Is sub-Saharan Africa’s construction industry slowing down?

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There is no argument that construction in sub-Saharan Africa is enjoying a renaissance but are we beginning to see Africa’s construction industry slowing down? Property prices in cities across the region have been climbing steadily for several years and speculation that these prices were indicative of a ‘bubble’ has not been substantiated.

Demand for housing in particular continues to grow and with the rising numbers of middle income families, the number of people able to afford them is also on the increase.

Prices are subject to supply and demand. For a long period during the 80’s and 90’s the supply of new housing stock remained low, while populations grew. Consequently there remains a huge pent up demand for residential construction. This fact is well supported. For example, in Kenya, government statistics state that the current supply of housing is 40,000 units per annum, while demand stands at 150,000 units, forecast to grow to 340,000 units per annum by 2030.

The construction industry looks like a ‘safe bet’ for some time to come, but from time to time, certain environmental factors may cause Africa’s construction industry slowing down. I believe that now is one of those times and there are a number of factors at play.

1. The fall in oil prices has had a huge impact on those countries reliant on oil exports from government income. The two countries most affected by this are Nigeria and Angola. In both cases oil exports account for over 80% of government income and in both cases, government spending accounts for a huge proportion of GDP. Fall in income equates directly to falls in expenditure and subsequently less money in circulation. Construction is seen as non-essential expenditure and is often one of the first areas to be hit.

Ghana’s construction boom has also experienced a rude awakening. The country’s glittering economic rise, heralding its drive to middle income status on the back of petrodollars is instead suffering from the largest currency fall this year (with the exception of the Zambian Kwacha). Falling prices and mismanagement of funds has led the government to approach the IMF for help.

2. Another impact of falling revenue is a fall in foreign currency availability. In Ethiopia this has been an on-going problem for importers. The government prioritises funds to its major infrastructure projects and the private sector has to wait for the leftovers. As a major agricultural exporter, crop prices can have a significant impact on FX availability in Ethiopia.

Recently however, other countries have found themselves with similar restrictions, especially those countries reliant on mineral and mining exports. Companies supplying Angola are experiencing long delays in payments, so the supply of products to the market is drying up. Major housing and other construction developments now find themselves on hold indefinitely. Almost all new projects are currently suspended.

The new government in Nigeria has already put a restriction on certain items that the central bank is forbidden to provide FX for. Some construction products are included on the list. Companies looking for FX to fund purchases are turning to the black market for funds and paying rates up to 15% higher than official bank rates.

Across the region, most African currencies are suffering against the high US$ exchange rate which is driving up the imported cost of materials.

3. At the same time, a softening of international demand for minerals has also seen prices tumble. Anglo American, the mining giant have recently had a write down of $4 billion due to sliding commodity prices. Precious metals prices are also in decline, with Gold reaching a five year low and silver following similar pattern. Economies reliant on mineral exports are perhaps in the worst position. In Liberia, one of Africa’s poorest countries, Arcelor Mittal have just completed a residential project to house its overseas workers, only to announce at the same time their withdrawal from Liberia because the cost of extraction is now greater than the price of ore. Goldman Sachs are predicting Iron Ore price will settle at $50 per ton, falling to $40 per ton by the end of the decade. This compared to highs of over $130 per ton less than 18 months ago. Rio Tinto too has seen share prices falling towards 5 years lows. In Mozambique coal mining has been dramatically impacted; while in Sierra Leone, London Mining’s Marampa mine has had to be sold by administrators PWC at a knock down valuation.

4. Politics in most African countries can also have an impact on activity in the short term and elections almost always have an effect. New construction investment tends to run slow prior to the election. Following peaceful outcomes, there follows a mini-boom, as pent up demand comes back on stream. The pre-election effect is currently being experienced in Tanzania, where a certain change in Presidency and no fore-runner in the pols, is causing much speculation and uncertainty. Such uncertainty is also affecting post-election Nigeria. The pre-election drop in construction happened on schedule, but the post-election lift has not appeared. During President Buharia’s first term in office as a military ruler in the 1980’s, he was known for austerity and controls. Nigeria’s many trading companies may be seeing the intervention and restrictions placed by the Buharia government on central bank financing of imports as a step in the wrong direction (so far as their business are concerned). There is without doubt a very real slow down in the construction sector in post-election Nigeria.

While the impact of this slowdown is not as devastating as the effect of the Global Financial Crisis was on the construction industries of Spain, Portugal and Ireland, it is none-the-less very real. Since current market conditions are expected to continue and long term oil and mineral price forecasts remain at or around present level, there is no reason to believe that there is any light at the end of the tunnel. We are rather more likely to see a medium term contraction on investment as government income; FDI, resource income and circulation of money in many economies all remain low.

There are some exceptions. The industry in Kenya for example, despite falls in the currency, has remained robust. There will always be exceptions, but it seems at the present time in sub-Saharan Africa there are few.

Wise investors and property developers will not have left themselves too exposed. If they can sustain themselves through the short term, they will emerge from the slowdown in a strong position. As described at the beginning of this article, the long term demand drivers all remain in place and will continue for many years, even decades to come. Industry participants should now be consolidating their business and positioning themselves for the inevitable rise, although no-body is predicting the recovery any time soon.

Joe Collins – Director at African Supplies Ltd and African construction industry consultant.

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