Competitive Analysis of the Construction Materials Sector on the Island of Ireland

Published: November 2015

Executive Summary

The construction materials sector is a strategically important element of the construction supply chain. It provides a range of basic materials such as stone and aggregates and a range of concrete products, including readymix concrete, blocks and precast concrete elements.

2.1 Overview

The Construction Materials Sector

The construction materials sector is a strategically important element of the construction supply chain. It provides a range of basic materials such as stone and aggregates and a range of concrete products, including readymix concrete, blocks and precast concrete elements.

Capacity utilisation

The 2012 InterTradeIreland report found that capacity utilisation in the sector was as follows;

From our consultations we conclude that the current level of sector capacity utilisation remains broadly similar in 2015. There has been some reduction in the number of operating facilities across the island; however, as these could be re-opened relatively easily and the capacity still remains, though operational efficiency has improved. 

Market demand

There has been some growth in construction output and market demand across the island in the recent past but this has been in specific geographic areas. Official data show that construction industry output in volume terms has fallen in Northern Ireland but has grown by small amounts in the Republic. However, industry sources say that the increases in activity are concentrated in and around the two major cities – Dublin and Belfast – and are not evident in many parts of the island. Total market demand remains substantially below what is regarded as a normal level of activity.

Employment

Employment in the construction materials sector had fallen from some 20,000 people within the
island of Ireland in 2007 to some 7,700 people in 2012 – a reduction of 62% from the peak. It is judged by the industry that employment levels have not changed to any significant extent and
many in the industry are providing employment on a “short week” – i.e. 3 days per week – or temporary basis.

Financial Performance

The 2012 report included a survey of twenty companies across the island that showed 65% of the companies incurring losses. It has not been possible to replicate that survey as a number of the companies have either closed or undergone substantial change. These companies were amongst the weaker or most at risk in the original sample. A review of the original sample companies whose financial statements were available suggest that these closures and corporate changes have led to some improvement in the sector’s financial performance – however, it must be stressed that this improvement is due more to rationalisation and corporate action than any market uplift.

2.2 Future Prospects for the Industry

Construction industry activity in the island is currently about half the size it should be in a normal economy. While economic indicators generally suggest that economic growth should be reasonably strong in the near future, housing output is far below what is needed across the island; infrastructure spending is very low and the EU supported Rural Development Programme is getting under way slowly.

Economic forecasts predict growth in future years – the Irish Central Bank’s most recent Quarterly Bulletin projects construction volume growth in excess of 8% for 2015 and 2016. The Construction Skills Network forecasts average annual growth in Northern Ireland construction of 2.2% over the period 2015 to 2019. The consultees in the review see significant potential for growth, but the lack of impetus both North and South in increasing public sector investment throws doubt on when the promised uplift will actually materialise. It is felt that any short term growth in construction demand is dependent primarily on the private sector.

2.3 Challenges Facing the Industry

Capacity

This current assessment concludes that some 35% of existing production plant capacity can be defined as structural over-capacity; broadly similar, though marginally smaller than the 37%
identified in the 2012 report. There have been improvements in operations efficiencies since that
report; including for example, sharing of transport and some manufacturing capacity, and in overall terms, the financial performance of companies within the construction materials sector has shown some improvement, but this appears to be due more to rationalisation and closure than improved in market conditions. An industry over-capacity issue remains.

Opportunity in the sector

Construction materials suppliers are very largely dependent on local markets. However, a number of companies across the island have developed markets in Great Britain for stone and precast concrete products. The development of off-island markets has been important for a number of companies in the sector.

These companies’ competitive advantage is attributed to the relatively low cost of basic materials in Ireland compared to Great Britain. High transport costs relative to the value of product being shipped preclude these companies from trading in markets further afield.

Regulation and Enforcement

A key challenge facing the sector is competition from unauthorised, non-compliant operators. This affects all parts of the island, though the issue seems more serious in the Republic. Product
standards; planning compliance and quality assurance requirements exist in the industry and the cost of meeting the relevant standards – the cost of compliance – is estimated at being between 10% and 15% of the selling price of the various materials.

Our consultations within the industry suggest that non-compliant operators benefit from:

• A price advantage of at least 10% to 15%;
• Failure on the part of some specifiers to refer to the relevant standards in contract documentation;
• Failure on the part of some public bodies and developers to audit the materials used by contractors; and
• Failure on the part of some local authorities to take enforcement proceedings against noncompliant operators.

This issue appears to have been addressed to a far greater extent in Northern Ireland than in the Republic. In the absence of enforcement, there is little the industry itself can do in addressing this issue.

Profitability and Scope for Future Investment

Prices within the island are widely regarded as unsustainable in the long run. Low prices are attributed to the current low level of demand coupled with the impact of non-compliant operators. Relative to Great Britain, prices in Ireland are extremely low; this is partly attributable to the high cost of aggregates in Britain. Concerns have been expressed within the industry and by customers that at current price levels, insufficient profits are being made to give reasonable assurance that future investment - such as opening new quarries or expanding distribution fleets - will be possible. A high cost construction materials environment, comparable to that in Britain, could develop in Ireland unless the issues of low market demand and noncompliant operators are addressed.

