Construction Materials Suppliers - April 2025

A ‘rollercoaster heading downhill’ that needs to ‘level out’, soon! The impact and prospects of economic and fixed investment trends on the Construction Materials Suppliers

‘Demography is destiny’, credited to French philosopher Auguste Comte (1798-1857), encapsulates a great deal about the dynamics of our economy, construction sector and the suppliers to the latter. There are many nuances to the saying, but in our context, what is available per person, or gross domestic product/income per capita holds the key.

The logic is straight forward; total production/income in the economy divided by the population. The size of the country’s production/income is an indication of its wherewithal to afford infrastructure (houses, hospitals, roads etc.) for its people, and the number of people is an indication of the needs of the population. Graph 1 shows the correlation between GDP/per capita and the size of ‘construction’ infrastructure.

But the connection also runs in the opposite direction; the more is spent on infrastructure, the faster an economy grows! It is a well-known fact that a country needs overall fixed investment to be in the order of 25% of gross domestic production for it to grow and expand. Graph 2 shows that it’s never been higher than 22% (for SA) and currently averages around 14% of GDP. The impact of this, since the middle 2000s, on the SA economy is difficult to ignore. Minister Ramokgopa (of Electricity and Energy) calls it ‘South Africa’s infrastructure emergency’.

Of greater concern is that the share of construction related investment of total fixed investment declined by 2% on average per year from 51% (2009), to 41% (2020), and even faster (-4% per year) to only 34% by 2024.

Spending on construction related infrastructure is directly proportional to the demand for construction materials. The trends observed in construction fixed investment data show (and should have) a high correlation with construction material sales (Graph 3).

The SA Reserve Bank’s diagnoses of the 3,7% contraction in fixed investment in 2024 (which was at odds with general business sentiment) is due to private sector investment declining by 3,2%, public corporations’ spending contracting by 5,1% and which were not countered by higher general government investment spending (+2%) during the second half of the year. Overall, this the state of affairs is ascribed to low (economic) demand and supply shocks (load shedding and logistics) since 2019.

The political or policy environment clearly acts as a brake on both economic growth and the appetite for fixed investment. Graph 4 shows the correlation between construction fixed investment data and political confidence. The overwhelming majority (+50%) of respondents to the BER manufacturing confidence surveys rated the latter as highly ‘obstructive’. The Government of National Unity partners’ recent non-alignment on fiscal policy clearly shows in the increased uncertainty, over the last quarter (Q1, 2025). Confidence has a direct impact on construction fixed investment and that in turn on construction materials sales.

Graph 5 shows the extent to which administered prices, caused by public sector inefficiencies, are impacting on/aggravating sector input costs (components petroleum products (22,6%), electricity and water (15,6%) transport and storage (34,8%), and government services (27%)). Declining fuel prices contributed to slower cost increases lately, but is no indication of structural costs declining; in fact, it’s contributing to uncertainty due to its volatility. (Source: SA Reserve Bank, Monetary Policy Review, April 2025).

With all the above said, the question then is about the future prospects for the sector. Taking a three-year view, economic growth is expected to slowly improve from about 1% (2025) to around 2% (2027), driven by growing consumption expenditure, helped by investment, better exports and steady commodity prices in the outer years, as well as the gradual positive impacts of alleviating energy and logistical bottlenecks. Overall investment is expected to grow by 2,1% this year, rising to 3,6% in 2027.

Construction fixed investment (housing, non-residential and construction works) is expected to grow by 3,5% (2025), 5% (2026) and 2,5% (2027). There are (albeit weak) indications that the lagged effect of lower (and stable) interest rates will have a positive impact on the residential building market, and that improved economic growth and the ‘return to the office’ trend after Covid, will stimulate demand for non-residential buildings. Private sector spending on embedded energy generation plants as well as public sector spending on energy related projects (+60% over 3 years) will boost construction works. Public sector spending on water and sanitation (+24% over 3 years) and transport and logistics (+11% over 3 years), barring delays in project execution, will also enhance construction works demand for construction materials.

However, the short-term trends emerging from high frequency datasets are ‘directionless’, clearly reflecting the uncertainties around domestic and international geo-politics, and virtually all markets. Linking confidence indicators to the relevant actual performance datasets give some indication of possible immediate future trends.

Production

The ‘expected building activity’ confidence index shows more optimism (reading above neutral) than reflected in the actual production trends. The civil engineers’ confidence index did the opposite and dropped below neutral. Builders’ confidence is more directly linked to sector production/products, than those of civil engineers (due to the diverse products demanded by the latter, as well as higher market concentration in this sub-sector of the contracting fraternity).

The resurgence of loadshedding probably had a detrimental effect on production recently, but sector data is delayed, so it’s not possible to gauge the impact with certainty, at the time of writing.

Although actual production in January was higher than in January 2024, and still grew over the last 12 months, January deeply disappointed (-7,5%) against December 2024.

Sales

Builders are more optimistic about expected business conditions, but although actual sales rose (3,4% in January on December), when inflation is taken out, it declined. Confidence about expected construction activity by civil engineers declined strongly (since middle 2024), in line with total (building materials and non-metallic) sales’ declining trajectory since 2022 already. The trend in wholesale volumes is also on a downward trajectory, despite seasonal volatility.

Not surprisingly, the production/selling price index for the sector has slowed down, from near 5% during 2024, to just below 3% on average for the first two months of 2025. The input cost index for the sector shows that input costs (an average) have been rising slower than selling prices.

Final thought

All of the above are sensitive to the implementation of structural reforms in energy and logistics and the evolution of the global economy. Tariffs and trade restrictions present serious threats to the global economy, and the resulting uncertainty will undoubtedly spill over into the fixed capital (and therefore growth) environment in South Africa. The successful navigation of the myriad economic and geo-political uncertainties, as well as domestic policy resolve/execution to ‘restart’ (construction) fixed investment, are indispensable for underpinning future higher economic growth in SA. Such an outcome will be positive for construction materials sales and production.

Henk Langenhoven, Economist