A leading industry analyst and forecaster, BIS Shrapnel, says engineering construction activity in Australia is set to ease marginally, but still remain at historically high levels throughout the next five years, defying a slowdown in the United States.
BIS Shrapnel forecasts overall activity in the sector will peak in 2007/08, followed by a slight pull-back in 2008/09 and 2009/10, before another upswing early next decade.
However, the easing will be mild when compared to the exceptional amount of work done since the early 2000s, according to BIS Shrapnel’s Engineering Construction in Australia, 2007/08 to 2021/22 report.
“The immediate outlook for engineering construction activity is still very positive, with infrastructure and mining-based construction activity set to grow around eight to nine% in 2007/08, following similar growth in 2006/07,” said BIS Shrapnel senior economist, Adrian Hart.
“While we expect some segments of the engineering construction sector will cool over the subsequent year or two, overall construction work will hold-up due to ongoing work on existing projects, the pressing need for further investment in many sectors, the positive financial position of most Australian state governments and the high likelihood of further robust Chinese growth, though perhaps at a slower rate than in recent years.”
The new Australian Bureau of Statistics (ABS) figures show total engineering construction work done rose just under 10% on average in the year to September 2007 to just under $49 billion (in constant 2005/06 prices). However, BIS Shrapnel notes the September quarter figures also include a substantial $10 billion commencement in Western Australia’s oil and gas segment -- likely to be Woodside’s massive Pluto gas field development.
“Mega-projects such as Pluto will keep a very high floor under any downturn in the engineering construction market,” explained Hart.
“This project alone has pushed the value of civil commencements to a new peak of over $64 billion in the year to September 2007, with work yet to be done on existing projects now sitting at a record $42 billion.
“With a host of other new projects -- from roads, railways and ports, as well as large investments in water infrastructure -- about to get underway, engineering construction work done is expected to remain at very high levels overall.”
The mild easing in engineering construction work done after 2007/08 will be driven by several factors, according to Hart. These include the timing of completion of several very large minerals projects as well as associated infrastructure in port and rail, sustained increases in construction costs and ongoing supply chain difficulties.
Furthermore, current uncertainty in the outlook for global resources demand, estimated by BIS Shrapnel to have accounted for 60-65% of the upswing in engineering construction over the past five years could delay the next tranche of minerals projects.
However, Hart advises against adopting a doomsday mentality: “While calendar 2008 will throw up some economic challenges, we do not expect the bottom to drop-out of this market anytime soon.
“We expect growth in China will soften somewhat, but demand for raw materials like iron ore, coking coal and oil and gas should continue along a strong growth path as China continues to direct investment to domestic development. This should continue to drive resources investment in Australia, while mining profits and a sustained economic growth within Australia should keep the financial footing of public works relatively firm.”
However, Hart recognises that private financing and fickle sentiment are key risks to the outlook.
“The recent credit crunch has made financing for all types of investment more difficult. Our main concern is that the credit squeeze derails not only the more speculative projects often seen near the top of a boom, but also ‘good’ investment in infrastructure that is necessary.
“Our forecasts also imply a fairly orderly adjustment in minerals investment as global demand and supply moves back into balance. But given the experience of recent cycles, there is no guarantee the adjustment process will be mild. Further, any shock to global demand could disturb confidence further and set off a much more severe slump in investment and this would have knock-on effects on state economies and their infrastructure plans.”
Overall, however, BIS Shrapnel believes the outlook for Australian engineering construction is positive, and should defy the current gloom surrounding the global economic outlook.
Hart believes higher levels of investment in infrastructure are required to correct years of under-funding and meet steadily rising domestic demand and societal expectations, boost competitiveness and trade, meet drought and greenhouse challenges, and harness new technologies in sectors ranging from electricity generation, water and sewerage, and telecommunications.
In this environment, any shortfall in investment in infrastructure or mining capacity in the short-term will add to the catch-up in investment required later on, according to BIS Shrapnel.
“During the 1990s we severely under-invested in mining and infrastructure capacity for a range of reasons, and even after years of booming activity we are only just starting to catch-up. Any pause in this process would enable operators to take advantage of an easing in construction cost pressures and invest in capacity. And if they don’t, it would only lead to another boom phase of activity later on,” said Hart.
BIS Shrapnel forecasts by state
New South Wales
After falling 7% in 2006/07, BIS Shrapnel expects New South Wales engineering construction activity to rise around 10% through 2007/08 and 2008/09. Key growth drivers are investment in coal and freight port capacity, along with water projects such as the $2 billion Kurnell desalination plant.
Victorian engineering construction activity is forecast to fall around 5% during the next two years. Roads is a key driver of the decline here, with the moving to completion of the $3 billion EastLink toll road pivotal. However, BIS Shrapnel believes large oil and gas projects such as the $1.4 billion Kipper development may provide some upside to these forecasts.
BIS Shrapnel expects the boom in engineering construction in Queensland to continue for two more years with nearly all infrastructure segments contributing, before a mild decline. Hart believes the late decade downturn could be worse if several key infrastructure projects spanning roads, rail, ports and heavy industry, are delayed.
Following a 27% jump in 2006/07, South Australian activity is poised to increase another 30% in 2007/08, with another strong increase timed for the turn of the decade driven by the Olympic Dam expansion, according to BIS Shrapnel. The current upswing is being driven by mining projects such as Prominent Hill as well as a plethora of roads, water and harbour projects.
Engineering construction in Western Australia is forecast to decline 15% over 2008/09 and 2009/10 (from an extraordinarily high base) as sharp increases in oil and gas works do not fully compensate for the winding down on major iron ore expansions (including port and rail systems), electricity and road works. Another strong upswing is timed from 2010/11, however.
Tasmanian engineering construction activity is expected to fall by around 20% through the next three years to 2009/10. Electricity will be the greatest detractor from growth, with the completion of the Woolnorth wind farm, but overall activity could be much lower again if the Gunn’s pulp mill does not proceed.
Engineering construction is forecast to decline by more than one-third in 2007/08 in the Northern Territory as work winds down on several large oil and gas fields and the $2.5 billion Gove alumina refinery. BIS Shrapnel expects this will be somewhat offset by rising pipeline construction activity. The next upswing in construction is not expected until next decade as several large oil and gas projects come on-stream.
Australian Capital Territory
Engineering construction activity is forecast to rise around 50% during the next four years in the Australian Capital Territory, driven mainly by a range of water and wastewater projects proposed by the ACTEW Corporation.