Drop-off forecast unless big projects fast-tracked

Photo / Brett Phibbs

The workload of New Zealand's biggest builder could drop away sharply next year and is mainly state-driven.

Rob Mercer of Forsyth Barr is concerned that Fletcher Building's forward workload is too heavy on Government jobs and too lumpy, a number of big projects ending soon.

He had thought the pipeline of commercial/infrastructure projects was improving and that this might mean next year looked better. But the situation now looks very problematic.

"Last year the risk of a drop in activity for major commercial/infrastructure was looking a key risk. Now the construction companies are unanimous: the drop-off is guaranteed unless the Government fast-tracks some of the projects that are scheduled for 2012/13," Mercer said.

"We have reviewed the National Infrastructure Plan published in March which clearly highlights the anticipated dip that will occur in 2011 (-10 per cent) which is then followed by a +20 per cent increase in projects being planned for development in 2012," Mercer said.

Construction sector staff numbers would fall by 10 per cent this year, but further headcount cuts were planned for next year, he said. Concrete, aggregates and steel sale volumes are already well down. Access to finance is a big problem and construction margins are being squeezed, Mercer said. Shifts at Fletcher's Pacific Steel plant have been cut from three to two a day, after the business ramped up steel-making capacity by 10 per cent last year.

"Lower steel volumes in New Zealand and Australia has caused Pacific Steel to cut back its daily shifts periodically which we believe will be ongoing in the near term."

NZ Transport Agency's sign-off of major motorway projects this year was likely to be pushed out to 2012.

"Maybe it held back because of the expectations that projects related to the Rugby World Cup, the large number of energy-related projects, airport developments, hospital projects and education buildings were going to fill the gap. But roading is a vitally important part of the project pipeline. Roading projects make up 50 per cent of the total investment in infrastructure spending between 2010 and 2016 and there is a clear dip in projects for 2011," he said.

The Super City's decision-making capacity would be slow and this hampered construction jobs. Less experienced staff were being appointed to positions with lower salaries and big decisions on funding large capital project in the Auckland region were being delayed by the changeover.

Business is still struggling and residential construction outlooks are relatively low, Mercer said.

"All of the emphasis around major projects is also forgetting that the $20 million to $75 million projects are equally important. The major projects are more difficult to mobilise in the short-term," Mercer said, also noting that the national infrastructure plan released in March predicted projects to decline next year. The outlook for private sector construction was very weak, constrained by credit availability and confidence.

Philip King, Fletcher's general manager investor relations, said though Mercer had reduced his earnings forecast for 2011, he was still forecasting solid growth in underlying earnings in 2011 compared with 2010.

"Rob's view on the current state of the commercial and government funded infrastructure market is consistent with our own," King said, referring to an analysts' presentation from infrastructure chief executive Mark Binns.

"He made similar points. This includes our experience that margins in commercial construction projects are under pressure and have been for some time as the volume of work has decreased in this sector.

"Our construction backlog remains strong. More than 80 per cent of the current backlog is from Government-funded work, reflecting both the increased investment in infrastructure by government over the past few years, and the downturn in commercial construction activity. The largest contracts awarded in recent times have been the Victoria Park Tunnel and the State Highway One -Mackays Cross to Peka Peka stage, although this won't be under way until 2012.

"We are continuing the build of other high profile projects such as Eden Park, Mt Eden Prison, and finishing the Manukau Harbour Crossing, all of which are on or ahead of schedule.

"The issue with large projects is their timing and phasing. Smoothing out work flows is harder with large projects when one comes to an end and this will be an issue for us to manage in the next year as several large projects are completed," King said.

NATIONAL PICTURE

House building:
Year to June, 2009: 12,146 new houses built.
Year to June, 2010: 15,750 new houses built

Non-residential construction:
Outlook for 2010: : volumes -10 per cent
Outlook for 2011:: volumes -15 per cent
Outlook for 2012: : "strong rebound"

Source: Rob Mercer, Forsyth Barr