FEBRUARY CONSTRUCTION AGAIN HAS THE XMAS BLUES

The Australian Industry Group (AiG) “PCI” in conjunction with the Housing Institute of Australia (HIA) monthly construction index has found that January and February 2014 were slow months for new orders. This is not unusual during this time after the festive season and the wet period in Queensland. Housing has indicated growth and especially in the Commercial sector with a drop off in Engineering Construction. From all reports Engineering Construction will remain down for the next six months even though there are projects in the pipeline. Building and Housing Construction is expected to remain buoyant. Commercial construction has seen a substantial increase.

KEY FINDINGS

The national construction industry contracted at a steeper rate in February as activity returned to negative territory for the first time in five months, after a sharper fall in new orders. Reflecting this deterioration, both employment and deliveries from suppliers continued to decline.

The seasonally adjusted Australian Industry Group/ Housing Industry Association Australian Performance of Construction Index (Australian PCI®) fell by 4.0 points to 44.2 points in February. This was below the critical 50 points level that separates expansion from contraction and signalled the industry’s weakest performance in six months.

Across the construction sub-sectors, house building activity showed continued growth in February, although its rate of expansion moderated to the slowest pace in the past six months.

A return to growth was evident in commercial construction, which helped to soften the overall decline in construction activity. This sector’s rate of expansion picked up to its fastest rate in almost four years. Weighing heavily on the headline Australian PCI®  however, engineering construction activity turned down sharply in February, to be at its most subdued level in the past eight months. Apartment construction also contracted for a second consecutive month, albeit at a slightly slower pace than in January.

This latest set-back in industry conditions coincided with reports of fewer new contracts and project completions, most notably in the engineering construction sector. Tight credit conditions and a lack of public sector tenders were other major factors generally cited as inhibiting activity.

CONSTRUCTION ACTIVITY AND CAPACITY UTILISATION

Underlying this result was a further decline in new orders in February, driven by lower levels of incoming business in the engineering construction, house building and apartment sectors.

The rate of capacity utilisation (not seasonally adjusted) rose slightly from the four month low level of 70.2% in January to 72.0% of industry capacity being utilised in February.

ACTIVITY BY SECTOR

The house building sub-index continued to indicate expansion in February, in line with the growth seen in new orders over the preceding five months. However, this sector’s rate of expansion moderated for a second consecutive month, with the activity sub-index decreasing by 5.3 points to 52.2 points in February. This is consistent with the slower rate of growth in new orders seen in December 2013 and January 2014.

The apartment building activity sub-index indicated contraction for a second consecutive month. However, the rate of decline moderated slightly, with the sector’s sub-index rising by 1.4 points to 46.6 points in February.

The commercial construction sector returned to growth in February, with its sub-index rising by 12.9 points to 59.9 points. This was the strongest reading for this sub-sector since April 2010, with the gains in February far exceeding the drop in this index in the previous month.

Respondents pointed to a lift in commercial building commencements, although it was noted that conditions remain mixed across the major commercial building categories.

The engineering construction sector exhibited a marked deterioration in February, with its activity sub-index falling by 14.6 points to 39.7 points. This was the weakest reading in eight months. Survey respondents noted that mining-related projects are coming to completion and more projects are being deferred, which is reducing engineering construction activity.

NEW ORDERS AND DELIVERIES

New orders (seasonally adjusted) contracted in February for a second consecutive month.

The new orders index registered 39.5 points in February, down by 8.2 points from January. This was the lowest reading for this index since June 2013.

This result reflected contractions in new orders across all sectors, but was especially evident in the engineering construction sector. Both the apartment and house building sectors also recorded notable falls in new orders in the month.

Consistent with the deterioration in aggregate demand, deliveries of inputs from suppliers declined for a third consecutive month, with the supplier delivery index registering 48.0 points in February. This was slightly (1.0 point) below January’s reading and was well down (9.9 points) on the 3½ year high level of three months ago.

INPUT COSTS AND SELLING PRICES

Input price inflation moderated in February, with the input costs sub-index falling by 4.1 points in the month to 66.4 points.

Reflecting the highly competitive market environment, selling prices contracted at a steeper rate in February. The selling prices sub-index decreased by 1.8 points to 44.6 points, the sharpest rate of decline in the past five months.

The ongoing gap between these two sub-indexes highlights the continued pressures on the profit margins of construction businesses, amid a strongly competitive pricing environment and continued growth in costs.

GLOBAL COMPARISONS