Market Research Bulletin

Market Research Bulletin: Iron ore prices begin to drift lower after July highs

CONSTRUCTION

  • The IHS Markit/CIPS UK Construction PMI reading for July came in at 45.3 – a slight rebound from the ten-year low posted in June but still indicating that activity in the sector is contracting:
    • Commercial construction was the worst performing sub-sector, closely followed by civil engineering as Brexit is causing delays to contract awards
    • The contraction in house building softened from June's three-year low
    • New orders dropped for the fourth consecutive month, the longest continuous period of decline since 2016, leading to cuts in employment numbers
    • Purchasing activity fell sharply as demand for construction products and materials continued to soften Input cost inflation remained high, partly reflecting rising prices for imported items and those in short supply


UK Construction PMI (Source: IHS Markit/CIPS)

  UK Construction PMI   Baseline


  • Building published their Top 150 Contractors and Housebuilders tables in July. Balfour Beatty once again led the contractors table in terms of contracting turnover (£6.1bn to the 12 months ending 31st December 2018) and saw pre-tax profits grow 5% to £123m. However it was Galliford Try that made the most pre-tax profit over the period (£143.7m). The top 5 contractors (by contracting turnover) were:
Turnover Table
  • Winners have been announced on the five-lot London Construction Programme framework. Kier, Durkan, Mace and Morgan Sindall have all secured places on two of the three £20m-plus lots on the £5bn major works framework, which covers public sector contracts across London.
  • The Construction Products Association (CPA) has revised down its construction output forecasts for 2020 and 2021 over concerns about the future of some major infrastructure projects under a Boris Johnson government. Providing major schemes such as HS2 and the Heathrow Airport expansion are delivered, the CPA is predicting a 0.3% decline in total construction output for 2019, in line with previous projections, but its forecasts for 2020 and 2021 have been revised down to 1% and 1.4% respectively (previously 1.4% and 1.7%).
  • James Brokenshire has been replaced as the housing secretary by Robert Jenrick, the previous exchequer secretary to the Treasury. Mr Jenrick has said little about housing policy publicly but he has in the past called for policies to bring smaller builders back into the market and establish development corporations to build new towns. He has also proposed an idea to build homes on disused public land and sell them “at cost” to the under 40s.
  • The latest RIBA Future Trends survey found that architects in London were more pessimistic about future workloads than other areas. Adrian Malleson, the RIBA’s head of economic research and analysis, noted that commentary from practices this month focused largely on the fragility of the current architectural climate. He said:

“Some drew attention to Brexit creating an unpredictable market, in which it is increasingly difficult for both clients and architects to make, and commit to, business plans.”

Adrian Malleson, RIBA

UK ECONOMY

  • Markets are pricing in the risk of a no-deal Brexit after Boris Johnson was appointed UK prime minister. Bank of England policymakers have indicated in recent weeks that a chaotic departure from the EU could lead to rate cuts, or at the very least derail plans to raise rates. Mr Johnson’s ‘do or die’ pledge to take the UK out of the EU on 31st October 2019, with or without a withdrawal agreement in place, has also caused the pound to tumble in recent days, further driving up inflation by increasing the prices of imported goods.
  • ‘Boosterism’ – a term recently used by Boris Johnson is the new plan to end a decade of austerity by spending the £26.6bn of ‘fiscal headroom’ that has been built up. Boris Johnson has ordered the Treasury to embrace this new philosophy as it prepares for an emergency Budget this autumn.
  • Investment in UK commercial property slumped by a third in Q2 2019 as the amount spent on deals fell to £9.1bn, making it the second-weakest quarter in the past seven years. Brexit uncertainty is putting a damper on trading, causing a sharp fall in transactions. Foreign investment in UK commercial property fell 39% in the quarter as Asian investors became net sellers for the first time in more than eight years.
  • Leading think-tank the National Institute of Economic and Social Research (NIESR) has estimated that the UK economy was likely to have contracted in the second quarter of this year and, with little apparent momentum, there was a distinct possibility it could contract again in the third quarter, putting the UK in a technical recession.


