Published: May 2012
The objective of the study is to assist recovery in the construction materials sector through a series of practical recommendations and options for tackling capacity issues and improving competitiveness within the construction materials sector.
The research involved an assessment of the capacity of the industry, as well as an estimation of how much of that capacity is currently being used and a forecast of how much is likely to be used in the medium term. The second phase of the project focused on developing potential options to address the challenges facing the sector. It was agreed in consultations with the industry bodies that the sectoral report should cover four key segments: aggregates, asphalt, readymix concrete and precast concrete.
Findings of the research
The construction sector is one of Europe’s biggest industries accounting for 10% of GDP in 2010. The sector employs directly 12 million EU citizens with 26 million workers dependent on the sector. Approximately 92% of manufacturers of construction materials amounting to 65,000 enterprises are SMEs with fewer than 250 employees . For the island as a whole, construction output as a percentage of GDP is of the order of 6.5%.
Output and Capacity
The capacity of the construction materials sector on the island and its current level of utilisation are shown in the table below. The levels of output in 2011 were of the order of 26% to 27% of peak output (in 2007) for aggregates and readymix concrete; and were of the order of 40% to 44% for precast concrete and asphalt. These reductions in industry output have been far greater than the overall economic decline seen on the island.
|Capacity Utilisation %
Readymix Concrete - 000s cu m
Aggregates - millions tonnes
|Precast - € millions
|Asphalt - millions tonnes
The key drivers of demand for the segments are as follows:
- Readymix concrete and aggregates: “new build” housing, infrastructure and commercial building works. Much lower activity in these areas has led to significant reductions in demand for these materials.
- Precast concrete: again housing, infrastructure and commercial property are key markets but producers have also been quite successful in sourcing off-island markets, predominantly in Great Britain. Transport costs limit the extent to which precast products can be supplied into other export markets.
- Asphalt: the key market is in road maintenance works, where demand has not fallen to the same extent as that for newly built roads. Hence its performance is also better than concrete and aggregates.
It is the assessment of the report that some 37% of existing production plant capacity may be defined as structural over-capacity. In other words, even when the economies on the island recover to more normal circumstances, this capacity will not be required. This assumes that the construction “bubble” of the mid2000s will not occur again.
Given such a fall in output the report estimates that employment in the construction materials sector on the island has fallen from some 20,000 people in 2007 to some 7,700 people at present – a reduction of 62% from the peak. This is a greater reduction than that seen in the construction sector as a whole – where employment has fallen by just under 50%.
It is projected that the construction sector across the island may see a further decline in activity of the order of 10% in 2012 due to a lack of demand for new housing and the reductions in projected capital programme spending by both Governments on public works and infrastructure projects. Indeed, the prospects for any substantial uplift in the medium term are weak. The fact that the construction materials sector is highly dependent on construction activity on the island makes the prospects for output and employment in the industry appear poor.
The large falls in sales are revealed in an analysis of the financial performance using the 2010 accounts for a sample of twenty companies across the island. These show that 65% of the companies incurred losses in that year. As construction activity across the whole island fell by some 20% in 2011 over 2010 this would point to the sector’s financial performance worsening in the last year.
The sector depends on three key sources of financial support at present:
- Continuing credit from cement suppliers;
- Continuing credit from the financial institutions; and
- Contributions from corporate or personal reserves held by owners/directors.
The likeliest scenario for the sector is that in the absence of any uplift in demand, individual businesses will continue in operation until their available reserves are depleted. It is not possible to predict when this might happen, as closures would occur on a company-by-company basis.
Related to these financial pressures is a concern raised in the industry consultations over the scope for companies to undergo processes of debt reduction such as examinership or insolvency and then to re-emerge as “phoenix” companies with what is perceived to be an unfair competitive advantage.
Options for the industry
Companies in the construction materials sector that supply readymix concrete, asphalt and aggregates are dependent on local markets. Although there are no apparent barriers to trade across the island, the economics of operations of high volume, low value products mean that all-island coverage is generally limited to higher value precast concrete products. This segment has also been successful in developing off-island markets, particularly in Great Britain. However, high transport costs relative to the value of product being shipped preclude these companies from trading in markets further afield (unless they use local partners). There is scope for improvements in the regulation of the industry, particularly in the areas of product certification and enforcement of planning. Stricter regulation would prevent non-compliant operators from undermining the industry.
