The existing tender process for the awarding of construction contracts in the affordable housing and social housing sectors requires extensive reform to mitigate the prevalence of substandard work and enable government to reach its delivery targets, asserts York Timbers CEO Pieter van Zyl.

Speaking at the timber company’s annual results presentation on Monday, he said the State’s current tender procedure, which awarded a tender based on the lowest price point rather than other factors such as the quality of construction work or the experience of the contractors, had, to some extent, resulted in an affordable housing backlog currently estimated at around 2.9-million houses.

He added that the existing tender process exacerbated the use of cheaper, substandard building materials, such as some of the timber roof trusses that were currently available on the market, which compromised the inherent stability of structures.

“Government is faced with a huge challenge related to their procurement policy and tender process, which enables the use of ungraded timber products. Its inability to deliver on the promises of affordable housing is very concerning to us,” he commented.

According to figures provided by York, government would have to lift its current delivery rate of 220 000 houses a year to around 550 000 houses a year to achieve its 2020 social housing target.

“This will require the State to increase its existing 2020 housing budget of R1.5-trillion to over R3-trillion,” he said.

As affordable housing currently accounted for some 91% of South Africa’s total housing demand, Van Zyl said government’s seeming inability to attain its social housing deliverables had sweeping implications for the construction and construction materials industries.

“Our industry is underpinned by the demand from social housing, with York positioned to become the dominant timber supplier for these projects and, as a result, we are [reliant] on the success of these projects,” he noted.

The JSE-listed company was currently lobbying government through the National Home Builder’s Registration Council, various working groups and industry organisation Forestry South Africa, in a bid to drive the State to amend its tender process.

TRADING CONSTRAINTS

Van Zyl told Engineering News Online that the “difficult” trading environment was further aggravated by extensive labour stoppages in related industries, which fractured the timber company’s supply chain and drove a slump in sales of its retail products.

He further emphasised the need for greater industry consolidation in the lumber industry, in which 108 sawmills were currently in operation, and which had resulted in untenably depressed lumber prices.

“The prevalence of sawmills batters the price down and retailers are capitalising on this by placing as much as a 42% mark-up on lumber.

“This is because there has traditionally been no dominant player in the lumber market, which is what we plan to become,” he said, adding that the company aimed to become the lowest-cost lumber producer and “squeeze” the smaller players out of the market.

PROCESS FOCUS

York’s ambition to expand market share would largely be achieved through its developing R1.5-billion integrated processing site near Sabie, in Mpumalanga, which was expected to improve efficiencies and create additional revenue streams from acquired raw material.

The company also planned to build a medium-density fibre (MDF) plant, which would exploit the tree fibre currently not being used in the plywood and sawmilling process and raise MDF production to 181 500 m3/y.

The facility, which Van Zyl said would be brought to market by April next year, would increase sawmill and plywood intake to 750 000 m3/y and 195 000 m3/y respectively, and would feature a 100 MW cogeneration energy plant. 

“We are using the Sabie project as a basis for growth and expect to have all our permits in place by April next year. At the moment, we are busy finalising [agreements] with our equipment suppliers, rezoning and completing the infrastructure layouts,” he said.

MIXED BAG

York Timbers posted a 2% increase in revenue to R1.1-billion for the year ended June 30, on the back of a 52% increase in profit out of the processing division, which was pushed by strong growth in plywood volumes and prices.

Group net profit slumped to R106.9-million from R137.8-million the prior year, after taxation of some R31.3-million.

Similarly, cash generated from operations decreased from R197-million in 2012 to R106-million, largely the result of the labour and transport strikes over the period.

In addition, earnings a share tapered by 22% from 42c a share to 32c apiece for the 2013 fiscal year.

Looking ahead, Van Zyl expected strong sales leading up to the second quarter of the upcoming financial year, after which he anticipated the market to remain stable at this level.