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Construction product sales at highest level since recession began

The Construction Products Association finds makers of heavy products are feeling the benefits of the upturn but light-side manufacturers may need to wait until next year.

Construction product manufacturers enjoyed their strongest sales performance since 2008 in Q2 2014, according to the latest Construction Products Association State of Trade survey.

The firmer economic outlook has lifted confidence in the sector and stronger expected sales are set to drive investment and hiring intentions over the next 12 months.

Recovery in construction products’ sales volumes intensified in Q2, with 100 per cent of both heavy and light-side companies reporting year-on-year rises in sales – the strongest result the survey has ever produced.

Furthermore, 90 per cent of heavy-side manufacturers and 73 per cent on the light side reported that sales rose by more than 5 per cent. This is a major improvement from the corresponding quarter of 2013 when manufacturers were, on balance, reporting falling sales.  

Survey notes

The Construction Products Association State of Trade survey asks building product manufacturers about past and future trends.

Results are calculated using the balance of respondents – the percentage of firms reporting a rise minus those reporting a decline.

Manufacturers of heavy-side products typically produce structural materials used early on in the construction process; light-side products are typically installed later in the process.

Encouragingly, this momentum looks likely to be sustained, as all manufacturers anticipate continued increases in sales in Q3 and over the next 12 months.

No respondents foresee a dip in sales over the next year – another result which has not been seen in post-recession surveys until now.

The expansion in overall construction output has been driven by strong growth in output in the private and public residential sectors since mid-2013.

This has been underpinned by house price inflation permeating beyond London and the South-east, as well as a sustained improvement in sentiment resulting from government policies such as Help to Buy, which is in place until 2020.

Growth rates in repair, maintenance and improvements on private housing have also accelerated, reflecting an increase in property transactions, a strengthening labour market and a greater discretionary element to household spending activity.

Investment and employment rise

Manufacturers’ optimism over recent sales and the outlook for the year ahead has translated into growth in employment and capital investment at product manufacturing firms.

Headcount compared with a year ago increased for 70 per cent of heavy-side firms and 82 per cent of light-side product manufacturers in Q2, while hiring intentions among light-side firms for the coming 12 months reached a six-year high in the quarter.

In a clear sign that manufacturers intend to capitalise on favourable conditions, heavy-side firms are expecting a broad increase in capital spending over the next year, with investment geared towards structures, plant and equipment, customer research and R&D.

Light-side companies are looking more restrained in their investment intentions, which is indicative of the longer lag between a pick-up in activity and an increase in demand for light-side products, which are typically installed in the latter stages of construction.

Cost and capacity challenge heavy product firms

The return to growth is likely to heighten some pressure points within construction product manufacturing. On the heavy side, firms that have responded to increased building starts and stretched capacity by increasing their labour force are consequently seeing cost issues emerge.

Capacity utilisation among heavy-side companies has increased in the past year as project starts – particularly in private housing – have accelerated, and more capacity is expected to be absorbed over the next four quarters.

Forty-two per cent of heavy-side manufacturers envisage operating at more than 90 per cent capacity within a year – a marked improvement from the survey a year earlier, when 17 per cent of these firms were expecting to see this level of capacity utilisation.

Inflation in the UK economy has been on a downward trend since the end of 2013, with the most recent consumer price index (CPI) reading registering a 1.9 per cent year-on-year increase in June, well below the 10-year average of 2.7 per cent.

In contrast, a fifth of heavy-side manufacturers have been hit with cost increases above 5 per cent in the past year. Overwhelmingly, the key drivers of this were wages and salaries.

On balance, 95 per cent of heavy-side companies and 80 per cent of light-side firms reported that wages and salaries have risen over the past year, reflecting the impact of the rapid rise in demand for skilled employment in anticipation of higher production requirements.

Some non-wage cost pressures will be mitigated by the recent appreciation in sterling. In June, the pound was 5.9 per cent higher against the euro than a year earlier and had risen by 9.2 per cent against the US dollar.

A stronger currency can harm exports as outgoing shipments become more expensive to buyers in overseas markets, but since the majority of construction product manufacturing firms produce for the domestic market, the appreciation will have the favourable effect of dampening costs of imported parts and materials.

Lack of demand dogs light-side market

The potential issues in costs and capacity that lie ahead for heavy-side firms stem from an acceleration in activity, whereas a lack of demand still remains the overriding concern for light-side manufacturers.

Labour availability has also been flagged as a future growth constraint for light-side firms, echoing warnings of a widening skills shortage across construction and manufacturing.

Indeed, despite the headline optimism over sales, 89 per cent of light-side firms identified weak demand as the factor most likely to constrain growth over the next 12 months.

A lag between the pick-up in heavy and light-side product sales is to be expected, given that light-side products are typically used in building interiors towards the final stages of construction.

Producers of heavy-side structural materials will be the first to see the benefits of the bulging pipeline of construction work, including the initial wave of the 230 residential, commercial and mixed-use towers set to reshape the London skyline.

Commercial construction – the offices sector in particular – has also been stepped up in regions beyond the capital, with large-scale projects under way in Birmingham, Manchester, Leeds and Aberdeen.

However, light-side workloads, sentiment and investment intentions are unlikely to catch up with those on the heavy side before 2015.

Rebecca Larkin is an economist at the Construction Products Association

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