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Oz Engineering Construction Set To Collapse

Australia | May 04 2015

– Construction decline steeper than assumed
– Commodity price collapse impacting
– Non-mining construction not offsetting
– GDP impact

By Greg Peel

The current decline in Australian engineering construction, brought about as the mining sector shifts from growth to production ahead of the energy sector following suit, is set to become a sharp collapse, according to a report published by industry analyst and economic forecaster BIS Shrapnel.

The report, Engineering Construction in Australia 2014/15 – 2028/29, suggests total work done in the sector will decline by a steeper than expected 13% in 2014-15 and another 15% in 2015-16, followed by further substantial declines in the subsequent two years. Activity is expected to fall by a net 40% out to 2017-18. This sharp fall will more than offset rising residential building activity, ensuring weak industry output and falling employment up to that time and restricting Australia’s GDP growth to under the trend rate of 3%.

Mining and heavy industry construction will be hardest hit by the resource sector investment bust, projected to fall 60% to 2017-18. Coal and iron ore construction has already fallen sharply from peaks in 2011-12 and 2013-14 respectively and will see further falls, while the looming collapse in energy sector construction, as six major LNG projects reach completion over the next three years, will drive the general decline from here.

While the “end of the mining boom”, as it is often labelled, has been anticipated for some time, the recent collapse in oil and iron ore prices has further curtailed investment plans and impacted on existing projects. Hence the downturn will be steeper than previously assumed.

The RBA has been hoping to assist the Australian economy to transition away from a reliance on the resource sector through monetary policy accommodation, expecting a period of below trend growth before the non-mining economy can rise to take up the slack. The boom in residential housing construction, thanks to low interest rates, is proving the primary driver of the transition and consumer spending has been improving, but recent RBA statements suggest the transition will take longer than first thought.

Falls in commodity prices have not only hit Australia’s terms of trade, and the government’s income, but as the BIS Shrapnel report suggests, the flow-on impact into resource sector construction will only exacerbate the problem.

Not helping the situation has been falling public investment, as governments at all levels deal with higher levels of debt, weaker revenues and large budget deficits. Major infrastructure projects have been completed without being replaced by new ones. “Considering the severity of the downturn in resources-related work,” says BIS Shrapnel, “it makes sense for governments to help smooth out the cycle and offer a sustainable and secure pipeline of infrastructure projects”.

The good news is that the low cost of debt and reduced costs in the construction industry are supportive of public infrastructure investment. But BIS Shrapnel warns that politicians need to focus on projects that provide the greatest economic benefits, and not simply the greatest electoral popularity. They must also not box themselves in by drawing upon asset sales as a funding solution instead of unpopular debt.

Premiers take note.

BIS Shrapnel believes the biggest winners in the engineering construction industry over the next five years will be those who tap into a coming cycle of non-mining infrastructure activity, with roads, railways, telecoms and water offering the strongest growth in work. While resource sector construction will decline sharply to 2017-18, non-resource construction will begin to rise by 2015-16 and accelerate towards the end of the decade.

A slow start to the cycle means there will nevertheless be nowhere near enough activity to offset the decline in the resource sector in the interim years, BIS Shrapnel warns.
 

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