There may be trouble ahead. The construction sector, an uncertain future for suppliers
“There may be trouble ahead”, so sang Fred Astaire to Ginger Rogers but this is a very apt statement to make in relation to the construction sector and suppliers to that sector. These headline statistics confirm the rise in company failures for Q1, 2017:
- 730 companies were subject to corporate insolvency - an increase of 9% compared with Q1, 2016
- Of these 730, specialist construction service failures were up 11%
- Insolvencies in civil engineering numbered 47 - an increase of 4% on Q1, 2016
The prospects for the remainder of 2017 and 2018 are unlikely to improve with Brexit uncertainties, the low value of sterling against other currencies, particularly the Euro and US Dollar and the lack of infrastructure projects in a government-led austerity programme. If you consider the strong possibility of an interest rate rise before the year is out (if not soon after), prospects look pretty grim.
If further evidence was required, see below stats from the ONS:
Total new company insolvencies in England and Wales by broad industry sector, year ending Q1 2017
As you can see, taking out the one-offs for ‘administrative & support services’, construction failures are way ahead of every other sector.
The ONS also reports that output in the construction sector fell by 0.6% in Q1, 2017 but also fell month-on-month in April 2017 by a further 1.6%.
There are major concerns regarding some of the big players in this sector too.
In March of this year, Mitie reported a loss of £194 million and the loss of 3,000 jobs. Interserve Plc in the year to December 2016 lost over £100 million and in the last week or so also revealed that it was likely to breach its banking covenants putting the groups’ future in serious doubt. Carillion Plc have also been in the press recently, announcing profit warnings and seeing a double-digit fall in its share price.
There is work out there, but it’s mainly concentrated in London and the South-East and it’s a fight amongst many to win contracts, to the point pricing by some contractors is unsustainable, generating revenue but not profits, just to keep the business “ticking over “. This ultimately eats into cash reserves and impacts on working capital.
So what does this all mean for suppliers to the sector?
With lenders, particularly the major banks, reluctant to further extend borrowing or even looking to reduce their commitments, suppliers are being asked to provide additional working capital and this leads to payment delays. This means tough times now,for the remainder of 2017 and into 2018.
When you look at the timber sector, indeed, prices have increased, but there are issues with supplies of some products - in particular from Finland. You have to bear in mind that the vast majority of timber is imported.The fact that the pound is weak against other major currencies has a serious effect on costs via exchange differences. Plus, source is also an issue with regards to lead times, and with China increasing its level of imports for home use, there are supply issues anyway. When something is in short supply, prices rise. Add to this the real possibility of interest rate rises and margins for suppliers into the UK market become ever more squeezed. And there is also no evidence that the Government is going to relax its austerity programme and implement infrastructure projects in the UK…
In other areas, there are also concerns regarding supplies of certain products. Blocks, for instance, are in short supply because of production issues for Ash, a principal component in the making of blocks. Again, a shortage of a product generally results in inflated prices. That is if you can get your hands on blocks in the first place!
The situation is likely to get worse before it gets better. Hence, troubled times ahead...