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Resources construction to drop 42 per cent over next five years

BIS Shrapnel is forecasting resources-related engineering construction to drop 42 per cent over the next five years, with oil and gas construction alone falling by more than 50 per cent.

Adrian Hart, Senior Manager for BIS Shrapnel’s Infrastructure and Mining Unit, said the outcome may improve if the Australian dollar eases and world commodity prices increase.

“Coal and other mining-related construction has already fallen sharply, and there are more falls to come as current greenfield and brownfield projects move to completion,” said Hart. “But activity will remain at high levels in historical terms given the need to sustain higher levels of production. Later, as global economic conditions improve and the Australian dollar eases lower, we expect that many of the projects deferred over the past few years will come back into the reckoning.”

The sharp downturn in resources-related engineering construction will be felt hardest in the former engineering boom states of Queensland and Western Australia, with declines in those states alone accounting for 94 per cent of the total decline in work done. By contrast, the strongest outlook is reserved for the Northern Territory – dominated by the $34 billion Ichthys LNG project – and New South Wales, driven a range of large public and private sector funded infrastructure projects focused on roads and railways.

“New South Wales was the sleeping giant through the latter half of the 2000s, but has seen an 80 per cent increase in engineering construction work over the past few years, led by coal mining and coal ports, and catch up investments in roads, railways and electricity,” said Hart. “While mining will be a drag on the state over the next few years, this is more than being made up for in terms of new transport infrastructure such as the North West Rail Link, the M1-M2 Tunnel, WestConnex and the Sydney Light Rail. In this respect, Sydney itself is fast becoming Australia’s next construction hotspot.”

According to BIS’s civil construction report, Engineering Construction in Australia 2013/14 – 2027/28, civil work done will fall only marginally in 2013/14 to $127 billion. However, aggregate engineering construction work is then expected to slip 11 per cent in 2014/15 and eight per cent in 2015/16 with further falls over each of the subsequent three years. By 2017/18, total activity will be 25 per cent below the 2012/13 peak.

However, the better than expected outcome for 2013/14 is not necessarily good news for the local construction industry, with the high level of work done only maintained by an unsustainable 37 per cent increase in oil and gas construction work, dominated by the ramp up in construction of LNG production trains and associated upstream and downstream infrastructure.

“Excluding the boom in oil and gas construction, engineering construction work will fall around 12 per cent through 2013/14, with another decline of 15 per cent in 2014/15,” said Adrian Hart, Senior Manager for BIS Shrapnel’s Infrastructure and Mining Unit. “In our view, this is a more realistic approximation of current domestic engineering construction conditions given that up to 70 per cent of the total value of the large LNG projects is tied up in offshored fabrication and other costs.”

According to the report, the key driver of the downturn in engineering construction work has been the dearth in new private and public sector projects over the past two years as commodity prices fell and Federal and State Governments began to rein in spending on new infrastructure projects.

“Overall, commencements through calendar 2013 have fallen to just $78 billion, the lowest result in six years,” said Hart. “While work in the pipeline is still high in historical terms, over half relates to oil and gas construction alone and is nowhere near enough to sustain current levels of work.”

The BIS Shrapnel report points towards very different outlooks for activity by sector and state, with telecommunications and transport projects offering the strongest prospects through the next five years. Overall, non-resources engineering construction is forecast to reach a trough in 2015/16, with activity rising thereafter on the back of NBN works and major transport initiatives.

“While public investment is falling sharply now, the prospects for telecommunications, roads and railways work look better after the middle of the decade, but a lot depends on how State and Federal Governments can work together to deliver needed productivity-enhancing infrastructure, particularly in our capital cities,” said Hart. “In this respect, the current round of State and Federal Budgets will be vital in establishing project priorities, but a lot more needs to be done to ensure we have sustainable revenue streams to fund infrastructure development and maintenance over the long term.” 

Key findings from the Engineering Construction Report

This annual BIS Shrapnel study provides detailed analysis and forecasts for 12 sub-sectors of civil construction activity including roads, bridges, railways, harbours, water, sewerage, electricity, telecommunications, recreation, pipelines, mining and heavy industry, and other engineering construction. BIS Shrapnel provides data and forecasts by state/territory, by sector of ownership (public versus private) and who does the work (private contractors versus public sector day labour). The engineering construction report is subscribed to by the major construction companies, materials suppliers, equipment hire companies and government departments.

