Money Margin pressures are intensifying across Australia's construction sector

08:20  07 june  2018
08:20  07 june  2018 Source:   businessinsider.com.au

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Australia ’ s construction sector continues to strengthen, boosted by housing and engineering work. Apartment building continues to weaken, mirroring a slowdown in apartment approvals. Margin pressures across the sector continue to increase.

19:31 16 june 2018 Source: smh.com.au. Margin pressures are intensifying across Australia ' s construction sector . Australia ' s construction sector continues to strengthen, boosted by housing and engineering work.

Australia's construction sector continues to strengthen.© AAP Image Australia's construction sector continues to strengthen. Australia's construction sector continues to strengthen, boosted by housing and engineering work.

The Australian Industry Group’s (Ai Group) Performance of Construction Index (PCI) stood at 54.0 in May in seasonally adjusted terms, down 1.4 points from April.

The PCI measures perceived changes in activity levels across Australia’s construction sector from one month to the next. Anything above 50 signals that activity levels are improving while a reading below suggests they’re deteriorating. The distance away from 50 indicates how quickly activity levels are expanding or contracting.

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Activity across Australia ’ s housing and apartment construction sectors improved sharply last Activity levels across Australia ’ s construction sector have been improving for over a year Despite boom-time like conditions, construction firms are reporting increased margin pressures

Activity levels improve across Australia for 12 consecutive months. Margin pressures intensify for services firms, especially in energy costs. Retail sector records its fastest deterioration in activity levels since mid-2012.

So at 54.0, activity levels still improved in May, just at a slower pace than April.

The Ai Group reports that activity levels have now improved in each of the past 16 months, the longest period of consecutive improvement in the 13-year history of the survey.

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The Ai Group said the improvement was driven by firmer activity levels for housing and engineering construction, offsetting a steep slowdown in commercial work and deterioration in apartment building.

"House building activity expanded at a stronger rate in line with firmer demand conditions and a solid backlog of work," it said.

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In the UK construction sector , margins are under increasing pressure during a time of unprecedented uncertainty. Margin pressure . The construction industry has suffered from low margins for a period of time, and has struggled to recover to the pre-financial crisis levels.

The PCI measures perceived changes in activity levels across Australia ’ s construction sector from one month to the next. “The widening gap between these price series indicates that profit margins are coming under increased pressure for businesses in the construction industry,” the group said.

"Engineering construction also gained some further momentum in May consistent with reports of new tender wins and on-going support from a strong and expanding pipeline of publicly funded investment in major infrastructure works."

Fitting with a recent moderation in non-dwelling building approvals, the group said activity across commercial construction slowed noticeably during the month.

"The pace of growth in commercial construction was significantly slower in the month, although May was the sector’s 13th consecutive month of stable or expanding activity amid a range of projects underway, including offices, accommodation and education buildings," it said.

Again, mirroring recent trends in non-housing dwelling approvals, the Ai Group said apartment building continued to decline.

"Apartment building remained the weakest performing sub-sector in May with activity contracting for a third consecutive month, albeit at slower rate in comparison with April," it said.

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Margin pressures are intensifying across Australia ' s construction sector . Australia ' s manufacturing sector is booming thanks to increased construction activity.

ABS data suggest that the building construction sector in Australia had an operating profit margin which was lower than the broader construction industry. It allows for examination of wage increases across all EBAs certified in the construction sector but examines only increases to the base rate of

This table from the Ai Group shows how each sub-sector fared in May, comparing the results to April as well as a year ago.

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Like the performance by sub-sector, individual activity subindexes also put in a mixed performance in May with new orders and employment growing at a slower pace while supplier deliveries accelerated.

"The industry’s on-going expansion was supported by continued rises in both activity and new orders," it said.

"This was associated with a stronger increase in deliveries from suppliers, although employment growth softened from the 3.5-year-high in April."

On new orders specifically, a lead indicator on activity levels in the future, the results suggest the recent divergence between housing and engineering construction compared to apartment and commercial building will likely persist in the months ahead.

"Slower growth in new orders was evident in the commercial sector while in the apartment building sector new orders contracted at a sharper rate," it said.

"In contrast, new orders expanded at a higher pace in the house building sector and eased only slightly for engineering construction businesses."

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Activity levels across Australia ’ s manufacturing sector improved at the fastest pace on record last month, according to the Australian Industry Group’s latest PMI report. Firms are reporting increasing margin pressures , including from higher wage growth to workers.

Technical challenges specific to the construction sector have a role in the slow pace of digitization. Rolling out solutions across construction sites for multiple sectors that are geographically dispersed—compare an oil pipeline, say, with an airport— is no easy task.

Despite strong conditions across most parts of the industry, the Ai Group said margin pressures remained intense.

The input prices subindex surged by 8.1 points to 82.6 points, indicating that cost pressures in the construction of building projects lifted sharply during the month.

Like the headline PCI, the distance away from 50 indicates how quickly prices are increasing or decreasing over a given month.

In May, the answer was a lot.

"This increase in costs was driven by robust demand for construction materials, escalating energy input costs and supplier price hikes related to strength in commodity prices," the group said.

In contrast, the selling prices subindex increased by a smaller 2.7 points to 60.4 points, indicating that pressure on input prices are only partially being past on to buyers given strong levels of competition.

"The ongoing gap between these price series demonstrates that strong pressures on profit margins persist for businesses in the construction industry," the Ai Group said.

"This is consistent with reports of a highly competitive quoting and tendering environment."

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