Activity in the Australian economy is becoming increasingly centred on infrastructure, largely civil construction, but mining is picking up after a lull and there are still substantial areas of work in property.
Contributions from all levels of government are finding their way to large projects and the workload is providing demand for materials, equipment and personnel. Over 80% of the work is occurring across the eastern seaboard, in particular in and around Sydney, Melbourne and Brisbane.
A large number of multi-billion dollar road and rail projects have been committed to across NSW and Victoria by both state and Commonwealth governments. The strength of the next round of infrastructure projects is greater than analysts at ANZ anticipated, largely because of more robust public sector balance sheets.
Governments are increasingly relying on population growth to support the economy and budgets so the analysts do not expect a rapid deceleration in population growth. In turn, this means infrastructure investment should remain healthy over the long term. The analysts believe 2018/19 is likely to be the peak in the level of total public investment but activity will remain strong for several years.
The outlook for the mining sector is also at the best it has been for a number of years, the analysts observe, while there remains a significant backlog of work in the housing and non-residential property sectors.
There’s always a downside to a rosy outlook, and in this case it is cost pressures. These are rising slowly and wages remain subdued, although the analysts suggest there are some examples of rising material costs.
While still relatively isolated, contractors and construction companies are tuned to the potential pressures. Accelerating activity can push against capacity constraints and leave some businesses exposed to a rapid escalation in costs.
Nationwide, building construction costs are up 2.4% but the analysts note the significant divergence across the states. NSW and Victoria are experiencing the strongest growth in costs, in line with the strong levels of work. Wages growth remains at record lows and, on the construction side, the underemployment rate has not materially changed for a decade, the analysts point out.
The NBN is the main driver of public investment at present and the most recent Commonwealth budget indicates $8bn in expenditure in 2018/19 before halving the following year. The NBN construction is expected to finish in 2020.
While the NBN has been the largest contributor to engineering construction outside of the capital cities, the other project that will support the regions is the Melbourne to Brisbane inland rail, providing $10bn of work in Victoria, NSW and Queensland.
Engineering projects are mainly in NSW and Victoria and strong levels of activity are anticipated by the analysts over the next five years. Most are road or rail related, such as WestConnex, metro rail and CBD light rail in Sydney, and metro rail and the removal of 50 level crossings in Victoria.
Most of the roads work is publicly funded, with the exception of Transurban’s ((TCL)) West Gate Tunnel in Melbourne, which originated from an unsolicited proposal. Longer term, there are the rail links and construction of the Badgery’s Creek airport and Snowy Hydro expansion, both in NSW.
Despite the cancellation of some large projects the construction outlook for South Australia remains fair, the analysts suggest. Several energy projects are under consideration including the $650m Aurora solar project and the $1.5bn Ceres wind farm.
Mining
Meanwhile, the mining sector is expected to resume its expansion, with recent commitments to several iron ore and LNG projects in Western Australia’s Pilbara, albeit on a smaller scale versus the prior round of substantial projects. Three large iron ore mines under development in the same region at the same time are likely to produce strong competition for labour, equipment and materials.
The largest individual project is offshore, being Chevron’s $5.1bn expansion of its Gorgon LNG plant on Barrow Island, expected to start in 2019/20. BHP Billiton ((BHP)) has recently committed to the South Flank mine and Fortescue Metals ((FMG)) has committed to the Eliwana mine. Rio Tinto ((RIO)) is expected to get the final investment decision for the Koodaideri project by the end of 2018.
The improvement in mining investment is in line with commodity prices that have improved markedly from their troughs of several years ago amid the stagnation in exploration activity. The analysts note, spending on petroleum and iron ore exploration is declining at a much slower rate than in recent years while much of the overall increase in exploration activity has been in gold, where spending has more than doubled over the past three years and is currently around record levels.
Still, exploration activity is around the lowest level in a decade, the analysts assert. For a comparison, the four largest projects in the coming cycle, those mentioned above, are at a combined cost of $13bn which contrasts with the four largest projects in Western Australia in the previous cycle at over $100bn.
There are also potential projects around LNG, such as Woodside Petroleum’s ((WPL)) Scarborough and Browse projects, while Queensland’s longer-term project pipeline relies heavily on a Adani’s Carmichael Coal project. The latter is still struggling to find funding and Aurizon ((AZJ)) has retracted its funding application to build the necessary rail line.
The analysts anticipate one more significant year of decline in investment in mining over 2018-19. The completion of both Prelude LNG and Ichthys LNG in the current year will leave a significant void in investment that will not be easily filled. Engineering construction data shows the backlog of mining related work nationwide is now at the lowest level in over a decade, with just $14bn in oil, gas, coal and other minerals work remaining.
Property
Property is not forgotten. While the housing industry is going through a downturn there remains $40bn in work currently under construction and the analysts suggest this should support activity for some time. Strong growth in construction is expected across the office and hotel segments over the next couple of years, supported by work in NSW, Victoria and Queensland.
These projects include Barangaroo and Circular Quay in Sydney while Melbourne’s CBD has several large office projects. Activity is also occurring in South Australia, Northern Territory and Western Australia on the retail construction front.
The analysts note that work yet to be done now sits at record levels for non-residential building and has risen as a percentage of GDP in NSW and Victoria, led by offices and short-term accommodation.
