What’s next for the civil construction industry?

GE Capital summary from CMPA General Meeting

Australia’s civil construction industry is forecast to grow at 4.3% annually through to 2016, despite a slowdown in Australian GDP growth – thanks to renewed business confidence and commitments to housing and infrastructure projects.

GE Capital presented the latest industry insights to the Construction Material Processors (CMP) Association General Meeting on 20 March 2014, revealing signs of optimism in the Civil Construction and CMP sectors, as well as some valuable insights from GE Capital’s Equipment Finance customer base in this industry.

Construction projects set to pick up as mining declines

With $20 billion in the Australian Federal Government commitments to infrastructure spend over the next three years, and a strong pipeline of Victorian Government infrastructure projects, there are solid opportunities for CMP businesses. this should offset the decline in mining and manufacturing investment.

Australia’s Gross Domestic Product (GDP) is expected to record growth of 2.4% in 2013 – a slowdown from the previous years – and mining investment will drop to 17% of GDP in 2016 from 30% in 2012.

However, the CMP sector nationally should grow at a steady rate of 1.8% over the next five years – “and with robust sand prices and lower wage pressures there should be profitable growth too”.

The latest AIG/HIA Performance Construction Index rose 3.9 points in September 2013 (its highest since May 2010 as this graph shows), and in Quarry Magazine an AIG spokesperson said, “businesses are now beginning to see more work, and enquiries are on the rise.”

Pricing should protect margins

Contractions in mining, manufacturing and public sector employment saw unemployment rates hit 6.0% in January2014 (the highest recorded since July 2003), signalling a potential weakening in wage growth. This, coupled with sand prices continuing to rise due to diminishing sand deposits and low import competition, should see CMP sector profit margins remain healthy.

“Our benchmarking indicates CMP businesses are seeing EBITDA/revenue ratios between 15% and 35%, depending on whether they own the quarry or have a rental model,”says Fulvio.

Infrastructure opportunities in Victoria

Last year’s Victorian state budget committed $6.1billion to infrastructure spending in 2013-14. other large projects include the East West link, Federal Government funding for the Bruce Highway, Pacific Highway and Inland rail.

“Our Victorian CMP clients say they’ve had a good start to 2014 and the Melbourne metro quarries are busy,” says Fulvio. “Government regulations – especially for greenfield expansions – and labour costs are still an issue.”

“CMP equipment manufacturers tell us they’ve had a solid 12 months of sales for example, Terex Australia says its CMP equipment division performed better than crane and aerial work platforms divisions last year.”

According to specialist landfill valuation firm CJ Ham and Murray, business valuations are edging up while volumes are staying stable.

Position your business for success

Given the economic climate and project opportunities ahead, what can you do to grow your CMP business? Fulvio offers three key success factors.

“First, you need to make sure your people are the right fit for your growth strategy. Look at your leadership culture, focus on your business’ core strengths and don’t get distracted from what you’re good at.”

He says the second factor focuses on customer service and delivery. “Building strategic alliances are a good way to get your tender over the line, or manage subcontractors without risking time frames. Only purchasing CMP equipment with strong ‘aftermarket’ support is smart – it’s not worth the risk if you miss a critical date due to processing issues.”

Finally, financial management needs to be rigorous, no matter what growth strategy you pursue. “Make sure you’re getting the most from your working capital and cash flow and tightly manage costs. It may require an independent financial review, but it’s worth it to protect your margins and improve your access to capital,” he concludes.

If you’d like any support with cash flow management or equipment financing arrangements, please call Fulvio on 0424 694 190 to find out how GE Capital can help.

SOURCES: GE Economics, IBIS World, ABS, RBA, CBA, Quarry Magazine.

The information contained in this article is general in nature and is not intended to be financial and/or taxation advice. GE Capital suggests you seek your own independent advice.

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