Market Research Bulletin July 19 2019

Market Research Bulletin: Fears grow that British Steel could be broken up

CONSTRUCTION

  • The latest ONS construction output figures show that ‘All Work’ output grew by 0.64% in May 2019 compared to the previous month. However, in the latest three month on previous three month series, total output growth flat lined, showing that there was 0% growth in the spring. Whilst all new work increased marginally over the latest three month period (0.3%), all repair and maintenance work fell (-0.5%).
UK Construction Output July 2019
  • Building Magazine’s 2019 International Salary Survey has found that, amid the ongoing political uncertainty in the UK, countries such as New Zealand and Canada may begin to draw more UK construction professionals abroad. There is the potential for this to make it more difficult for UK companies to replace EU workers that leave the British construction workforce.
  • In a debate led by former House of Commons leader Andrea Leadsom, several Conservative and Labour MPs argued that HS2 will likely cost in excess of £100bn. However, the transport minister, Nusrat Ghani, responded saying that: “There is one budget and one timetable… I stand here to state confidently that the budget is £55.7bn...” Boris Johnson has said that if he becomes Prime Minister he would order a reassessment of the business case for HS2.

“There is one budget and one timetable… I stand here to state confidently that the budget is £55.7bn...”

  • Ian Marson, the UK head of construction at EY, has said that based on the number of contractor profit warnings made since the beginning of the year, he expected the total 2019 figure to push beyond levels not seen since the turn of the decade. He said: “Profit warnings [are] at their highest level since 2011. By the run rate so far this year, it will take profit warnings to above the 2011 level by the end of the year. They are already at the 2010 level, by half-year, which is pretty incredible if you think about it.”

“Profit warnings [are] at their highest level since 2011. By the run rate so far this year, it will take profit warnings to above the 2011 level by the end of the year. They are already at the 2010 level, by half-year, which is pretty incredible if you think about it.”

  • According to a recently published interim report by the Government’s Building Better, Building Beautiful Commission, old retail parks and supermarkets should be redeveloped into mixed communities served by public transport. The interim report made several other recommendations, setting out ways in which the UK can ‘build beautifully’. The final report, which will include the Commission’s recommendations to government, is expected in December 2019.
  • A report written by the Housing, Communities and Local Government Select Committee has said that the Government’s housing target of building 300,000 homes annually by 2025 risks not being met due to an overreliance on traditional construction techniques. The report proposes tracking how much of the Committee’s total spending on housing goes towards MMC developments and how many homes are built using MMC annually. Chair of the Committee and Labour MP Clive Betts said: “This is not simply about shifting production away from the building site and into factories. It is about seizing opportunities that modern technologies allow.”

“This is not simply about shifting production away from the building site and into factories. It is about seizing opportunities that modern technologies allow.”

UK ECONOMY

  • According to Resolution Foundation, Britain is facing the highest risk of recession since 2007. With the latest PMI data showing contractions in both construction and manufacturing sectors, and the latest GDP estimates indicating a lower growth rate for Q2 2019, the risk of a recession has risen to almost 40% in recent weeks from 21% a year ago according to Resolution Foundation’s risk model.
  • Ireland has stepped up talks with Brussels regarding how checks on cross-border trade could be carried out in the event of a no-deal Brexit. Ireland is discussing with the European Commission how to limit, to the greatest extent possible, what Ireland needs to do in order to protect EU single market rules. The objective is to avoid creating a security risk at the border while reassuring other EU countries that goods from the Republic of Ireland meet EU standards.
  • There are growing fears that British Steel could be broken up as owners Greybull Capital revealed they are in talks with two of the company’s smaller factories in the north east with the purpose of examining how the businesses at those sites could trade as standalone entities. The Teesside Beam Mill supplies the construction industry, while the Skinningrove special profiles facility counts the digger maker Caterpillar as a customer.
  • UK retail sales experienced their worst June on record as total sales fell by 1.3% year-on-year in June, compared with a year-on-year increase of 2.3% in June 2018. Helen Dickinson, chief executive of the British Retail Consortium (BRC) said: “Rising real wages have failed to translate into higher spending as ongoing Brexit uncertainty led consumers to put off non-essential purchases.”

“Rising real wages have failed to translate into higher spending as ongoing Brexit uncertainty led consumers to put off non-essential purchases.”

  • Recent weak economic data and comments from Bank of England Governor Mark Carney that intensification of trade tensions have increased the downside risk to global and UK growth have sent market expectations of an interest rate cut this year above 50%. The probability that traders in Britain’s money market assign to a rate reduction this year hit 53% on 3 July – more than doubling the probability from the end of the previous week.


