One of the sectors riding the resources and infrastructure booms very nicely has been civil engineering and construction.
There the likes of Leighton (and its associates John Holland and Thiess) have built roads, tollways, tunnels, airport extensions, highways and mining and processing facilities in a multi-billion dollar spree that has gone on for several years.
It has seen Leighton shares reach an all time high (with help from speculation about corporate activity) with competitors like Worleyparsons, United Group, Downer EDI and Transfield also doing well here and moving offshore into Asia and North America.
But is this about to end?
This was a query a year ago ahead of the 2006 Federal Budget which promised more money for the federal government, state and local governments to spend on roads and associated infrastructure.
A year on and a leading forecaster says the engineering construction sector is showing signs of fatigue following several years of very strong growth and warns the current boom in infrastructure and mining construction is set to slow throughout 2007/08 and decline in 2008/09.
BIS Shrapnel said in a survey released yesterday that the coming downturn in total engineering construction work is expected to be mild, with activity levels to remain double what were attained during the 1980s and early 1990s.
So did the report have an impact? Leighton eased around 60c to just over $34.20 a share but it has enjoyed a strong run up in the past three to four months and the shares of others in the sector, such as Transfield, Downer and United Group were all higher in a very strong market.
So what did BIS Shrapnel say in its report entitled Engineering Construction in Australia, 2006 to 2021?
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The immediate outlook for engineering construction activity is still positive, with infrastructure and mining-based construction activity set to achieve reasonable growth in 2006/07 following a 25 per cent surge during 2005/06,” according toBIS Shrapnel senior economist and project manager, Adrian Hart.
Overall, total engineering construction activity has more than doubled during the past five years to more than $43 billion.
BIS Shrapnel expects activity to peak during 2007, then slide back around 15 per cent over the three years to 2009/10.
The latest Australian Bureau of Statistics (ABS) figures show total engineering construction activity rose 16 per cent on average through calendar year 2006 to just over $43 billion (in constant 2004/05 prices).
However, BIS Shrapnel believes much of this slowdown occurred during the second half of the year as activity dropped back from the red hot pace achieved in 2005/06.
The company forecasts single digit growth in engineering construction activity through 2006/07, with a downturn expected for later on this decade.
The timing of completion of several large projects has contributed to the weak growth outlook, while strong increases in construction costs and supply chain difficulties are also constraining growth.
“While there are no detailed measures of the extent of cost increases in the engineering construction segment, the engineering construction implicit price deflator surged over 11 per cent during 2006,” explained Hart.
“Anecdotal evidence suggests costs are rising by even more than this, particularly in regional ‘hotspots’. In turn, sharply rising construction costs and the difficulty in sourcing key staff and materials will continue to delay many projects.
“With activity having doubled since the 1990s, it may be that we are fast approaching a limit to how much more work we can do.”
With the federal budget just days away and more state government budgets to follow, BIS Shrapnel warns both the federal and state governments against releasing unrealistic infrastructure plans.
“While more investment in infrastructure capacity is clearly required, both state and federal governments need to work together on this. In particular, governments need to be aware of the volume of work already in the pipeline and the distinct possibility of further blow-outs in project costs and timing delays,” explained Hart.
“In this environment, it is questionable whether governments are getting value for money or whether they will be able to fulfil their infrastructure plans on time and on budget.”
While overall growth in engineering construction activity is slowing, BIS Shrapnel expects infrastructure and mining construction activity will rise further over the next 12 to 18 months, given robust commencements and the record level of work in the pipeline.
During 2006, the value of commencements in this sub-sector rose 18 per cent in real terms to just under $50 billion, according to the ABS. Over the same period, the value of work yet to be done exceeded $25 billion, with the strongest growth occurring in mining and heavy industry, railways, water, sewerage and electricity.
“The resources boom has been the engine of growth for engineering construction activity, fuelling a spike in heavy industry work done and construction of related infrastructure such as railways and ports.
In addition, generally robust state and federal government finances have seen a strong, and long overdue, pick-up in public sector spending on roads, bridges, water and electricity,” said Hart.
However, Hart cautions that while the latest ABS data is very strong it is now around four months old. “Based on a project-by-project analysis and our understanding of key markets, we feel the peak in commencements is probably happening around now, implying a shift to lower levels of construction activity in 12 to 18 months’ time. In the meantime, we can expect the cost pressures and shortages of labour and materials will only get worse.”
BIS Shrapnel is forecasting a slump in mining construction and deterioration i
