Engineering construction spending 'hard to exceed': ACIF report

The turning points reflect key macro-economic changes and industry developments.

Falling commodity prices has narrowed the pipeline of new major development projects or deferred other major projects — the engineering construction boom is projected to taper off.

Meanwhile historic lows in interest rates and improved housing affordability are expected to encourage an uplift in housing starts and an increase in residential construction spending.

A recent recovery in investor sentiment as well as lower interest rates is expected to encourage an improvement in commerce that will be reflected in an upturn in non-residential construction spending.

ACIF views that a fall in construction activity in some sectors of the industry will be offset by increases in others. Total construction activity is projected to amount to around $229 billion next year, roughly the same as it was in 2012-13. The total amount of construction building work to be done in 2013-14 is projected to be around 75 per cent larger than it was a decade ago. This is in real terms (that is, taking out the impact of inflation).

More than ever this sanguine big picture hides considerable variation, swings and troughs in construction spending in specific construction sub-sectors and in different states and cities.

Events since the release of May 2013 ACIF Forecasts that affect the outlook for the industry include: ongoing concerns about the stability of the Eurozone; signs that China is managing to sustain economic growth and price stability; continued economic recovery in the US raising concern about the tapering off of quantitative easing and increases in interest rates; fall in Australian interest rates to record lows and a fall in the $A/$US exchange rate; and outlook for Australian growth has moderated although investor sentiment is improving.

Forecasts for engineering building and construction

The ACIF Forecasts indicate that engineering construction spending has peaked in real terms in 2012-13 at around $124 billion per year. This is higher than previously expected and represents an historic achievement that will be difficult to exceed or repeat in the next few years.

The updated ACIF Forecasts shows that the engineering construction sector continues to be dominated by mining. Global uncertainties over demand for energy and minerals has seen some major projects put on hold. However, the resource projects still in the pipeline, and major nation building infrastructure projects in the ports, roads and railways sectors are expected to keep the broad category of engineering construction at relatively high levels.

Government policy plays a strong hand in the engineering construction and there is also some risk from changes in government policy. Delays in the National Broadband Network (NBN) have induced a volatile spending pattern in telecommunications which may be unwound through a review which is currently underway. Changes or repeal in the legislation supporting the Carbon Price Mechanism (CPM) may impact on the range of major renewable energy projects identified in the current list of major projects.

Highlights

The November 2013 revisions see a quicker and stronger ramping up of projects up to last year, particularly in mining, leading to a higher peak and a sharper drop off in coming years.

Road construction

Trend growth with a 'blip' next year driven by the new government's commitments to new major projects.

Energy and pipelines

Energy and pipelines activity is falling away from the local peak achieved last year. Electricity will lift as regulatory decisions permit necessary investment in networks. Some renewable projects at risk depending on the legislative reform agenda of the new commonwealth government.

Bridges, railways and harbours

There are some rail projects evident in the data and the ongoing sale of some ports is likely to encourage some reinvestment.

Water and sewerage
 
Investment falling away from the ramp up achieved in 2010-11, and the projections involve smaller amount of investment sufficient to support urban development and redevelopment.

Heavy industry including mining

Achieved work done of $57 billion last year (in 2012-13). Activity over the next four years is forecast to moderate to around $40 billion a year. This will have a pronounced impact on states such as South Australia and Western Australia as well as the Northern Territory, which have a less diverse engineering construction activity base.

By state

Queensland

A reduction in growth and then declines. Investment in ports, railways, bridges to be shored up next year and then it also moderates into the medium term.

Western Australia

What goes up must eventually come down and Engineering construction is forecast to moderate over the forecast period. There is still a significant number of mining projects and supporting development in the pipeline which will sustain activity in the next five years being higher than that achieved in the last five years especially in areas such as mining, ports and roads.

New South Wales

Some tapering off in engineering in the next two years, followed by growth in areas including roads, electricity and pipelines and other utilities.

Victoria

A contraction in 2013-14 with some growth in the medium term in areas such as road construction and telecommunications.

South Australia

A decline in activity in the next two years followed by an upturn especially in roads, electricity/pipelines and telecommunications.

Tasmania

Engineering construction activity obtains a lift, largely through increases in electricity and road construction.

Australian Capital Territory

Engineering construction is not a major category of activity in the ACT and it is forecast to decline in the next two years. There are some projects in the major projects list relating to roads and renewable electricity.

Northern Territory

Engineering construction activity is to increase next year reflecting construction of the Ichthys LNG project. There are few major projects behind this one and the forecasts reflect a decline in future years.

Source: Australian Construction Industry Forum