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State of the construction industry in Australia – a report card

By: Chris Williams reports exclusively for IndustrySearch
21 October, 2013

When the Australian Performance of Construction Index (APCI) was released in September there was no escaping the bottom line - Australian construction is contracting, and has been for the last 39 consecutive months.

While it is by no means all gloom and doom, Housing Industry Association chief economist Harley Dale didn't attempt to sugar-coat the APCI findings.

"It speaks volumes of the recovery task ahead that the headline index contracted for a 39th consecutive month, and the sub-indices for both activity and new orders remain in contracting territory for all four construction sectors," Dale said.

"In other words there is a very long way to go."

Peter Burn, the Australian Industry Group's director of public policy was keen to find positives in the results, but also acknowledged the difficulties that lay ahead.

"Although the construction industry remains in a fragile state, there are early signs of a very gradual improvement in overall conditions," Burn said.

"However, clearly we need to see much stronger conditions to offset the slack resulting from the winding down in mining-related projects, and the distinct weakness that persists in commercial and apartment building activity."

The construction industry is traditionally segmented into commercial construction and engineering construction (non-residential construction) and house construction and apartment construction (residential construction).

Engineering Construction

Business researcher and forecaster BIS Shrapnel  offers a stark projection for the long term outlook for engineering construction, declaring a 12 year boom stretching back to 2001 is now over.

The key driver of the downturn is declining investment in mining projects and related infrastructure, with civil construction activity not expected to regain 2012-13 peak levels until at least 2025, although large LNG construction projects in Queensland, Western Australia and the Northern Territory will help offset this over the next few years.

"The good news is that a sharp collapse in engineering construction activity at the national level, while still a risk, is unlikely in the near term," Adrian Hart, senior manager for BIS Shrapnel's Infrastructure and Mining Unit, said.

"The key risk to mining investment remains our stubbornly high cost structure. While miners are taking steps to reduce operating costs, we are doing very little as an industry to tackle issues across planning, infrastructure development, workplace reforms and industrial relations to reduce our structural cost disadvantage.

"This means we will risk losing global market share in resource projects to other countries."

However gloomy economic forecasts don't tell the whole story, as Mark Holding, general manager of civil construction supplier Earthco Projects, explained.

Holding's company supplies the road construction industry with a stabilising aid that makes roads stronger, last longer, and cheaper to build.

"I actually think the media is responsible for the downturn in the industry by predicting gloom – it affects people's behaviour," Holding told IndustrySearch.

"We deal mostly with local government which is under no threat whatsoever, but they read the newspapers, decide the interest rates are weird, and pull their heads in. It's pointless but that's how people work.

"Doom and gloom is more popular than the alternative, but things aren't as bad as people make out – no way."

While Holding acknowledged that the recent federal election and slowdown in mining investment had an impact on confidence, he said Earthco Projects' business was well placed to not just ride out any downturn, but actually to flourish because of it.

"We save people money so the worse it gets the better we should get," Holding said.

"The best time in my whole business life was when they predicted the GFC – we had enormous growth because people were trying to save money. Things got tight and we got better."

Non-Residential Construction

BIS Shrapnel said the private sector would underpin something of a recovery in profitability and a return to growth in non-residential construction in the next 12 months, but that from 2015-16 onwards that will reverse following the completion of a number of very large hospital projects in particular.

"A number of large private projects in office, and entertainment and recreation building will make up ground, but even so commercial and industrial building (offices, hotels, retail etc) will record falls," BIS Shrapnel's Building in Australia report claims.

"Social and institutional building is forecast to weaken as public funding allocations dry up, (while) commercial and industrial building is anticipated to enjoy a brief good year in 2013-14 especially for retail, offices, warehouses and hotels, (however) negative overall growth will be a defining characteristic of 2015, 2016 and 2017."

Residential Construction

Of the above sectors, the residential construction market is in the best shape, but the outlook varies from state to state, and the sector is not responding to low interest rates as might be expected, according to BIS Shrapnel associate director, Dr Kim Hawtrey.

"Home building has been punching below its weight and…high household debt, concerns about the global economy, planning restrictions in some states and lack of land supply are among the factors that explain this," Dr Hawtrey said.

Dr Hawtrey predicts that residential building will show little overall growth in the year ahead, with gains in some markets offset by losses in others, although strong traction is expected into 2015.

According to the Building in Australia report, an improvement in residential markets will be seen in NSW, Queensland and Western Australia, where population growth and stronger economies will see home building respond to rising stock deficiencies.

However Victoria and other southern states will see a continued contraction, an inevitable correction following several years of phenomenal home building in Victoria which sees the market in oversupply.

A stronger pick-up is forecast for 2014-15 (+ 9 per cent) and 2015-16 (+ 4 per cent) as the market builds momentum on the back of low interest rates, strong population growth and pent-up demand.

The lower Australian dollar – compared with recent years – will help stimulate the sector, but this will be moderated by residual consumer caution, concerns over rising unemployment, affordability barriers and high household debt levels.

While a constant boom-bust cycle in the building and construction sector may be an economic inevitability, there is an equal inevitability that Australia will always need homes, apartments and infrastructure.

Or as Earthco Project's Mark Holding puts it: "The next couple of years is very positive, this industry will go on, it has to. We are going to need roads, we are going to need bridges, we need infrastructure, it won't just switch off."

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