How to avoid destroying market prices and the market
“Britain must invest but poor government has left it incapable of investing sensibly,” says Mike Rigby MD of MRA Research. “Climate change, global competition and an ageing population won’t wait for Government to fix itself. Companies must look to themselves.”
Labour put growth on the agenda, and Government accepted that housebuilding and infrastructure are part of the solution not the problem. But given the own goals, and disruptions from climate change, war, trade wars, political and supply chain instability, growth will remain subdued.
The UK has a massive amount of building and improvement to do in housing, education, health, power generation and distribution, water, transport, and defence, and the population is forecast to grow. But how it’s funded, who builds and improves it given the skills shortages, and when it gets done, are open questions. It’s unlikely the Government will fork out for more than token support given politics and financial belt tightening.
Knowing Britain must build, leading companies are investing considerable sums to grow their share and grow their markets.
Recently Etex announced a £170m investment in doubling plasterboard capacity in Bristol. Knauf Insulation is investing £170m in a state-of-the-art rock mineral wool insulation factory in North Wales. And Heidelberg has received planning permission for a £400m investment in a first-for-the-UK carbon capture cement plant in Padeswood. Designed to capture 95% of emissions it will bury 800,000 tonnes of CO2 a year in depleted gas reservoirs beneath Liverpool Bay.
These are step-change investments in a low growth market. They’re well planned and clearly signalled, as you might expect from such leading companies. But often they’re not.
In the 1950s and 1960s, multinational petrochemical companies famously invested in huge plants to crack oil to make ethylene, propylene, and other building blocks for plastics, fertilizers and chemicals. Markets grew quickly, but it was a near-ruinous, profit and loss roller coaster for several companies.
Investing in significant increases in capacity in a low growth market with a few major players is more than tricky. Aside from excellent market knowledge, robust plans and funding, it requires a lot of bottle as the stakes are exceptionally high.
Invest at the right time as the first and main mover, and you can achieve a step-change in market share and long-term returns. The market also benefits from stability. But invest in below step-change capacity, or don’t invest, when others are going big condemns your brand to long-term low growth and low returns.
However, invest in step-change capacity at the wrong time when others are also investing in step-change increases and everyone loses as prices tumble in a long-winter supply glut. Margins and returns collapse until the market catches up, and demand and supply are better balanced.
Management academics made their reputations explaining why so many very smart people kept wrecking the profits and prospects of so many companies (e.g. Professor Jerry Harvey, the Abilene Paradox 1974).
If every company keeps its cards and plans to itself the risks are immense for everyone and the market. How to avoid that corporate hell? Leading companies should signal very clearly their ambitions and intentions to invest to deter competitors from lumbering them and the market with excess capacity that destroys prices and prospects for years.
This article was first published in the Builders Merchants News magazine.
