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Product sales increase amid housing boost but capacity fears remain

Building product sales strengthened in Q3 2013 and the outlook for the next six to 12 months appears rosy, though concerns remain over both the sustainability of demand and available capacity.

Sales of heavy-side products – an early indicator of construction activity – have continued to recover after a strong rebound in Q2 2013, according to the latest State of Trade Survey by the Construction Products Association.

The fact that heavy-side product sales continued to rise in Q3 suggests that trading conditions are improving. The majority of heavy-side companies reported a rise in activity in the quarter and only 18 per cent of firms continued to experience falling sales compared with a year earlier.

Light-side sales also picked up strongly in Q3, with 77 per cent of light-side firms reporting higher sales year on year – in sharp contrast to the flat activity reported in the second quarter.

Housing market boosts product sales

The improving housing market was one of the main factors behind the surge in light-side sales.

Since the beginning of this year, property transactions have increased, while housing starts have been rising on a quarterly basis since Q3 last year, boosting demand for light-side products.

Housing and infrastructure were largely behind the rise in product sales, although signs of wider recovery also emerged.

Concerns for capacity

A swift increase in demand for bricks and blocks has left some housebuilders suggesting there is a shortage of building products. Following the collapse in demand in 2008, product manufacturing capacity fell and left stock levels relatively low.

“Manufacturers need more certainty about the strength of the recovery before committing to investment in new capacity”

In the short term a mismatch in demand and supply can be met with increasing imports and working extra shifts. This is often not the most cost-effective way to provide for the marketplace and can put pressure on costs, which continued to rise in Q3.

From a builder’s point of view, planning product orders ahead of time can go a long way, too. But manufacturers need more certainty about the strength of the recovery in the medium term before committing to investment in new capacity.

Even with this, it will still take some time before investment plans actually result in capacity gains.

Growth in construction

Recent strong heavy-side sales point to growth in construction activity over the next 12 months, with wider economic recovery aiding confidence and paving a way for future growth. Both heavy-side and light-side manufacturers seem to agree that things can only get better.

“It is too early to tell whether this optimism is strong enough to turn investment intentions into new capacity”

Two-thirds of heavy-side and light-side producers expect sales growth to continue into Q4 2013. The overwhelming majority believe sales will be higher in the next 12 months, with only 3 per cent of respondents predicting further falls in activity.

However, it is too early to tell whether this optimism is strong enough to turn investment intentions into new capacity.

Housing and infrastructure construction are likely to be at the forefront of the expected growth over the next 12 months.

But, as ever, sustainable economic growth remains crucial to the near-term fortunes of construction and building product sales, and recovery beyond housing and infrastructure will be required to ensure that sales rise over the next year.

The Construction Products Association State of Trade Survey questions building product manufacturers about past and future trends. Results are calculated using the balance of respondents; a 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.

Milja Keijonen is a senior economist at the Construction Products Association

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