What lies ahead for the Australian construction sector? Atradius ANZ managing director Mark Hoppe gives his thoughts.
While there may be an upturn in Australia’s construction performance in the medium-term, driven by higher investment and increased economic growth, it currently remains subdued, mainly due to the massive decrease in mining-related heavy industrial, rail, and port infrastructure activities after the commodity boom.
As a result, business construction contracted throughout 2015.
There is no immediate relief in sight: activity levels contracted at a faster pace in February 2016, putting them at their lowest since February last year.
Low interest rates, pent-up domestic demand, and foreign investment are likely to drive residential building spending. However, according to Ai Group head of policy Peter Burn, unless commercial construction and a pick-up in infrastructure investment can be maintained, it is unlikely that the construction industry will be a source of growth for the economy or jobs in the coming months.
Construction businesses in New South Wales may benefit from infrastructure investments, while those in Queensland and Western Australia may struggle in a subdued market. Western Australia, in particular, has seen a dramatic drop in new home constructions.
Construction insolvencies are expected to level off in 2016 but the overall numbers remain high. This can be devastating for smaller organisations that have subcontracted to now-defunct companies, and are unlikely to be paid in full.
This risk is exacerbated by the fact that debt levels have increased and margins have decreased. For smaller businesses with little ability to differentiate themselves in the market, this is bad news.
These businesses rely on price competition to acquire orders. Continuing to compete on price can force smaller players out of the market altogether. The additional risk of non-payment, or even late payment, means smaller operators face a tough competitive environment.
Payment in the construction sector can vary between 60 to 120 days, on average. This can have a significant effect on cash flow. At the same time, the number of non-payment notifications has increased, putting even more pressure on smaller operators.
Construction sector operators, therefore, should take steps to protect themselves from these volatile and unpredictable market conditions.
While most organisations in the sector automatically take care of insuring workers, tools, equipment, and workplaces, relatively few consider trade credit insurance.
Trade credit insurance protects organisations against non-payment by customers or contractors. It is particularly valuable in industries like construction, which require significant outlay to complete jobs, creating a high level of risk for the organisation.
It also provides crucial information regarding the solvency and reliability of potential business partners. This can give even smaller companies the confidence to trade more freely, potentially developing more lucrative arrangements with customers.