WORLD NEWS

  • Debt in developing countries has hit an all-time high (in both dollar terms and as a share of their GDP) according to the Institute of International Finance (IIF). The IIF said that lower borrowing costs thanks to central banks’ monetary easing had encouraged countries to take on new debt.
  • China’s economy grew 6.2% in Q2 2019 from a year ago – its weakest annual growth rate in 27 years. Tom Rafferty, principal economist for China at The Economist Intelligence Unit, said: “Uncertainty caused by the US-China trade war was an important factor and we think this will persist... Businesses remain sceptical that the two countries will reach a broader trade agreement and recognise that trade tensions may escalate again.”

“Uncertainty caused by the US-China trade war was an important factor and we think this will persist... Businesses remain sceptical that the two countries will reach a broader trade agreement and recognise that trade tensions may escalate again.”

  • The UK intends to press ahead with plans for a special tax on large technology companies, shortly after the US threatened to impose sanctions on France for imposing a similar tax. The UK’s draft legislation for a new digital services tax is expected to raise £400m a year by 2022 and will be done by applying a 2% levy on the revenues of search engines, social media platforms and online marketplaces serving UK customers.
  • Singapore’s economy shrank by 3.4% in Q2 2019 compared to the previous quarter, taking its annual GDP growth rate to just 0.1%. The trade-dependent economy has often been described as the ‘canary in the coal mine’ for the world economy, acting as an early leading indicator for the overall health of the global economy.


COMMODITIES & MATERIALS

  • China is investigating the underlying causes of the steep rise in imported iron ore prices in an attempt to “crack down on abnormal behaviour”, an industry association official has said. The drop in steel prices and the rise in iron ore prices have meant that the level of Chinese steel company profits has continuously declined, diminishing their global competitiveness.
  • Recent data from the Department for Business, Energy & Industrial Strategy shows that the ‘All Work’ material price index increased by 3.1% in the year to May 2019. However, month-on-month data shows that material prices from April to May 2019 fell by -0.4%, reflecting a weakening global economy.
  • Copper, the industrial metal many investors use to gauge momentum in the global economy due to its extensive use, has seen prices retreat since mid-April. Following soft manufacturing data from around the world, copper prices have fallen by 10% since their 2019 peak on 17th April 2019, signalling weaker demand and continued investor concern for the global economy.


ANNOUNCEMENTS IN THE CONSTRUCTION PRESS

  • Housebuilder Barratt said that it expects to report a 9% increase in pre-tax profits in its financial results for the year ending June 2019. Barratt said pre-tax profit would be in the region of £910m, while operating margin had risen to 18.9%, up 1.2%, with underlying margin improvement of around 70 basis points, driven mainly by margin initiative. Improvements to margins were driven through sites being purchased at higher gross margins and new products feeding through, as well as the sale of a legacy commercial asset and the reversal of inventory impairment provisions.
  • Skanska’s restructuring helped the firm more than treble pre-tax profits in the UK last year. After a series of problem contracts led to a £32m writedown in July 2017, Skanska introduced a new business plan to improve operational efficiencies and ramp up productivity. The contractor said that pre-tax profit jumped from £13.5m to £44m in the year to December 2018. Turnover for the year was up 7% to £1.9bn.
  • Atkins’ new president Philip Hoare has called on the Government to commit to a long-term spending plan for major infrastructure projects, saying that such projects don’t fit into a parliamentary calendar and therefore need to have all-party support.
  • Highways England has begun its search for a main contractor to build the £1.7bn Stonehenge road tunnel, despite concerns having been raised by MPs about the viability of the scheme and the lack of a secure funding plan. The Government’s roads agency is looking to draw up a shortlist of three firms (or JVs) to carry out the job, which it says will run for up to 13 years including provisions for five or seven years of post-construction maintenance.
  • Land Securities Group has begun the search for a new chief executive after current boss, Robert Noel, said he plans on leaving the firm at some point next year after a handover period. The announcement comes shortly after Landsec reported a big annual loss due to a steep decline in the value of its assets, as a string of collapses on Britain’s high street led to higher vacancies.

HS2 [has] recognised the current market conditions are challenging and the increasing concern regarding risk transfer, and wanted to revise our position to provide a better balance and overall outcome.”

  • HS2 is struggling to find a contractor to build a £435m station at Curzon Street in Central Birmingham because not enough firms are prepared to take on the risk of the proposed procurement route. In a notice posted to the Official Journal, it said: “HS2 [has] recognised the current market conditions are challenging and the increasing concern regarding risk transfer, and wanted to revise our position to provide a better balance and overall outcome.” In an attempt to attract a larger number of bidders, HS2 said it would launch a “revised strategy” for the scheme, under which less risk will be handed to the station’s design and build contractor

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