South Africa’s multidisciplinary construction industry is under tremendous financial pressure, a recent study from Frost & Sullivan, an American market research and analysis firm, has found.

The study focused on an analysis of ‘the South African Multidisciplinary Construction Industry within an African Context’. It analysed 12 of the biggest construction companies that operate in the fields of mining, processing plants, and project management within Sub-Saharan Africa for the 2015 financial year.

Of the 12, eight were publicly listed, South African Engineering, Procurement, Construction Management (EPCM) companies. The report showed that the eight EPCM companies showed an average decrease in market capitalisation of 31% over the 2015 financial year.

These companies also witnessed an average decrease of 52% in market-to-book value from 2011 to 2015, indicating a significant drop in investor confidence.

The four remaining companies forming part of the analysis were international businesses with a reputation for delivering projects in Africa, two of which are not publicly listed companies.

Frost & Sullivan explained that the analysis offered deep insight into the current financial performance of the companies, the scope of capabilities, and the current challenges faced in the South African construction industry.

“Despite the resounding growth experienced in  the build up to the 2010 FIFA World Cup hosted by South Africa, the construction industry is currently witnessing a major slump as construction companies face several challenges both locally and globally,” Frost & Sullivan’s chemical, materials, food industry analyst Lynessa Moodley said. “Challenges include employee relations, lack of skilled labour, and liquidity risk resulting in poor overall financial performance of the sector.”

She added that increased competition also restrained company profits due to “price wars”.

Frost & Sullivan said that growth in the industry also experienced a slump in 2015 due to slow economic growth. “A weakening exchange rate caused a rise in the import costs of raw material, transportation and project costs,” the company said, which stalled the demand for EPCM work, and thus reduced profitability.

However, Frost & Sullivan indicated that the current state of the industry will not remain as such in the long term due to the South African government’s National Development Plan and increased social infrastructure spend, which will result in a temporary surge in the market. It said that the 2022 Commonwealth Games was also expected to help boost market growth.

Overcoming challenging market conditions

Kimberley Bryant, Frost & Sullivan’s CMF research analyst, said that in order to overcome the current challenging market conditions in South Africa, “EPCM companies need to look at alternative markets in Africa where a growth in demand is expected for infrastructure projects and EPCM services.”

“EPCM companies are advised to establish a strategy that encourages trade and business interaction between African countries and focus on the developments related to this network to bring in revenues,” Bryant added.