Bruised Boral runs the economic gauntlet

Hamstrung by structural and, likely, cyclical forces, and with no relief on the horizon, building materials maker Boral will be bracing for more pain ahead.

In January Boral upgraded its first-half earnings guidance and delivered on that forecast of better-than-expected earnings. Today it downgraded its guidance for its full-year profit, indicating how volatile and fragile the building and construction sector is at present.

Boral cited weaker than anticipated third-quarter earnings from its construction materials and building products operations as the reason for the profit warning, saying the construction materials and cement division’s results in the quarter had been impacted by declining residential construction activity in Victoria, project delays in Victoria and South Australia and poor weather in southeast Queensland. Divisional earnings were $19 million below forecast.

Australian building products were benefitting from ongoing restructuring programs but the impact of the strong Australian dollar and import competition on the group’s timber businesses and West Australian brick and masonry operations, with increased pricing pressures, continued to adversely impact results.

Boral’s problem appears to be that just as the US housing markets is showing signs of life, albeit off a low base, the Australian building and housing markets appear to be deteriorating despite low interest rates.

Some of that may be structural, with both households and businesses in defensive and saving modes and the continuing strength of the dollar a challenge for any trade-exposed elements of the sector (or for companies translating offshore earnings back into Aussie dollars).

There may also be an element of cyclicality, with activity on pause throughout this protracted and bitter election campaign while businesses and individuals wait nervously to find out how the major parties will pay for their smorgasbords of expensive pre-election promises and deal with the structural budget deficit within a slowing economy post-election.

The extraordinary length of this informal election campaign and the economic uncertainties that have proliferated since Julia Gillard announced the election date has inevitably had a chilling effect on activity.

It is no surprise that households and businesses aren’t inclined towards risk-taking, given the environment and the weak demand for credit and, consequently, low levels of demand for new housing and construction appears to reflect their anxiety.

While Boral has pulled back expectations of its full-year earnings it still expects them to be an improvement on last year’s, with increased revenues from the big LNG projects in Western Australia and Queensland and its own continuing restructuring program underwriting the gains. It expects full-year earnings before significant items of between $90 million to $105 million, including $10 million of profits from property sales yet to be finalised.

The resources investment boom, however, is now in its final phase – the big LNG projects will be completed over the next two or three years – and it is going to be a very real challenge for the cash-strapped federal and state governments to stimulate growth elsewhere as the impact of that boom dwindles, particularly if the Australian dollar continues to hold up and defy its historic correlation with commodity prices.

Boral’s Mike Kane has been running hard to stand still, shedding 700 employees earlier this year and targeting a 1000 headcount reduction by the end of the financial year from its continuing businesses. Those reductions have come from head office to the factory floors and will inevitably continue if conditions don’t improve.

Boral isn’t alone. Across the non-resource side of the economy – and increasingly including the resource sector – businesses are cutting costs and shedding employees to try to adapt to shrinking demand.

With federal Treasury apparently downgrading its own estimates for GDP growth in the face of the continuing strength of the dollar and the soft domestic demand it is probable that there will be more profit downgrades and more restructuring across the economy as companies continue to respond to both the long cycle of weak growth and the structural challenges that, for many of them, lie beneath the cycle.