Australian Construction Outlook – Resources

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The overall resources construction sector continued to decline through to year-end 2019, but is poised for an upturn cycle beginning in 2020. Total resources construction has been weighed down by persistent falls in oil & gas investment for the past five years, the decline in this sector will continue until mid-2021. Meanwhile, outside the gas sector, recovery in construction is actually well underway. Total resources construction, excluding oil & gas, increased solidly in FY2019 and should increase again in FY2020. This growth is underpinned by upturns in iron ore and coking coal, which have been accelerated by stronger than expected growth in world steelmaking.

But the upturn has a limited time frame and the outlook is highly variable by commodity type.

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Australian Construction Outlook – Non-Residential Building

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Non-residential building activity remains in the midst of a strong upswing. The value of work commenced rose strongly over the period 2015/16 to 2017/18, and the value of work done followed with solid increases over the last two years (2017/18 and 2018/19). There has been a slowing down in project starts in 2018/19, but we believe this is only transient. The most recent six months of approvals data (covering April to September 2019) shows substantial increases in approvals in Quarter 2 and Quarter 3 of 2019, compared with the same quarters of 2018. This is predictive of a rise in the value of project starts, and as shown in our forecasts, we expect a period of strong non-residential building in 2019/20.

Accordingly, most of the upturn is taking place in Sydney and Melbourne. Western Australia and Queensland should experience some delayed, and more modest, growth in work done through 2019/20 and 2020/21.

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Australian Construction Projects Database

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This latest list of projects included in our forecasts corresponds with the fully revised set of forecasts published in November 2019.

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Australian Regional Construction Outlook

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The metropolitan areas of Sydney and Melbourne plateaued in 2018/19 and we are expecting downturns in both regions over the next couple of years as the residential sector continues to weaken. We expect that both downturns will be softened however by booming commercial building sectors and a number of large urban transport infrastructure projects (road and rail) in each city.

The Brisbane market has started an upturn off the back of strengthening non-residential building and transport infrastructure projects, despite the continuing drop in apartment buildings.

Perth has declined over the past few years, mainly due to a big drop in residential building and a weak economy (related to the mining downturn). Transport projects and small upturns in non-residential building and utilities should provide some short-term improvement in 2019/20, but total activity is then expected to be relatively flat with a slight trend down over the next few years.

The resources-dominated Pilbara has seen enormous downturns in activity and big outflows of people but is expected to rebound reasonably strongly from 2019/20.

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Australian Construction Materials Forecasts

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Our latest forecasts assess the implications for construction materials demand of the outlook for each segment of building and construction work. Demand is currently declining, driven by a downturn in residential building, while other segments are plateauing. There are downturns looming in non-residential building and renewables investment, while demand from transport infrastructure construction (roads, rail, airports and ports) will hold up for longer.

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Electricity, Gas and Water: Cost & Activity Forecasts

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In the electricity, gas and water (EGW) sector, the outlook is for subdued cost inflation over the next few years. The inflationary environment in the Australian economy generally is expected to remain weak for a few years, and the EGW sector reflects this. We anticipate relatively weak economic growth in the medium term, resulting in low employment growth and subdued wage increases. A construction downturn is developing, led by residential building, but with non-residential building, renewable energy, telecommunications and, later, public infrastructure, expected to join the general cyclical decline. This will drive a downturn in demand for construction materials and other inputs to construction.

We also anticipate subdued growth in the world economy and global trade volumes, with a number of major risk factors at play, including Brexit, US-China trade tensions, volatility in US politics, Middle East tensions, Hong Kong protests, to name but a few. All of this is likely to dampen commodity prices, at least in the short to medium term. Furthermore, there is reduced scope for further depreciation of the Australian dollar below its current levels, which will also mean lower price increases in Australian dollar terms.

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Australian Construction Cost Trends

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Construction cost inflation was 2.3% in 2018/19, but this is now expected to slow in 2019/20 and stay below 2% in 2020/21 and 2021/22. This slow-down is based on:

  • Slower growth in the Australian economy,
  • A downturn in the non-resources construction sector,
  • Potential declines in commodity prices, and
  • A stabilisation of the Australian dollar, with only a small further depreciation likely.
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Australian Construction Outlook – Transport Infrastructure

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Australia is in the middle of our biggest ever transport infrastructure boom, featuring:

  • An unprecedented collection of big capital city projects (road and rail),
  • A ramping-up of urban renewal, maintenance and improvement programs (including arterial road upgrades and level crossing removal programs), and
  • A general improvement, on a less splashy scale, of regional works (including Inland Rail and ongoing, large scale upgrades on the Bruce, Pacific, and Princes Highways).

The peak is expected in 2022/23, at around $42 billion of work done (in constant 2016/17 prices). This continued upturn will be important in maintaining record levels of total spending on Australia’s public infrastructure, as a number of other segments turn downturn significantly, such as telecoms, electricity and social building.

We ultimately expect a downturn, however, once the current wave of big projects moves to completion, and the budget circumstances of State Governments become less conducive to further expansions of capital spending.

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Australian Construction Outlook – Utilities

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Construction in the utilities sector has rebounded over the past two and a half years, following a sharp downturn which occurred during 2014 to 2016. The current financial year (2019/20) is expected to be peak of the cycle.

The current growth is almost entirely due to a boom in renewable energy investment, driven by the 2020 Renewable Energy Target, and by improved commercial viability of renewable energy projects. If we excluded renewable energy investment, construction in the utilities sector would be in decline.

Telecommunications construction made a strong contribution to growth over a seven-year period from 2011 to 2017, due to the construction of the National Broadband Network (NBN), but this work has now passed its peak.

While big falls in the cost of renewable energy have shifted the expected long run level of investment higher than previously expected, there will still be investment cycles, much like any other asset class. The large additions being made to renewable electricity generation capacity (particularly solar) have already caused substantially lower wholesale prices during the daytime hours, and this will undermine the financial feasibility of new renewables projects, as well as placing pressure on coal power stations.

We are forecasting a downturn in renewable energy investment, and hence also in total utilities sector construction, beginning in 2020/21 and last four or five years.

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Australian Construction Outlook – Overview

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Australia’s construction industry has generally experienced a robust expansion over the past two-and-a-half years. The main exception has been LNG construction, which has been in sharp decline following the completion of projects in Western Australia, Darwin and Central Queensland.

If we exclude oil & gas work, total construction work done in Australia has risen solidly over a three-year period, and will be around 20% higher in calendar 2019 (in real terms) than in 2016.

There have been four pillars of the upturn in construction over the past three years:

  • An extraordinary residential building boom,
  • A large upturn in non-residential building,
  • A boom in renewable energy construction, and
  • A wave of road and rail infrastructure projects.

Three of these four pillars of growth however will now turn down in succession. The residential building sector is already in sharp decline, non-residential building will be the next sector to turn down, and finally, renewable energy investment is expected to decline with the conclusion of the renewable energy target period in 2020. The last of the four pillars left standing will be road and rail infrastructure, which should continue to rise through to a peak in 2022/23 (see chart of major projects below).

Overall construction work done, excluding oil & gas, is forecast to peak in 2019 calendar year, and then fall to a trough in the cycle around 2023/24.

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