At AfriSam’s bi-annual National Budget post-analysis event, private and public sector leaders came together to review the current state of the economy and the outlook for construction.

IMIESA speaks to Richard Tomes, sales and marketing executive, AfriSam, about future scenarios.

As the leading black-controlled construction materials group in Southern Africa, AfriSam plays a critical role in sustaining a vibrant building and civil engineering industry, both at home and within the broader African region. The latter includes operations in Lesotho, Swaziland and Tanzania.

The current trading environment remains constrained, with South Africa slipping into a technical recession during Q1 2020. Year-on-year, the construction sector remains a negative contributor to GDP and trading conditions will continue to be impacted by a struggling
global economy going forward. This has now been compounded by the unprecedented Covid-19 pandemic. 

“At times like these, focusing on common goals is imperative and AfriSam stands firm in its commitment to its customers, employees and communities to find workable solutions,” says Tomes.

“As an executive team, we are engaging with government on key issues that affect us and our industry. These include fair and transparent legislation, protection from cheaper-priced cement imports, and measures to improve the ease of doing business in
South Africa.

“As a country, we urgently need to boost local and foreign direct investment. However, that will require far clearer policy certainty on pressing issues like the land reform debate. From a construction materials perspective, the industry also needs greater clarity on the unfolding implications of the Mining Charter,” he explains.

“Eskom is also looking to impose high tariff increases on industry, which will put even more pressure on costs. So, as a major corporate citizen and employer, we need to make our voice heard,” he continues. 

SOEs and the cost of borrowing

At AfriSam’s 2020 National Budget Breakfast, two internationally renowned speakers provided their expert analysis. Dr Azar Jammine, director and chief economist, Econometrix, presented an overview of South Africa’s 2020 National Budget, with specific reference to the building and construction industry. In turn, Daniel Silke, political analyst and keynote speaker, presented on the topic, ‘South Africa 2020: Tipping or Turning Point’.

“Presenting the economic data and reviewing our political landscape is essential in formulating current and future business strategies,” says Tomes. 

Silke’s comments on how the rest of Africa is dealing with its SOEs was particularly interesting. The chosen route was towards privatisation – a case in point being Angola’s recent decision to sell off more than 70 SOEs. As Silke points out, there’s evidence of a substantial change in thinking, which now needs to be fully embraced in South Africa.

Dr Jammine’s presentation highlighted how public debt as a percentage of GDP is a
deciding factor in the success or failure of a nation, citing Greece as a classic example. Borrowing at a faster rate than its economy, Greece eventually had to be rescued by the International Monetary Fund.

South Africa could face a similar fate if it continues along its present path. According to National Treasury, public debt as a percentage of GDP is expected to hover around 67.8% by 2022/23. 

“Our takeaway is that government has presented a reasonable budget under very difficult circumstances. However, there wasn’t much to get excited about in the building and construction materials space,” he continues.

“The budget’s primary focus was on social spending in areas like education, grants and healthcare. We are optimistic, though, that the imminent roll-out of government’s Infrastructure Fund will serve as a catalyst for a pipeline of much-needed projects,” he states.

Over the next three years, the conservative estimate from economists is that cement sales will grow by 3%.

Housing market activity

Based on the indicators, the fortunes for the civil engineering sector are looking more positive than the building segment. Building plan approvals (private commercial and residential) are on the decline; however, within the affordable housing market, some private developers remain reasonably positive of continued demand in the R500 000 to R1.5 million range. As announced in the budget speech, the scrapping of transfer duties for properties below R1 million should also impact positively on property sales.

“From a budget perspective, mention is made of a pipeline of social housing projects, as well as R64 billion earmarked for student accommodation,” says Tomes. “Should these materialise, that would be a welcome boost for the building market.”

Procurement Bill

Another topic raised during the budget speech is the proposed Procurement Bill. The industry view is that while addressing past imbalances is essential, how the transformation process is handled must take cognisance of present economic realities.

As a company, AfriSam has always maintained good levels of compliance in terms of Broad-based Black Economic Empowerment (BBBEE) and currently has a Level 4 BBBEE status.

“As an executive team, we are looking at revising our transformation and inclusivity targets, and retaining scarce and critical skills,” he continues. “Additionally, it’s important to state that these objectives go well beyond compliance. As an organisation, we live the AfriSam values of inclusivity and creating opportunities for all citizens in South Africa.”

Protecting local producers

The cement industry is a national asset and critical to government’s delivery mandate. For this reason, it needs to be protected against lower-priced imports. During 2019, in excess of 1 million tonnes was imported from countries that include China and Vietnam, even though there is excess local capacity. As Tomes points out, these importers do not have to comply with requirements like BBBEE, the Mining Charter scorecard, or the Carbon Tax. Whether these cement imports consistently meet South African quality standards is also being questioned.

A potential and uncontrolled escalation in cheap imports has the potential to undermine, or even destroy, the South African cement sector. Were it to fail, this would have a serious knock-on effect in advancing government’s transformation and macroeconomic agendas. 

“In response, the South African cement industry has approached the International Trade Administration Commission (ITAC) for an application to impose tariffs on all imports, regardless of source. Currently, Pakistan is the only country where an ITAC tariff ruling has been applied, and there’s a sunset review, which terminates at the end of 2020. So, we have also asked ITAC to reimpose this,” Tomes explains.

The end goal is to have cement identified as a designated, key resource that needs to be sourced locally for all government projects.   

“Since environmental responsibility is a global concern, we have also asked government to impose a Carbon Tax on all cement importers,” he adds.

In the interim, AfriSam – along with its fellow producers and the construction industry in general – has revised its forecasts to get through the bad weather ahead.

“We saw this coming,” says Tomes. “In response, we’ve invested in operational efficiency improvements and right-sized the business to remain competitive.”   

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