1. Falling resources investment the key driver of the downturn

According to the report, the slowdown in the resource-hungry Chinese economy since mid-2012 has been the key driver of the downturn in work, with several large mining projects once expected to commence in 2013 or 2014 being deferred. BIS Shrapnel estimates that resources-related engineering construction activity (included port and rail works) will fall 42 per cent in real terms – from around $78 billion in work done during 2013/14 to around $44 billion by 2016/17 (all figures expressed in constant 2011/12 dollars). Even so, this is still well above the $25 billion in resources-related work estimated to have been done in 2007/08 before the global financial crisis.

“Resources investment has been by far the dominant driver of the 12-year engineering construction boom, and now it is the dominant driver of the bust,” said Hart.

“But even within the resources segment there are very different stories playing out. On one hand, surging oil and gas construction has kept the total engineering construction market afloat in 2013/14, but much of this work is either specialised or offshored, and so is not providing a boost to many local businesses operating in the market. On the other hand, coal and other minerals construction has been falling sharply since last year, and will continue to fall through 2014/15 as existing projects which commenced when prices were higher move to completion.

“After 2014/15, the oil and gas sector will be the biggest drag on the engineering construction market, with work done falling 51per cent between the 2013/14 peak and 2017/18. This is being driven by the simultaneous completion of several large LNG projects, while the next round of LNG projects will involve floating offshore production platforms with even less local engineering construction content.”

However, BIS Shrapnel expects non-oil and gas resources investment to stabilise after 2014/15 and start to show new signs of life thereafter, offering new opportunities for engineering construction.

“This is certainly not the end for mining investment in Australia,” said Hart. “It has always been a cyclical industry and we anticipate further cycles will play out over the coming decade, although perhaps not as large as the most recent boom. While growth in China is moderating, it is coming from a much higher base. Meanwhile, minerals and energy demand is also increasing elsewhere in the Pacific Basin. Over the next few years, we expect that the feasibility for new mining projects will improve in Australia based on current cost cutting efforts, relatively stable commodity prices and a weakening Australian dollar.”

Resources versus Non-Resources Civil Construction Estimates

2. Big winners and losers among Australia’s states

The largest declines in the volume of civil construction work over the next five years are projected to take place in Queensland and Western Australia, given their strong links to the resources investment boom. Queensland annual work done is forecast to nearly halve from the LNG-inspired peak in 2013/14 by 2016/17, while activity in Western Australia is expected to fall by one quarter ($10 billion) over the same period. South Australia and the ACT are not expected to fare well either, with falls of around 30 per cent expected for both. Smaller declines are expected for Victoria and Tasmania.

Northern Territory work is expected to experience a volatile boom/bust cycle over the next five years on the back of the $34 billion Ichthys LNG project, with overall activity rising from $3.5 billion in 2012/13 to over $10 billion per annum through 2014/15 and 2015/16, before dropping back to $3 billion again by 2017/18.

In stark contrast to other states and territories, New South Wales is heading into a period of sustained growth, following a significant decline in work in 2013/14 as major projects across coal, ports, roads and rail wound down. This is being driven by a large upswing in non-resources engineering construction work, focused on road and passenger rail infrastructure, and spearheaded by the $9 billion North West Rail Link, the $2.8 billion M1-M2 Link, the $1.6 billion Sydney Light Rail, the $3.6 billion first stage of the WestConnex road project, and several Pacific Highway upgrades. The BIS Shrapnel report notes that a second Sydney Airport development would provide even greater upside to New South Wales if it entailed construction work over the next five years.

Overall, New South Wales is expected to see around $82 billion in non-resources civil construction work done over the next five years, compared to $52 billion for Queensland and $48 billion for Victoria.

Sum of Work Done Over the Next Five Years By State, $Billions

3. Growth opportunities still exist for suppliers and contractors

Despite the negative outlook for the total civil construction market, there are still several subsectors of the market which will offer strong growth opportunities over the next five years, including telecommunications, roads, passenger rail, freight, and subdivision infrastructure including roads.

“While there is a temptation to think so, it’s not all bad news out there and the smarter companies in this space are keeping track of the opportunities subsector by subsector,” said Hart. “Even within sectors, there are substantial differences in the outlook by asset type. Falling mining investment is impacting on related roads, railways and harbours construction through the next few years, but passenger rail and freight harbour works are expected to rise strongly given the outlook for key projects and the need to re-invest.”

The other key opportunity for contractors, according to Hart, will be in maintenance and facilities management. Since the start of the engineering construction boom in 2001/02, the net capital stock of non-dwelling construction assets has grown around 50 per cent in real terms, to A$1.8 trillion, according to ABS national accounts figures.

“The engineering construction boom has left an enormous legacy – a whole new built environment which needs to be efficiently managed, operated and maintained. With substantial growth in the size of the asset stock, and with governments and the private sector looking to save money, contractors will be in the box seat to service the coming boom in maintenance and facilities management work” says Hart.