consecutive quarter of negative growth, and so continue to ensure we remain focused on our diversification strategy, cost reduction and efficiency improvement initiatives,” says Andries van Heerden, CEO of Afrimat.

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