With a reduced market demand on the island for construction materials, the strategic options for companies in the other market segments are very limited. On the one hand the more successful
companies have some unique selling proposition. However, there also appears to be a financial,
technical or management capability gap in many businesses which is acting as a barrier to developing new products or markets.
In most industries the expected reaction to a fall in demand of the level seen in this sector would
normally be a substantial number of closures and/ or insolvencies or “industry shake-out”. While some closures have occurred, these have not been of a scale that might have been expected. Companies have certainly reduced labour costs, as shown by the reductions in employment, and transport and other costs have also been reduced as far as practicable.
The financial analysis shows that many companies are surviving by using their financial reserves to stay in business. This poses the question of reducing capacity by agreement within the industry. A review of the attempts to reduce capacity in the Irish beef industry through a system where those remaining in the industry would recompense those who left the industry indicates that it is extremely unlikely that any such structured scheme would comply with national or EU competition law. However, it is possible that some forms of cooperation such as mergers or specialisation agreements could be applied without contravening competition law. The key test is that there must not be a substantial lessening of competition in the relevant market. A general review of the sector cannot provide specific criteria for these forms of arrangement as any and each such proposal would have to be assessed on an individual basis.
Given that the sector is facing a restructuring of significant proportions following a collapse in demand and output, the report proposes a series of recommendations for Government departments, agencies and the construction materials industry to consider and take forward. These have been categorised into short and medium term.
- InterTradeIreland, in cooperation with the industry bodies and agencies, to disseminate the findings of this review.
- The agencies and the representative bodies need to interact to explore how existing services and supports could be used more effectively by the sector in both jurisdictions and on a cross-border basis.
- Agencies and industry bodies should prioritise the provision of management skills training for the sector, with a focus on operations management, financial aspects such as product costing and profit management.
- Agencies could promote support available for both product innovation – such as glass reinforced concrete – and process innovation – such as improved methods for repairing potholes in roads – that would have spin off benefits for the construction materials sector.
- Agencies should continue the ongoing work in the promotion of sales off the island in the pre-cast concrete product segment, particularly the higher value added end of the product category.
- Agencies should explore opportunities for exporting the intellectual property associated with high quality pre-cast concrete design; and potentially providing design bureau services from bases on the island.
- Industry actors should develop and adopt an improved all-island product certification and standards.
- Industry actors and the relevant Departments and agencies to cooperate on exploring the potential for using ‘project bank accounts’ and for enforcing other regulations to fully protect the construction supply chain.
- Individual companies in the sector should undertake a critical analysis of its current market, sales and financial performance, and likely future prospects in order to allow owner/directors to consider the costs of staying in business versus the long term payback that may accrue when the economy improves.
- The two governments to address the issue of sustainable levels of capital investment in required infrastructure. Projects where the identified fiscal and economic benefits are substantial and/or substantial private sector investment is available should be prioritised.
- At the same time maintenance of infrastructure and state buildings constructed during the past ten years should be considered.
- The relevant agencies and Departments to explore options for providing assistance for those made redundant from the sector through retraining to assist them to find employment in other industries and funding mechanisms such as the European Globalisation adjustment Fund (EGF).
- The relevant agencies to work with the industry to explore how regulation of the sector through product certification and improved planning enforcement.
- Work with the construction materials industry to seek the means to bring about improvements in planning enforcement where such improvements are needed.
- Local authorities should seek to plan their demand patterns insofar as possible, so as to enable the industry to respond to demand in the most efficient manner possible.
 Committee on the Internal Market and Consumer Protection of the European Parliament – EU Parliament document 10753/3/2010 – C7-0267/2010 – 2008/0098 (COD): https://www.europarl.europa.eu/doceo/document/A-7-2010-0343_EN.html
Click here to download the full report: Construction Materials Sector Report May 2012