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.
A downturn in dwelling commencements began in earnest in the December quarter of 2018 (in approvals terms, the downturn began a quarter earlier, in September). Nationally, the December quarter 2018 commencements were 16% lower than the corresponding period a year earlier. The latest approvals data reached a four-and-half year low over the year to March 2019, indicating that further falls in commencements are expected. Looking ahead, we forecast falling commencements in Australia in 2018/19, 2019/20 and 2020/21, prior to an upturn in 2021/22.
This national picture reflects a variety of cyclical patterns across the states. Residential building in Western Australia peaked in calendar 2014, at the tale–end of the mining boom, and has been declining ever since. Queensland peaked in 2016, then experienced declines, partly related to its own resources sector slump, but had a brief improvement in the first three quarters of 2018. Victoria and New South Wales were at or near their peaks in mid-2018, prior to the start of rapid declines in the latter part of 2018. The greater size of the New South Wales and Victoria markets means that the national picture more closely reflects the cycles in those states.
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.
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.