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UK construction sector rooted in contraction for now

World Cement,

September data from Markit and the Chartered Institute of Purchase and Supply (CIPS) suggested that the UK construction sector remained firmly rooted in contraction, with output levels and new business declining since the previous month. Employment in the sector was relatively resilient in September, but confidence in the business outlook was again much lower than at any time prior to mid-2008. Greater cost pressures placed added burden on construction companies as the rate of inflation hit a six-month high, while low stocks at suppliers resulted in another lengthening of lead-times for raw materials.

Adjusted for seasonal factors, Markit/CIPS Construction Purchasing Managers’ Index® (PMI®) posted 49.5 in September, up fractionally from 49.0 in August but below the 50.0 no-change mark for the second month running. Moreover, this was the first back-to-back sub-50 reading since the start of 2010 and much lower than the series average of 54.2.

Residential building was the worst performing area of the UK construction sector during September, thereby continuing the trend seen throughout most of 2012 to date. The latest drop in house building work was the most marked since December 2010. Commercial activity also dropped in September, at the fastest rate for just over two-and-a-half years. A return to civil engineering growth however, helped soften the overall downturn in construction output. The rise in civil engineering activity was the first for four months.

September also saw the fourth successive month of decrease in new business inflows. Although the pace of reduction has eased since August, it was still the second sharpest decrease in almost three and a half years. It has been widely commented on by construction companies that the current business climate remained unfavourable for securing new contracts. This in turn led to subdued confidence about the year-ahead outlook for output in the construction sector. The degree of positive sentiment about the prospects for activity was among the lowest seen since the start of 2009.

Staffing levels increased in September, following stagnation during the previous survey period. While this indicated a degree of resilience in employment trends across the sector, the rate of job creation was much slower than its average prior to mid-2008.

Lower workloads resulted in another drop in input buying across the UK construction sector during September. Reduced purchasing activity has now been recorded in each of the past four months, but the rate of contraction in September was the least marked over this period. Delivery times from vendors nonetheless lengthened markedly, which construction firms widely linked to low stocks at suppliers. Input price inflation meanwhile accelerated for the third month, running to its highest since March, driven by increased costs for fuel and a range of raw materials during the latest survey period.

These trends reflect predictions made by Jerry McLaughlin, MPA Director of Economics, earlier this year when he said, “We are also expecting further declines in construction and mineral products markets in 2013.” Though 2012 is yet to fully play out, the situation doesn’t look like taking a drastic upturn any time soon. There is  good news just over the horizon, in the form of the Government’s recently launched Guarantees scheme. There is the hope that this will encourage investment in infrastructure, but it is not likely to have a significant impact until 2014 and more must be done to improve the situation in the near-term. With residential building being the weak card in the hand of the UK construction industry, it is likely to take an improvement in the housing market too before the construction sector sees any great improvement.

The gloomy atmosphere in the construction industry doesn’t necessarily translate to a dearth of activity for the cement industry though. Recently, the news has shown UK equipment producers, such as Guttridge and ANH Refractories, expanding their interests abroad, recycling and resource management companies, the likes of SITA, being awarded overseas fuel-supply contracts and producers such as Lafarge, one of the UK’s leading manufacturers of cement, investing in the optimisation of its plants and the use of alternative fuels. It make take some time before the UK construction sector makes a full recovery, but when it does, the cement industry will be in a strong position to meet its demands.

Edited from various sources/written by Jack Davidson.

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