Civil construction down 20% over 30 months – BIS Shrapnel

Civil construction will suffer a 20% decline in activity between now and the end of the 2011 financial year.
But according to BIS Shrapnel senior economist, Adrian Hart, that decline has not really started yet. The December 2008 quarter data indicates the sector is still growing. But we suspect that growth can only continue for the next three to six months before we see problems, when we stop living off the project pipeline were living off now.
Hart was speaking to Earthmover just after BIS Shrapnel had published its regular Engineering Construction in Australia outlook on the Internet for subscribers.
He said some sectors will do better than others. For example, road and rail construction activity will not decline by 20%. They will continue to grow because they are traditional public sector stimulus sectors. You might see activity come off a little bit because the private sector stimulus wont come through though.
The mining sector has driven rail construction in Queensland, WA and the Hunter Valley. There will a very sharp contraction in the five year surge of private sector investment and that will happen within a year, he said.
BrisConnections goes on
BrisConnections and its financial ability to keep building Brisbanes Airport Link, have been much in the news in recent weeks, because its partly paid share structure has not worked in a bear market. But Hart said it will keep building the Airport Link and that is what keeps road construction in Brisbane at fairly high activity level. But when the north South Bypass tunnel or the Clem 7 (Clem Jones Tunnel) finishes in a year or so, there will be no other major project to take over.
Hart said the great thing about toll roads is that they bring a lot more private funding and extra work, and compress it in a short space of time. So what we have seen in Queensland, is a big surge in road construction, because on top of the public sector projects, they have been able to attract all this private sector finance and that has led to a boom in Queensland road construction in the last few years.
He said that despite the financial crisis, road activity in NSW would probably suffer less than in other states. That was because big projects like the Cross City Tunnel, the Lane Cover Tunnel and the Westlink M7, all finished within 18 months of each other a year or two ago, and road construction activity then fell 30% or so.
Ramping up
So with a mixture of federal and state government funds, it was actually ramping up or had just started several major new projects, as the crisis hit late last year. Those are particularly on the Hume and Pacific Highways. That means road building activity in NSW, will accelerate as work proceeds on the Tarcutta, Bulahdelah and Ballina bypasses, on the Hume and Pacific Highways.
But we do not see the next round of toll roads starting for about five years, depending on the resolution of the financial crisis and access to funding, Hart said.
In Sydney in the next three to five years, the F3 to the M2 connection and the M4 east look most likely. In Brisbane the northern Link is likely to be next after the Airport Link and in Melbourne there are options like the East West Link tunnel under the city and the EastLink extension.
So apart from the Airport Link in Brisbane, activity will be much more muted than it has been over the last 5 to 7 years.
Hart said about 30% of road construction involved roads on subdivisions, access roads and airport runways. In 2007-08 about $3.3bn of a total of about $12bn was spent on building subdivision roads.
Residential upswing
All the pieces are in place for a big upswing in residential subdivision work. Not least is the reduction in interest rates making renting or buying a house a line ball decision.
The biggest declines, not surprisingly, will be in mining and heavy industry or the construction of new mines and rail lines and roads associated with those. It will fall from about $21bn in 2008-09 to $11bn by 2010-11.
Hart said the financial crisis had taken the top off what would have been a pretty unsustainable mining boom. Rio Tinto and BHP Billiton were making huge investments that would have brought on a massive amount of capacity, and I suspect had all that come on, we would have had a downturn, anyway in maybe a couple of years, when we reached a fundamental oversupply.
The general message is that the private sector downturn is coming and it will be strong and will outweigh what the public sector can throw at it for the next few years. That means many companies will have to take steps to work through what they are going to do for the next few years, he said.
But maintenance in the mining sector will be a fairly strong market where assets have been idled for the first time in years, because they couldnt afford to stop to properly maintain it until now.
Capacity constraints
Weve been having capacity constraints because of wage pressures, high fuel costs and not being able to get skilled labour. But now youre going to be getting civil people coming back from mining, when fuel and steel are much cheaper, and it will make big projects much more viable than in the immediate past.
For example, companies like Chevron are looking at projects like Gorgon at Karratha in WA, a massive LNG project. No-one has a real idea of the cost although there have been estimates of $50bn to build five LNG chains over several decades.
If that went ahead, relatively soon there might only be a 30% decline in mining and heavy industry infrastructure construction, instead of 50%, Hart said. The concerns for us are that states like WA and Queensland, have relied a lot for revenue on the general economic uplift supplied by the mining boom. We have all the right rhetoric coming from governments but it will be very hard to keep infrastructure spending up at the levels they have been over the last few years, if revenue falls much.
Not surprisingly we have our biggest overall activity declines occurring in WA and Queensland. NSW will be declining in quite a big way too, because of the completion of port projects to handle more coal exports, the completion of the Sydney desalination plant and many other projects winding up.
Forever good
Hart said that last year he couldnt talk to construction people about the future, because they knew it was going to be good forever. Their biggest concern was just getting stuff done, let alone worry about what to do when the market turned, because that was going to be years away, he said.
Earthmover asked if BIS Shrapnel had more construction sector subscribers to its forecasting services than a year ago. Hart said no but there was a different mix.
Some in the industry are so pessimistic about the future that they are just not interested. But most of our subscribers big construction companies, equipment suppliers, equipment hire companies and material suppliers are interested. However I would have thought state and federal governments would have been more interested in this type of report because it shows them what the likely scenario is for the next five years.
Everyone talks doom and gloom but actually but there is a good opportunity for state governments to a lot of work at a much cheaper price, he said.