Skills

Employment in the sector has fallen substantially from its peak; many young qualified people have left both the sector and the island and concern is expressed regarding an emerging skills shortage; especially at craft, technical and professional staff levels. The age profile of the sector is a concern; attracting and retaining good new staff is difficult and while training in some areas such as management and safety is on-going, technical skill shortages may hamper future development in the event of a market upturn.

Roles of the State and its Agencies

A conclusion of the 2012 report was that Governments could address national
infrastructure needs and at the same time assist the construction materials sector by ensuring appropriate levels of investment in new projects, along with appropriate levels of maintenance on existing infrastructure. The expressed view that this would help to support a strategically important sector; to maintain jobs; retain existing skills and ensure that a competitive construction materials sector remains in existence when the economies of the island recover to more normal operating conditions remains valid today.

Local authorities can also assist the sector through improved planning for use of materials and also thorough improving planning enforcement. It is hoped that the restructuring of local authorities in Northern Ireland will provide an opportunity for the industry to get more support from local government in the area of planning enforcement. In general the experience of those in the industry that have worked with the State development agencies has been positive, especially in the development of export markets. This view was expressed across the island. Some companies dependent on indigenous markets found that some aid programmes such as ones providing assistance with working capital were overly bureaucratic.

2.4 Recommendations

Government

1. The Governments should appreciate the strategic importance of the construction materials sector and seek to support it through addressing the island’s infrastructural needs and thereby making sustainable levels of capital investment in new projects together with appropriate levels of maintenance on existing and newly built infrastructure. The fiscal and economic benefits of spending on construction can be significant, and projects where the identified fiscal and economic benefits are substantial and/or substantial private sector investment is available, should be prioritised. This recommendation was also made in the 2012 report, which suggests that little has been achieved in this regard since then.

2. We recommend that both Governments should seek a more rapid implementation of programmes such as the Rural Development Programme and sub-programmes.

3. There is scope for much improved regulation of the sector, particularly in the areas of planning enforcement; product specification in construction contracts and improved monitoring of materials provided. We recommended that Governments should encourage the relevant agencies to develop processes to enable them to act on unauthorised non-compliant operators much faster than at present. At present, by the time action is taken against such operators, projects can have completed its acquisition of basic materials and enforcement is ineffective at that stage. This issue appears to have been addressed more effectively in Northern Ireland than in the Republic.

4. Governments should implement procurement policies in all public bodies under which contracts should include conditions that all construction materials suppliers are compliant with relevant product standards and have the requisite planning approvals. Public contracts should be contested by compliant operators.

5. The Governments should institute improved contracts governing public works to reduce the risk for suppliers. For example, the use of Project Bank Accounts is being trialled in Northern Ireland, while it does not appear to be even a consideration in the Republic.

Local Authorities

6. We recommend that local authorities that have responsibility for planning enforcement and compliance with CE marking should work with the construction materials industry to seek the means to bring about improvements in enforcement where such improvements are needed. This recommendation was also made in the 2012 report. Its inclusion suggests that little, if any, progress has been made in this regard since then.

7. We recommend that local authorities should seek to manage their demand patterns to enable the materials sector to respond to demand in the most efficient manner possible. This is as made in the 2012 report and we note that in the Republic roads grant programmes incorporate a requirement to spend specific amounts of the annual road maintenance and improvement grants by the end of the summer.

Other State and Development Agencies

8. We recommend continuing liaison between the development agencies and the representative bodies to see what scope exists for supporting the sector. At present, there is a high level of satisfaction with aid provided for exporting activities. Consultation might therefore consider other forms of aid that could be provided, say for management development, in companies reliant on indigenous markets.

9. We recommend that consideration be given to an industry skills audit to see the extent and scale of prospective skills shortages in the sector and the subsequent drafting of a skills development programme.

10. We recommend that the State agencies should ensure that the interests of the construction
materials sector are considered in any future strategic planning exercises carries out by them. While there are no issues that this is not being done; it should be a consideration in future planning.

The Industry

11. Four recommendations were made to companies in the sector in the 2012 report which essentially were that:

• Companies should give consideration to upgrading management skills or systems to support the ongoing development of their business;
• Individual companies consider the pros and cons of exiting the sector; and the costs of staying in business versus the long term payback that may accrue when the economy improves.
• If the use of financial reserves to keep a business in operation does not provide an acceptable return or payback; the owners/ directors should consider the potential for bringing about a reduction in costs through operating or specialisation agreements with other companies in the sector.
• Finally, if some form of corporate action such as examinership or liquidation is inevitable, companies should take a proactive approach and seek to maintain as much control as possible over their own destinies.

These recommendations remain valid for the sector, even though some improvement has taken place in terms of operations rationalisation and cooperation in the use of transport and production facilities. Given the uncertainty regarding the emergence or – more specifically – the timing of the emergence of substantive demand of the industry, further opportunities for co operation should be pursued.

Financial pressures appear to have abated somewhat, though this is possibly due more to some company closures and action on the part of some companies in the sector to rationalise and restructure. For some individual companies, the recommendations remain valid.

12. The industry should make stronger representation to customers and specifiers to ensure that construction materials used on building works should comply with all relevant regulatory requirements and that an audit trail should be a requirement of all construction works to ensure that only compliant materials are used.