Negatives to weigh on construction firms in 2H

KUALA LUMPUR: Unfavourable macro dynamics such as high crude oil prices may weigh on construction companies in the second half of this year as players contend with costlier operating expenses. This could reverse the trend in the first quarter of 2011, as well as the preceding third and fourth quarters of 2010 where local contract margins had actually improved.

"Nevertheless, the situation is still manageable as other costs, such as those of building materials like steel bars were not as costly as they used to be," said a construction sector analyst.

According to the analyst, prices of steel bar are hovering between RM2,100 and RM2,200 a tonne now compared with RM4,000 a tonne in 2008. During that year, crude oil prices also hit a record of RM147 a barrel, fuelling inflation which led to a sharp spike in the cost of doing business.

As share prices of construction firms "have gone ahead" of the Economic Transformation Programme (ETP) and Mass Rapid Transit (MRT) projects, the analyst is recommending a neutral stance on the construction sector for now.

In a recent note, AmResearch Sdn Bhd said the construction, banking, power, transportation and automotive sectors were deemed the most vulnerable to disappointing earnings in the third quarter of this year.

It added that the anticipated shortfall in earnings, especially among construction firms, would also be due to delays in executing large cornerstone projects under the ETP.

Last Friday, local builders said construction costs may rise at a faster pace than earnings, prompting players to seek greater liberty to import building materials and equipment at lower tariffs.

Master Builders Association Malaysia (MBAM) immediate past president Datuk Ng Kee Leen told The Edge Financial Daily that construction costs could rise by at least 15% next year if policymakers did not review their policies on imports of building materials and machinery.

According to MBAM, building costs in the country had risen by 10% over the last one year due to the combined impact of rising inflation and material prices, apart from high import duties.

The association hopes policymakers would consider reducing import duties on more building materials including marble, tiles and aluminium-based components, apart from equipment like cranes and trucks.

For now, local construction firms can import steel products and cement at zero import duties. But players are lamenting that import taxes of 30% on other materials, such as marble and tiles, are on the high side.