Market Research Bulletin

Market Research Bulletin: Construction activity expanded in February 2020 but COVID-19 disruption looms

Construction

  • The IHS Markit/CIPS UK Construction PMI rose to 52.6 in February 2020 from 48.4 in the previous month, easily beating market expectations of 48.8. The latest reading, which was based on survey data prior to much of the disruption caused by the coronavirus outbreak, pointed to the steepest pace of expansion in the construction sector since December 2018. According to February’s survey:
    • Housebuilding activity increased the most since July 2018 and commercial work output grew for the first time since November 2018
    • Civil engineering activity fell for a 13th consecutive month
    • New orders rose the most in just over four years on greater tender opportunities and the release of spending that had been delayed in the run up to Brexit
    • Employment stabilised and demand for sub-contractors picked up for the second month running and to the greatest extent since December 2018
    • Input cost inflation eased from January Business optimism weakened but remained much stronger than seen in H2 2019
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  • The coronavirus (COVID-19) pandemic has prompted contractors to review their contract terms and clarify their legal positions. Firms are anticipating potential project delays, increased costs and the possibility of site closures and stalled contract signings as a result of global supply chain disruption caused by the outbreak. Clifford Chance’s global head of construction David Metzger suggested that clients and contractors should adopt a more conciliatory approach towards potential disputes.

“I would hope this is the point where people get together and act collaboratively. It helps nobody if you adopt a strict contractual approach. You end up with bigger problems, if someone falls over and they need replacing.”

  • Although construction output increased by 1.4% in the three months to January 2020, the latest ONS figures show that monthly output dipped in January. The All Work index fell by 0.8% compared to December 2019, driven by a 2.5% fall in Repair and Maintenance work. However, New Work output growth remained flat in February. The month-on-month series has been particularly volatile in recent months, reflecting the political and economic uncertainties. Adverse weather, COVID-19 and ongoing trade negotiations are likely to translate into continued volatility in Q1 and the rest of 2020.
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  • Rishi Sunak’s ‘levelling up Budget’ revealed a host of positive headlines for the UK construction industry. By the end of parliament, public sector net investment will be triple the average over the last 40 years and in total, £640 billion of gross capital investment will be provided for roads, railways, communications, schools, hospitals, and power networks across the UK by 2024/25. (G&T’s 2020 Budget analysis can be found here).
  • Housing secretary Robert Jenrick said the government will look to pilot a “zonal” approach to planning as part of reforms due in the forthcoming planning white paper. The suggestion was part of a series of measures laid out in a parliamentary statement on housing and planning, billed as a back to “first principles” rethink of the planning, which included commitments to reform planning fees and push ahead with previously trialled expansion of permitted development rights.


UK Economy

  • The Bank of England announced an emergency interest rate cut from 0.75% to 0.25% in an effort to mitigate the economic impact of the COVID-19 outbreak. Mark Carney, the outgoing governor of the Bank of England, said policymakers had seen a "sharp fall in trading conditions", including spending on non-essential goods but stressed that the economic damage caused by the coronavirus remained unclear.
  • UK economic growth was flat in January 2020 compared to the previous month. Despite the decisive general election result hopes of a post-election bounce did not materialise in the month. The economy had expanded 0.3% in December and business confidence surveys had indicated the trend would continue with an improvement in business and consumer sentiment before the extent of the coronavirus outbreak became apparent.


World Economic News

  • Global markets crashed last week caused by spiralling concerns over the coronavirus outbreak. Despite emergency actions taken by the Federal Reserve and the European Central Bank to mute the financial and economic damage from COVID-19, US stocks fell almost 10% in their worst day since the 1987 crash. Markets responded violently to the growing prospect of a global recession as the US announced a travel ban and Italy imposed a nationwide quarantine.
  • China’s exports fell by 17.2% in dollar terms in the first two months of the year. Manufacturing activity in China also plunged to an all-time low in February according to the latest PMI survey. The week-long lunar New Year holiday, as well as quarantine and containment measures, shut down much of the economy over the period, disrupting travel, production and transport. The economy is still struggling to return to pre-virus levels even as the government pushes companies to restart.


Commodities & Materials

  • In a backdrop of falling steel prices Chinese steelmaker Jingye has completed the £1.2bn acquisition of British Steel from the official receiver. Jingye has pledged to invest £1.2bn into British Steel as it plans to develop a new electric arc furnace in Teesside and build a new 250MW power plant to serve British Steel’s Scunthorpe site. Jingye said it also plans to invest in British Steel’s rolling mills, build a new rebar line and beef up the group’s current rail mill.
  • Ibstock plans to spend £45m redeveloping and expanding an existing site in Walsall that will increase annual brick production by 80m units once completed in 2022. Chief executive Joe Hudson said that its clay division is operating in a market in which demand for bricks exceeds that available from domestic manufacturing capacity. He noted that investment will further expand Ibstock’s capacity against a backdrop of a significant UK housing deficit and robust demand from the new build housing sector over the medium term.
  • Crude oil prices fell to $33 per barrel last week as global production far outpaced demand. Saudi Arabia, the world's top exporter, launched a price war following the implosion of an alliance between the OPEC cartel, led by Saudi Arabia, and Russia.


Announcements in the Construction Press

  • After losing £200m on a scheme to build a bypass around Aberdeen, Balfour Beatty chief executive Leo Quinn said contractors were having to store up rainy day money because margins remained so low:

“There is still too much risk being passed down to contractors. Terms and conditions need to be less onerous. If industry could achieve standard margins, which I believe are almost double what they are today, we could invest in skills and capital equipment. The industry standard is 2%-3%. We’re only talking about [getting up to] 4% or 5%.”

  • Costain, whose shares fell more than 50% last week, has launched a £100m rights issue to shore up its balance sheet after suffering a £6.6m pre-tax loss in the year ending 31st December 2019. The firm said it was facing growing demands on its cash from the Government’s prompt payment code and the increased use of project bank accounts. Delayed job starts and project cancellations have also put pressure on the Costain’s cash position.
  • Kier has announced a 9% drop in revenue in the six months to December 2019. Despite making a pre-tax loss of £41.2m the firm has reported good progress on its cost-cutting programme. Central overheads have been slashed from £35m in the six months to December 2018 to £14m in these latest results. Since the cost-cutting began two years ago, Kier has now shed 1,200 jobs and further 50 will be gone by the end of its financial year in June 2020. These reductions in headcount will result in cost savings of at least £65m by June 2021, the company said.
  • Galliford Try’s Chief executive Bill Hocking has said that the firm is poring over existing contracts in order to determine how much in extra costs it might be liable for as a result of the COVID-19 outbreak. He added that on contracts it was about to sign, the firm was insisting that force majeure clauses be inserted to cover coronavirus:

“Coronavirus is a force majeure event. I’m sure we’ll have robust discussions [with clients] but if a client says no, we are going to have to make a decision. The thing is to remain calm and treat each other fairly.”

  • Buildots, an Israeli AI construction technology firm, has opened an office in London as it seeks to roll out its computer vision technologies on UK construction sites. Buildots incorporates AI and 3D computer vision technologies to provide on-site project teams with a platform that tracks activity and progress. The system, which integrates with BIM, works by site workers wearing a 360-degree camera on their hard hats during weekly or daily site walks, which records data. This data is uploaded, analysed using Buildots’ patent pending algorithms and compared with the project’s planned status. Project dashboards are then updated with latest status reports, 360 degrees site images and insights on any design or schedule discrepancies. Notifications of this information are then sent to relevant project team members. Its developers claim that this “optimises subcontractor productivity, increases on-site efficiency and reduces time and costs”