Australian Construction Outlook – Utilities

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.

Alternative Construction Market Segmentation

This new data set provides a more meaningful picture of the construction upturn, by mining sub-segments and types of infrastructure investment. Construction related to LNG and coal seam gas is very weak, including pipelines, water treatment, up-stream and mid-stream. Coal and other minerals process construction is strengthening however, along with State Government major road and rail work. Electricity generation is also strong, but will begin to decline in a year’s time.

Australian Road and Bridge Works

Road construction and maintenance work done has risen strongly since 2015/16, driven by:

  • A wave of large road projects, mainly in capital cities,
  • A ramping-up of urban renewal, maintenance and improvement programs (including arterial road upgrades and level crossing removal programs), and
  • Generally solid levels of regional work (including upgrades on the Bruce, Pacific, and Princes Highways).

The peak in the value of work done is expected around 2021/22 or 2022/23, after which we expect a modest downturn, once work on the current wave of big projects subsides, and as the budget circumstances of State Governments become less conducive to further expansions of capital spending.

Coal Mining Cost Forecasts

This report provides detailed data, forecasts and commentary covering the outlook for costs – construction and operating – in the coal mining industry. Along with the numerical data and forecasts, we provide explanations of the important drivers of costs and our rationale for the forecasts of each input cost component. We also provide descriptions of the methodology behind the calculation of the overall indexes of construction and operating costs.

We provide forecasts for total Australia, as well as for the two largest coal mining states; Queensland and New South Wales.

The drivers of costs are many and varied. Some factors are important only for the prices of specific inputs, while others can have a much broader impact on the overall rate of cost growth. In general, the key determinants of overall cost inflation fall into the following three categories:

  • Demand for inputs, as determined by the volume of construction activity, and augmented by the composition of overall construction activity at a particular point in time.
  • The supply of inputs, of which perhaps the supply of labour has been of most importance in recent times.
  • Global economic conditions, which not only influence construction activity and economic growth in Australia (and hence demand for inputs), but also commodity prices, including metals (steel; copper) and fuels, as well as the exchange rate.

Our forecasts of overall costs are produced through a detailed examination of the determinants of each basic cost item. That is to say, we break overall costs down into its individual components (e.g. labour, EPCM services, equipment and materials of various types, etc.), analyse and model the movements in the prices of each, and then forecast based on the expected outlook for their respective determinants.

The total cost indexes that we present, in the table over the page and later in this report, are constructed by estimating the relative importance of each component in coal mining construction and operations, respectively, and then combining (or averaging) over the price growth of each component in such a way as to reflect that relative importance.

Looking at the experience of recent years, cost increases across all categories were particularly strong during the mid-2000s. Cost growth in this period was broad based, as evidenced by big increases in the prices of steel products, equipment and wages, which coincided with an unprecedented increase in Australia’s terms of trade, and an enormous surge in resources sector construction and expansion. The period was also marked by rising oil prices, which was particularly important for operating costs.

Construction cost growth peaked at more than 17% in the 2008/09 financial year, following the more than 60% increase in steel prices during 2007/08, combined with the sharp depreciation of the Australian dollar in the immediate aftermath of the GFC. Construction costs then declined during 2009/10 as the effects of falls in both steel and copper prices flowed through, and, importantly, the dollar regained much of its losses. Labour and EPCM services cost growth also declined during this period as annual construction activity went from growth of around 10% in 2008, to around 2.5% in 2010.