In an update to its Engineering Construction in Australia, 2008/09 – 2022/23 report, BIS Shrapnel says the fall in work done will be driven by a 25% decline in privately funded work over the next two years. The company warns that as the current round of projects – predominantly in mining and related sectors – are completed, there will be fewer projects ready to take their place.
“While the outlook for the global economy has improved during 2009, we are still forecasting a substantial setback to minerals investment over the next one to two years, given the ongoing credit squeeze and global slump in industrial production,” says senior manager for BIS Shrapnel’s Infrastructure and Mining Unit Adrian Hart
“Even including work starting on the Gorgon LNG project in the first half of 2010, heavy industry construction and mining is set to decline by one-third over 2009/10 and 2010/11.”
Privately funded slump
Apart from heavy industry and mining, BIS Shrapnel is forecasting a slump in privately funded work over the next two years for other infrastructure sectors including roads, railways, ports and electricity. Privately funded road construction will be adversely impacted by the winding down or completion of large toll road projects in Brisbane as well as a setback to mining access road and subdivision construction, while railway and port activity will be affected by the completion of a raft of bulk commodity and container port developments.
Hart says the coming downturn in private investment justifies the need for governments to stay the course on their own spending and investment plans for at least for the next two years.
“There seems to be a perception that, having enjoyed an unprecedented boom over the past eight years, private funding for infrastructure will simply accelerate again from here, despite an ongoing financial crisis and the biggest global economic slump since World War II,” says Hart.
“To the contrary, the next 12 to 18 months are going to see a sharp setback to privately funded construction work – both in engineering construction and non-residential building – as the fallout from the financial crisis comes through.”
Hart says that given in 2008/09 the private sector funded nearly two-thirds of all civil construction activity, which was worth around $44bn in constant 2006/07 prices, declining activity from this sector will have substantial impact on overall activity.
Governments should spend
“In this environment, it would be prudent for governments around Australia to continue to spend and invest to minimise the impact of the downturn on jobs and economic growth.”
According to the updated forecasts, BIS Shrapnel expects a sustained recovery in privately-funded engineering construction activity from 2012, contingent on a full resolution of credit problems and a pick-up in global economic growth.
This, says Hart, would present governments an opportunity to begin winding back their stimulus measures.
“By 2012, BIS Shrapnel expects to see the next round of major mining projects ramping up across oil and gas, and coal and base metals,” says Hart. “This will encompass new mine works as well as related infrastructure including ports, railways, water, electricity and pipelines. The recovery would provide freshly elected state and federal governments an opportunity to rein in their own spending plans and repair their budget bottom lines.”
Forecasts by state
New South Wales
Activity in New South Wales surged 30% in 2008/09 but will decline by around 10% over the next two years as major projects in water (Kurnell Desalination Plant), harbours (Port Botany and Newcastle Coal Ports), electricity and other heavy industry (Tumut Pulp Mill) move to completion. Roads and rail work, however, will remain robust.
Victoria
Activity grew by 10% in Victoria in 2008/09, with a further 18% growth forecast for the next two years. This will be led by rail (South Morang, Regional Rail Link, Rail Revitalisation), roads, water (Wonthaggi Desalination Plant), electricity (Mortlake Power Station) and oil and gas (Kipper and Turrum projects).
Queensland
Engineering construction activity rose another 20% in Queensland in 2008/09, but a sharp 30% decline is forecast for the next two years as major projects are now complete or winding down. Roads and bridges (Gateway Duplication, major toll roads), water (Recycled Water Grid), electricity and mining and heavy industry construction (particularly the Yarwun alumina refinery expansion and Boyne Island smelter works) are all about to finish up. Oil and gas will provide some support to the Queensland economy but there is no major LNG project expected to start within the next two years.
South Australia
Activity surged 35% in South Australia in 2008/09. This was driven by roads (Northern Expressway and South Road projects), water (start of the Adelaide Desalination Plant), electricity and mining and heavy industry construction (Prominent Hill and Jacinta-Ambrosia projects). Accelerated rail projects and the desalination project will help drive activity higher over next two years, with the outlook beyond that very much dependent on the timing of the proposed Olympic Dam expansion.
Western Australia
Western Australia saw another 12% growth in activity during 2008/09, however a 20% decline is now forecast for the next two years as mining and mining-related sectors (e.g. rail and harbours) retreat from unprecedented high levels. Oil and gas is a key exception, with the Gorgon project timed to start in the first half of 2010. Water activity will also grow through the forecast period due to the Southern Seawater desalination project and Ord River Scheme.
Tasmania
Activity in Tasmania is expected to be sustained in 2009/10 by work on the National Broadband Network. Work will then fall back sharply over 2010/11 and 2011/12 as this project winds down and the Tamar Valley Power project is completed. BIS Shrapnel’s outlook does not include the $2bn Gunns Pulp Mill, so there may be some upside there.
Northern Territory
Activity in the Northern Territory doubled in 2008/09 on the back of oil and gas work but is forecast to fall sharply over the next two years as these works subside. However, the Ichthys LNG plant will boost activity from 2011/12.
Australian Capital Territory
Work in the Australian Capital Territory fell marginally in 2008/09 but is expected to boom over the next two years. This will be led by major water (Cotter Dam and Murrumbidgee to Googong Dam Pipeline) and road works (Gungahlin Drive Extension).
