Construction industry likely to avoid crash landing

The building sector is one of the key drivers of growth in the economy and predictions of a slight cooling are good news for the rest of us, writes Barry O'Halloran

The building boom continued apace in 2006, delivering figures that qualified the industry as one of the biggest employers in the Republic. The Irish Labour Market Review published last month by State agency Fás says that there were 264,000 people working in the sector last year, more than one in eight of the two million reckoned to be employed in the economy as a whole.

Not surprisingly, services accounted for 1.4 million and manufacturing for 290,000. The figures, compiled jointly by the agency and the Economic and Social Research Institute (ESRI), show that construction added 19,000 jobs last year and services added 124,000 new posts, while manufacturing employment dipped by 4,000. In short, the building and service industries created new jobs at roughly the same rate - about 9 per cent - during 2006.

And the people in building did well. Central Statistics Office (CSO) figures show that in September, skilled workers in the industry were earning an average of €890.43 per week, compared with €885.94 a year earlier. Unskilled workers were earning €756 per week against €712 a year earlier.

Those statistics support what economists and other experts have been saying for some time, that along with services, the building industry is one of the key drivers of growth in the Irish economy, and thus a nasty shock to it could mean a similarly nasty shock for the rest of us.

But it seems unlikely that the sector is in for such a shock, as there is a general acceptance that the rate of growth in house building and commercial projects will slow, but not by that much, while infrastructure development is likely to keep going.

Overall, the industry seems to have hit a peak, but instead of heading downwards in a dramatic fashion, it is likely to cool slightly. Fás sees employment in the business growing by just 1,000 this year to 265,000. Recently, Ulster Bank chief economist Pat McArdle became the latest in his profession to predict a soft landing for the industry.

None of this has come as a big surprise. Nobody expected the boom to last forever and a soft landing with the minimum of attrition in terms of jobs or output is the outcome that everyone wanted.

Some of the big players in the game have been preparing for such an eventuality by looking for opportunities outside the country, and outside their industry. During the autumn, Siac, one of the Republic's biggest players, bought a structural steel firm in Gloucester, England.

Announcing the deal, the group's chief executive, Finn Lyden, said it had a two-fold motivation: one was to spread its risk outside Ireland, and the other was to begin positioning itself to bid for projects associated with the London Olympics in 2012.

Companies like Siac and Sisk, leading players in big ticket projects here, have the expertise and, as a result of the boom, the wherewithal to look seriously at getting involved in 2012-related projects.

But this is not the only show in town. Siac is currently working on completing a number of hospitals in the UK paid for the by the private finance initiative, the British equivalent of public-private partnerships. Another player that has been building a presence in the UK is structural engineering firm AMSE.

Sisk has been looking outside the sector for new opportunities. This year, the group bought two medical equipment distributors, MED Surgical and Cardiac Services. The group's executive chairman of construction, Bernard O'Connell, said it was simply balancing the risk and profile of the business.

Another industry figure that has been looking outside for investment opportunities, albeit in a personal rather than a group capacity, is Bernard McNamara. He was one of the backers of the deal to buy retailer Champion Sports for a reported €60 million in September. That was his second foray into retailing, as he is also a shareholder in Superquinn, which was sold in early 2005.

However, none of this should be taken as an indication that the companies or their management are losing confidence in the Irish construction industry. In fact the opposite appears to be case.

Lyden and O'Connell both predicted last autumn that the sector would continue to thrive in the medium term. Andrew Mannion of AMSE told The Irish Times last month that he believed there was scope for more growth here.

McNamara is one of the investors due to pay €420 million for the old Ardagh site in Dublin's south docklands. Shareholders in South Wharf, which owns the property, voted to sell it to McNamara, Derek Quinlan and Dublin Docklands Development Authority. Given the price paid, all three must believe it represents an opportunity.

Figures also emerged during the year that showed that not everyone in construction has been necessarily enjoying an unlimited bonanza. The Irish Concrete Federation (ICF), which represents key suppliers of materials, asked consultants Grant Thornton to carry out a review.

While the study found that these producers did well in the 2000 to 2005 period, price growth actually lagged the sector as a whole. The reason was that volumes grew rapidly as well, largely due to the fact that the industry has been spending money on increasing production.

The review showed that total revenues over the 2000 to 2005 period grew at an average of 6 per cent a year. In 2000 turnover was €1.4 billion, in 2005 that had reached €2.1 billion, an increase of 50 per cent. But Grant Thornton states that "output volume increases, not price increases, accounted for the major portion of the growth".

"Concrete product prices increased by 2.4 per cent in total over the two-year period 2004 to 2005, while output volumes increased by 7.3 per cent over the same period," the report states. "This shows that the industry was more reliant on volume growth than price increases for increases in total revenues."

Construction price inflation varied from 4 per cent to 8 per cent over the same period, indicating that the price increases enjoyed by ICF members did not keep pace with other elements of the industry. However, there was a surge in 2004, driven by increases in energy and steel costs (steel is a component of many reinforced concrete products).

ICF chief executive John Maguire says that along with the increases in the actual amount of material his members are producing, they have also boosted efficiency by reinvesting in new plant.

According to Mr Maguire, the federation also has ongoing concerns about illegal quarries which are operating without planning permission, often on a more or less ad-hoc basis, and is looking for local authorities to clamp down on the practice.