In a still volatile economic climate, Paul Trigg, assistant Head of Risk Underwriting and timber specialist at trade credit insurer Euler Hermes, examines the risk outlook for the timber industry.
Speaking to timber companies across the country it is apparent that many are optimistic about their prospects for the second half of the year and beyond. With the current upswing in the economy, a large number are looking to pursue new contracts and expansion opportunities.
The boost in confidence is partly due to reports released by the Construction Products Association in April, which show that output growth in the construction sector is expected to outperform GDP, with levels predicted to rise by 5.5 per cent during 2015.
This rise in output reflects an upturn across the sector, helped by the new Government reiterating commitments to build 200,000 new starter homes by 2020. Together with a general increase in commercial construction activity and the return of speculative development, structural timber companies are expecting demand for products to rise.
But despite this positive outlook, the sector is still fraught with risk, and it’s important that companies remain vigilant and protect themselves accordingly. The rise in insolvencies seen within the sector should act as a telling warning sign – the failure of several large companies, including Midlands-based Anglo Holt Construction Ltd and GB Building Solutions at the beginning of the year, has surprised many in the industry.
The spike in insolvencies we’ve seen is due to a combination of factors affecting companies across the UK. A rise in input prices caused by a shortage in raw materials and increasing labour costs is causing considerable concern, while a pipeline of low margin work secured during the recession is placing increasing pressure on cash flows.
Surrey-headquartered Longcross Construction Ltd, which put insolvency measures in place in early June, is a prime example of this. Problem contracts and the scaling back of developments in the food retail sector have led to severe financial problems for the company.
In addition, despite promises from the Government with regards to new public sector infrastructure and housebuilding programmes, realistically there is a limit to the amount of projects that can be progressed over the next year due to site availability.
From a structural timber perspective, the increase in UK construction activity presents a real opportunity, however growth has arguably been a little one dimensional with the main driver coming from residential housebuilding.
Meeting structural timber suppliers, one of their main concerns continues to be falling prices, and, although many hope that they have now floored, factors such as excess global capacity and the weak euro is causing concern.
With uncertainty surrounding prices, there is a risk that timber material purchases will be delayed to see if they will fall again. This creates a stock risk for many structural timber firms, and those with high stock levels are faced with a decision to sell at a loss or to maintain high stock in the hope that prices increase in the future. Either way, continued price pressure has the potential to severely affect cash flow and could put firms in significant financial difficulties.
To help address the challenges the market is presenting, businesses should maintain an attentive approach to their finances, working closely with their credit and funding partners. Staying aware of the payment patterns and keeping an eye on key customer and debtor trends, both in the short and long term, should be a key focus for businesses and help protect vulnerable firms as the timber industry continues to grow during the second half of the year and throughout 2016.
For more information visit: www.eulerhermes.co.uk
