Plummeting prices of construction materials in both wholesale and retail segments presaged pressures in the construction industry in the 2Q.
Unlike the mainstream ‘economics’ where asset prices seem as the only factors that matter, I wrote then,
Construction BOOM? The Government’s Construction Material Prices Have Been On a Swoon, Why??? July 24, 2017
As a communication network, the market price system coordinates integrates and harmonizes the value judgments of the consumers, which represents demand, with the cost and revenues for producers in service of the consumers, which accounts for the supply.
Hence, the market price system serves as a very important guide to economic conditions.
Since the real economy and asset prices have become intimately tied to BSP operations, the quest to generate NEGATIVE real rates through debt monetization in mid-2015 to the 1Q of 2016 percolated into prices pressures in the real economy. And the buildup of price pressures eventually filtered into prices of construction materials.
And in response to such price strains, the BSP whittled down the pace of their ‘secret stimulus’ program. Hence, the combination of lower liquidity (or money supply in circulation), the aggravation of price volatility and the law of demand must have taken a substantial toll in the construction industry.
Consequently, tensions from such price instability inflicted considerable damage to the finances of the four major cement producers over the same period, exactly as anticipated. [Cement Industry’s 2Q Crash: The Numbers; Wild GDP Week Pumps in Motion, BSP Intervenes in the USD Peso? August 16, 2017]
Yesterday, the Philippine Statistics Authority released its 2Q data on construction permits. The PSA reported: (bold mine)
“Number of constructions during the second quarter of 2017 drop by 9.2 percent
1. Total number of constructions in the second quarter of 2017 reached 35,983, according to the preliminary results of construction statistics from approved building permits. This reflects a decrease of 9.2 percent from the 39,635 constructions recorded during the same quarter in 2016.
2. The number of residential building constructions declined by 11.7 percent to 26,827 from 30,366 reported during the same period of 2016. All types of residential constructions except duplex/quadruplex showed decrements in number as follows: residential condominiums (45.7%), apartment/accessoria (19.9%), other residential constructions (12.8%), and single-type houses (11.0%).
3. Meanwhile, non-residential constructions posted 6.9 percent increase from 4,548 recorded during the same period of previous year to 4,861 projects. The growth was brought about by the increase in number of constructions of the following: other non-residential type of constructions, 145 (15.1%), commercial buildings with 3,026 (13.1%), industrial buildings with 564 (5.4%) and agricultural buildings with 222 (2.8%).
4. Additions to existing structures declined by 16.3 percent to 1,208 projects from 1,444 recorded during the same period of 2016. Likewise, combined number of alterations and repairs of existing structures decreased by 5.8 percent with 3,087 from 3,277 recorded of previous year.
The construction industry suffered a crash in 2Q! The numbers cited above focused only on the number of units. It excluded floor area and value of the permits.
The sharp downturn in 2Q had been broad based!
In total, while the number of permits dropped 9.2%, floor area (sqm) and value (Php in 000) collapsed 24.58% and 35.12% respectively!
For residential construction, while the number of permits dived 11.7%, floor area (sqm) and value (Php in 000), cratered 26.9% and 29.76% correspondingly!
For the non-residential construction segment, while the number of permits increased 6.9%, floor area (sqm) and value (Php in 000), submerged by 21.42% and 42.36% accordingly.
The asymmetry in non-residential construction activities translates to the predominance of mom-pop projects while the majors were on hold.
2Q’s meltdown practically dragged the 1H performance! This would mark the biggest 1H decline in 6 years! (sorry not enough data to have a longer horizon)
So the 2Q slump had barely been about domestic and foreign competition (from Vietnam imports) and or from smuggling!
Yes folks, based on data from the construction permits, DEMAND had signified as the primary culprit!
Of course, weakness in demand magnifies the supply (overcapacity) issues. As I have said here, the cement industry has been announcing left and right of proposed massive capacity expansions to meet the Php 8-9 trillion “build build build build golden age of infrastructure and the so-called ‘domestic demand’ (euphemism for credit financed consumer bubbles: shopping malls, hotels and real estate projects)
Just a reminder. The general construction material wholesale price index (GCMPI) includes the “computation of price escalation of construction materials for various government projects as indicated in the Presidential Decree (PD) 1594.” Hence, the collapse of GCMPI in the 2Q may indicate that “build build build” must have hit a wall.
And in reaction to 2Q’s doldrums, the cartelized industry appears to have been struck by panic!
The Cement Manufacturers Association of the Philippines (CEMAP) impliedly blamed the industry’s “competition concerns” to the publications of sales data.
Thus, the association recently announced that they would “stop collating quarterly sales data”
Huh? A case of shooting the messenger?
Three of the main cement producers are publicly listed companies. Disclosures of 17-Q and 17-A reports constitute as legal prerequisites. So unless these firms fudge their respective financials, the sales numbers will come out.
And though the aggregate numbers might not be complete, it would be sufficient to provide a backdrop of the industry performance.
Also, the National Coalition of Filipino Consumers (NCFC) reportedly asked the Department of Trade and Industry (DTI) to investigate alleged sales of substandard cement.
NCFC could be shills for CEMAP. That’s because calls to impose product standards represent non-tariff based anti-competition barriers. The general idea is to “protect” domestic (cartelized) producers by restricting supply through legal means.
Looking forward, the BSP has reactivated its stealth stimulus program.* And the redeployment of such inflationary finance has bolstered June and July M3 back to over 13% while pushing August CPI back to 3.1% (slightly above the BSP ‘target’).
As a side note, the CPI statistics and their target are both their creation, so who’s to know if they haven’t been juggling these numbers? Besides, there can’t be ‘aggregate numbers for individuals’
*The Deepening Plight of the Peso: January to July’s Deficit Roars to 2010 Levels as BSP Taps the Secret Stimulus Anew!September 4, 2017
Prices of July construction materials wholesale and retail has likewise rebounded from the June lows (1.71% and 1.09% respectively). The July bounce may be extended. The PSA will report these numbers next week.
Interestingly, the banking system’s construction industry loan portfolio in July has hardly improved (+19.56%) from the April to June numbers (+19.12%, +20.85% and +19.49%). Such little improvement may have reflected on the slight gains in prices of construction materials.
Lastly, if the BSP thinks that rising prices is all about benefits absent costs, then the law of demand will surely upset them. AGAIN.
And one more thing.
The establishment has been so desperate to see a new record for the Phisix. So they have been doing “whatever they can” with the apparent blessings of authorities to accomplish such mission.
Yesterday’s day long decline was magically transformed into (+.18%) from mostly a stunning end session pump (+1.4%) on SM. Has this been perhaps another credit based buying on relative party interest by SM Prime?
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