Murray & Roberts (M&R) CEO Brian Bruce believes South Africa's construction economy, which has been in retreat for three decades, is on the cusp of a new cycle of multidecade growth.
Speaking to the investment community yesterday - following the release of strong operational results, but a 10% fall in headline earnings on a higher tax charge and some exceptional items - Bruce said that M&R was confident of a strong recovery in the construction economy, particularly given the potential for sustained economic growth, as well as prospects for expanding the level of fixed investment as a percentage of gross domestic product (GDP).
At present, South Africa's gross fixed capital formation (GFCF) as a percentage of GDP is 17%, but government has set a target of 25%, along with a growth-rate target of 6% - the country's most recent growth figure came in at 4,8%.
“Assuming that South Africa moves up to the 25% level, and sustains a growth rate of 4% to 4,3% a year . . . there will be a surge in investment,” Bruce argued.
He hauled out a historical chart tracing South Africa's GFCF back to 1947. It showed that a multidecade rise was not unprecedented and that, other than a slump in the mid-1950s, South Africa had previously sustained a construction-economy boom for three decades, from just after WW II through to the oil crisis of the late 1970s.
The M&R graph comes only a week after the head of mining giant BHP Billiton, Chip Goodyear, displayed his now-famous chart tracing the US commodity-price cycle over a 200-year period. In his presentation, Goodyear hinted to a 'secular' or long-term change, which could underpin a scenario of multidecade commodity-price rises. His graph indicated that the commodity cycle was still near an all-time low, despite recent price recoveries.
Similarly, Bruce's graphic shows that, since 1977, South Africa's fixed investment has been in decline, falling to nearly 14% of GDP in the late 1990s. The recovery to 17% was also well off historic-trend levels, which peaked in 1977 at 30%.
Bruce admitted that a belief in an extended business cycle required a leap of faith for construction professionals, most of whom had never experienced anything other than decline. But he indicated that M&R was building the possibility of multidecade strength into its future scenarios.
“We believe that it is possible, which is an important first step, because once you believe, then you become part of the contribution to making it happen,” Bruce told Engineering News exclusively.
“My board and my executive team believe, as do a lot of the investors in M&R, particularly the international investors, who are very optimistic about the potential for South African GFCF.”
He said he was fortunate in his business career to have entered the construction industry in 1972, which exposed him to the last five years of boom conditions. “Many people in this industry do not have that memory. Most people only know what it is like to live in an industry in crisis, and we can see this in terms of the lack of preparation that has been taking place over the last few years. There has been no understanding of what lies ahead, and that is manifesting itself in talk of skills shortages and leadership crises,” Bruce elaborated.
However, he stressed that M&R was not aligning its business purely to a surge in the South African construction economy, but also to the sustained strength being shown by the economies of Asia, especially China.
He pointed out that M&R had reoriented it business over the last five years towards the natural-resources sector, and that it was now well placed to serve the large resources majors as they pursued mineral and energy expansion opportunities.
He argued, further, that the global “awakening of democracy” meant that ordinary people were looking to improve the quality of their lives and that Asia, where 67% of all people reside, was already driving this trend, leading to a significant rise in growth levels.
“Countries are either going to wake up or stay asleep. I believe South Africa is awake and part of this global trend.” This said, Bruce was also conscious of the possible constraints to participating in this growth, arguing that falling production rates in South Africa were a major concern.
“There is a lot of activity in South Africa to produce raw commodities, but we don't produce enough other products, which could become a major constraint in the longer run. If you want anything made, now, you go to Asia to make it and, as a consequence, they will drive world growth. What we have to find is an ability to achieve our growth through what South Africa can do, while tapping into what Asia is doing,” he concluded.