Camilo Thame, Business Reporter
IT IS not that fewer buildings went up or that they valued less than those constructed the year before. Rather, it is the reduction in other activities that is expected to underpin a decline, even if small, of real growth in the construction and installation sector in 2006.
A slowdown in infrastructure projects, including many undertaken by the Government, will be revealed to be among the major culprits, sector spokesmen and official data suggest.
In fact, a Financial Gleaner analysis suggests that the sector, which contributed $59.5 billion to the economy in 2005, could forego an estimated $5.3 billion in earnings, should outturn fall flat, against expectations of nearly four per cent growth during 2006.
As official performance figures will not be ready for at least another month, such expectation of a flat performance appears counter-intuitive to some industry watchers. After all, construction had, on the face of it, weathered a potentially crippling crisis - a severe shortage of cement at one point - to end the year in the robust health it started to enjoy between the last quarter 2004 and September 2005 when Spanish investors began to build a slew of hotels in Jamaica. The industry growth during the period was romping at 10 per cent, until a series of calamities at the island's sole cement manufacturer, Carib Cement, cause a shortage of the product on the market and sent the industry into a slump.
In the end, the problem was solved by throwing the market open to cement imports.
"Cement sales and consumption was up 18 per cent in 2006," said Dennis Morrison, an economist who director general of the ministry of development, which is part of the Office of the Prime Minister.
"If that is right, the decline (in construction) in the first half of the year was completely reversed ... There must have been growth in the sector."
Carib Cement's financial statements for the full year was unavailable up to yesterday, but for the nine months to September 30, the company's cement sales was tracking just behind the same period last year.
At the same time an additional 143,000 tonnes of cement was brought to the market by two private importers, Mainland International and Arc Systems.
So if Carib ended 2006 at the same level as the previous year, 865,000, total cement sales to the market would be 16 per cent higher.
However, the data from the Statistical Institute of Jamaica (STATIN), the government agency that measures and reports in activity in the economy are so far running counter to such intuitive assumptions.
For the nine months of last year, up to September 30, Statin reported, there was overall decline of 3.9 per cent in construction and installation.
Such a performance would clearly place in jeopardy any achievement of the projections of another government agency, the Planning Institute of Jamaica (PIOJ), which had predicted a 3.6 per cent growth in construction and installation for the 2006/2007 fiscal year, when ends on March 31. When the PIOJ made its projection, the agency took into account the possible impact of the cement crisis, but expected the industry to be driven, among other things:
Work associated with recovery from hurricanes and storms in mid to late 2005;
Preparations for Cricket World Cup to be hosted in March; and
Work hotels started in 2005.
The agency also expected that the first phase of the US$260 million Spanish Fiesta hotel, being built in Hanover, and the Golden Eye Resort, planned by Chris Blackwell for St Mary, would have started earlier. Both were delayed.
But it is not any slow down in these projects that would have had the biggest impact on construction and installation last year.
Indeed, Statin - which tracks the sector by measuring the dollar value of inputs flowing into the industry, deflated by a composite of commodity prices - showed what government sources said was a "small growth" in the building construction sub-sector for the nine months to September. The building construction subsector accounted for over 60 per cent of the sector's output in 2005.
So, on the face of it, it was the slowdown of other construction activities, such as road maintenance and equipment installation, driven in the first half of the decade by communications companies, that would have been largely behind the decline.
For instance, mobile telephone companies such as Digicel and MiPhone, which committed billions of dollars to build infrastructure from scratch to capture market share from Cable and Wireless Jamaica, have lowered capital spending in recent years.
The telecommunications firms have shifted their focus towards internet expansion.
Additionally, government spending on capital projects, for the nine months to last September, was two per cent, or $244 million, behind expenditure for the same period in the previous year. Placed against 12-month inflation to September 2006 of 6.5 per cent, the real cut back in capital spend for the period looks closer to 10 per cent.
Most analysts agree that the construction sector should have begun to see robust growth in the final quarter of 2006, the upshot of the correction in the cement supply situation during the last quarter and enhanced government capital spend between October and November, which at $7.9 billion was up more than 120 per cent, compared to the corresponding three months in 2005.
The real impact of this resurged energy wont be known for a while yet. The PIOJ, which in November projected 2.5 per cent growth for the quarter, won't be able to estimate the outturn until mid February, while Statin will have the results for the economic performance of the final quarter in early April.
Many, however, doubt that this will be sufficient to off-set the early negative impacts, especially given the trend of what happened with government spending between January and November. For those 11 months, the government had projected its capital spending to be $24.2 billion, but instead spent $20.7 billion.
According to one government official, "government capital spending is captured in 'other construction' activities as measured by Statin," which means that the reduction in government spending directly impacts the sector.
Take the case of Mainland International, a major hardware merchant and cement importer. It had been forced out of imports in 2004 when the government hiked the tariff on cement to 40 per cent, to protect Carib Cement's market while the company undertook at US$100 million in investment. This made Carib Cement the market's sole supplier.
But in the last quarter of 2005 hurricane-related storms damaged Carib Cement's stored raw material, causing a cutback in its output and an initial tightness in the cement market. Storms also caused a closure of some construction sites.
Then in the first quarter of last year, Carib Cement was forced to recall an estimated 20,000 tonnes of cement it had released to the market. There were two effects: uncertainty in the industry, as contractors pondered whether they had any of the bad product in their buildings, and a slow-down in output at Carib Cement, under official scrutiny, attempted to fix its problem. With a worsening cement supply problem, and construction at a standstill, the government was eventually forced to remove the import tariffs from the product.
In the meantime, many hardware suppliers were reporting falling sales and profits. Mainland was one of them.
With the change in policy, Mainland imported 42,500 tonnes of cement last year, but that was not sufficient, the company says, to bring revenues above 2005 levels.
"We ended up the year with significant lost sales," said Garth Walker, Mainland's vice president for marketing. "There was three to four months out of the year when there was severe shortage in the market and without cement other construction materials don't move."
Walker did not have a fix on the loss in turnover, but placed it in the order of tens of millions of dollars.
Don Mullings, a former president Incorporated Masterbuilders Association of Jamaica (IMAJ), and principal of construction and engineering firm, M&M Jamaica, says 2006 was challenging for the industry generally.
But given his firm's main focus being on road, sewage and water supply projects, the cement crisis was "less impactful on us".
He, however, had other problems. Higher costs associated with delays and higher-priced cement for projects, squeezed M&M's bottom line.
"Any ripple in the sector will impact profit," said Mullings. "The sector is very competitive, so mark-up on cost is around 15 to 20 per cent of which about half goes to overheads."
Mullings also highlighted some of the issues that would have faced contractors struggling with a shortage of cement.
"We still have to pay the bank for initial instalment, we can't not pay equipment operators and have to keep key workers on site even when there is no work," he said.
These are issues to which Mark Chin, CEO of Islandwide Concrete Company Limited (ICCL) - which operates under the Ready Mix brand - can relate. Chin, whose company has a construction arm, said ICCL's revenue went up 10-15 per cent last year, but profits were lower than for 2005.
Construction projects for 2007:
Major housing development in Clarendon and St. James, including a 900 unit housing development in Rose Hall and a shopping village in Ironshore;
Continued hotel construction started in 2005 and 2006, in addition to Golden Eye in St Mary;
North Coast Highway, the Port Antonio leg to Ocho Rios; and
Continued expansion of Airports in Kingston and Montego Bay.
camilo.thame@gleanerjm.com