WORLD NEWS

  • A recently published Confederation of British Industry (CBI) report, which studied no-deal preparations made by the EU and UK in 28 areas of the economy, has found that Brussels and EU member states had made “only a small number of limited temporary measures”. The findings come as Boris Johnson vowed to ‘turbo-charge’ the UK’s no-deal preparations ahead of a planned October 31st exit date.
  • The Federal Reserve has cut its main interest rate by 25 basis points (0.25%) – the first reduction since the financial crisis. The move is being branded as a “mid-cycle adjustment to policy” rather than the start of a more aggressive monetary easing policy and stems from ongoing trade tensions and “uncertainties” linked to weakness in the global economy.
  • Chinese manufacturing stabilised in July as the Caixin China General Manufacturing PMI index rebounded to 49.9 during the month from 49.4 in June (a reading below 50 represents a contraction). Lingering concerns over the impact of the US-China trade dispute meant that manufacturing activity contracted for the second month in a row, however the survey noted business confidence in China was picking up.
  • According to Eurostat, the European Commission’s statistics bureau, the Eurozone economy expanded by just 0.2% in Q2 2019. Slowing growth off the back of weaker global demand increases the chance that the European Central Bank will launch a big package of stimulus measures in September.


COMMODITIES & MATERIALS

  • Oil prices rose for a fifth consecutive session on 31st July after data showed that US crude stockpiles hit their lowest level since November 2018. Brent crude was trading at $65.21 a barrel. However, last week influential London-based oil brokerage PVM said that the next big move in oil prices could be $30 a barrel in either direction.
  • Shares in iron ore producers such as Rio Tinto, BHP Group and Anglo American fell at the end of July after Brazilian group Vale announced that operations at its Córrego do Feijão mining complex would partially resume after a waste storage dam burst in January. Resumption of processing at the mine will result in an additional 5m tonnes of output.
  • Since peaking at $126 a tonne earlier this month the price of iron — the key ingredient in steelmaking — has started to drift lower. It was quoted at $115.10 on 31st July by S&P Global Platts as analysts at Liberum said a number of recent data points indicated “the top may be in for iron ore.”
  • Nickel - the metal used to make stainless steel - rose by more than a fifth in the first few weeks of July, outpacing other industrial metals. Strong demand in China where production of the “300 series” stainless steel - which has a high nickel content - surged 13% year-on-year in June helping to drive up the price.


ANNOUNCEMENTS IN THE CONSTRUCTION PRESS

  • Boris Johnson, the newly elected Tory leader, has signalled he will press ahead with HS2 even if costs soar. Mr Johnson, who is planning a separate study into the line’s scope and value-for-money, offered a broadly positive verdict on the future of the project, saying:


“I do think it’s only responsible as an incoming government, with all the controversy surrounding the spend on HS2, which will probably be north of £100bn, it’s only responsible to have a short review without interrupting the timetable at Curzon Street (the HS2 terminus in Birmingham) or anywhere else”

Boris Johnson
  • In a trading update Kier announced that trading in the group’s Infrastructure, Services and Buildings divisions has remained resilient but that it expects turnover for the 2019 financial year to be approximately £100m lower than for the 2018 financial year. The group noted that there were numerous property and land-led transactions which did not complete in June 2019, which will impact profitability. Despite this, Kier's share price jumped 33% on the back of the update, buoyed by news of debt reduction and the appointment of Simon Kesterton as the new CFO – a cost-cutting expert.
  • The latest official data on contractor pay performance shows that whilst improving overall in the previous six months, only a handful of firms (four in total) are meeting the Government’s target for contractors to pay suppliers within 60 days. Starting next month, contractors that haven’t paid 95% of all invoices within 60 days in their two previous six month reporting periods will be frozen from new public contracts. The top five contractors were:
Invoices Table
  • Countryside Properties plan to open two more factories costing £12m to build modular homes. The housebuilder wants to increase output using the method to 7,500 units a year by 2023 and has already spent £6m opening its first modular homes factory in Warrington in April.
  • Skanska has abandoned its plan to sell its Cementation piling arm after an unsuccessful 14-month search to find a buyer. The firm had been hoping to solicit offers in excess of £50m for a business that last year had revenues of £62m and posted a pre-tax profit of £12.5m, but no potential buyers were prepared to pay the asking price. UK CEO Greg Craig originally wanted to sell the arm because the churn of buying and replacing plant and equipment meant the business was eating capital and selling it would free up money to plough into other areas.
  • A quarterly State of Trade survey by the Federation of Master Builders (FMB) has found that a fifth (21%) of SME’s polled reported a shrinking workforce. This is the first decrease in employment levels among small construction firms in over five years and is thought to be a consequence of Brexit and the worsening skills shortage. The survey results prompted the FMB to warn that firms may be forced to take on more subcontractors and move way from direct full-time employment.

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