Building and construction sector to peak soon

Civil chart

Recent infrastructure-heavy State and Federal Budgets will not prevent a peaking in the public investment cycle over 2018/19, according to leading construction industry analyst and economic forecaster, BIS Oxford Economics.

In officially launching its civil construction report, Engineering Construction in Australia 2018 – 2032, BIS Oxford Economics said total measured work done in Australia’s largest building and construction sub-sector is on track to rise 10 per cent to $96 billion in 2017/18 – thanks to both surging public infrastructure investment and a renewed burst of LNG activity.

“Publicly-funded engineering construction rose 12 per cent (+$4.5 billion) in calendar 2017 and over 2018/19 activity will be 40 per cent higher than the trough in 2014/15,” said Adrian Hart, Associate Director of Construction, Maintenance and Mining at BIS Oxford Economics. “Driven by a range of new projects across transport as well as the rollout of the NBN, higher public infrastructure investment has helped offset the drag from the bust in resources investment – and has been a key driver of growth and employment in the national economy.

“The problem is, even accounting for the 2018-19 Federal Budget, we are fast approaching the crest of the public investment ‘wave’ – meaning the Australian economy will require new drivers to support growth in employment and incomes into the future.”

According to the BIS Oxford Economics report, measured engineering construction activity will fall back sharply in 2018/19 as publicly-funded works peak and privately-funded works slump in line with contracting oil and gas activity. However, Hart cautions against calling this a bust in the engineering construction market.

“An $18 billion crunch in measured oil and gas construction is the main reason behind the fall in activity in 2018/19 – and most of this represents imported LNG modules with little impact on the local construction industry,” said Hart. “Excluding oil and gas construction, the engineering construction market will be sustained at a high level in historical terms.

“Over the next five years, non-oil and gas engineering construction will average $71 billion per annum – higher than any period outside of the mining boom and around double that of the pre-boom period.

“In other words, we are moving from a wave to a higher tide of engineering construction activity.”

Further Capacity and Capability Risks Ahead – With Construction Costs Rising
 
According to BIS Oxford Economics, this sustained level of engineering construction work will continue to bring a host of challenges to the industry and to procuring government agencies.

“Victoria was right to focus on industry’s capacity and capability to deliver the infrastructure task in its 2018-19 Budget – indeed, that is the key risk going forward for most states and territories,” said Hart. “This follows an expert report prepared by BIS Oxford Economics for Infrastructure NSW – the NSW Construction Delivery Assessment[1] – to support the State Infrastructure Strategy. This report highlights a range of capacity and capability risks affecting key inputs to the construction industry, including having sufficient ‘onsite’ skills, securing access to local construction materials, having the right procurement and risk-allocation strategies by governments, and dealing with the inevitable transport and logistical issues as major works take place.”

Emerging capacity and capability constraints are expected to see greater risks of ‘slippage’ and delays in the delivery of work, and rising construction costs.

“The 2018-19 Federal Budget revealed that slippages are already apparent, with the Federal Government underspending by around $1 billion on infrastructure via National Partnership Payments in 2017/18 as projects struggled to get procured on time.

Meanwhile, construction costs are also already on the march, with growth in the engineering construction implicit price deflator (a key price measure for the industry) accelerating to 2.5 per cent on average through calendar 2017 – the fastest rate of growth since the resources investment boom.

Chart 4: Growth in Construction Costs Are Coming Through: The Engineering Construction Implicit Price Deflator (IPD)

Winners and losers by state

According to the Engineering Construction in Australia 2018 – 2032 report, there are large variations in the outlook for activity by state and territory, although among the winners there are still significant differences in the magnitude of growth.

As a symbol of the shift in Australia’s investment drivers, New South Wales is expected to surpass Western Australia as the country’s largest engineering construction market in 2018/19, a title it last held in 2004/05.

“While New South Wales and Victoria will continue to perform well, activity is picking up in Queensland and South Australia – the question is whether it can be sustained,” said Hart.

“Meanwhile, the outlook for Western Australia looks dire, but much of the decline from 2018/19 represents the completion of import-intensive LNG projects. Excluding oil and gas construction, engineering construction activity in Western Australia is forecast to rise from around $9.7 billion in 2017/18 to between $11-12 billion per annum over the subsequent four years, supported by the recent additional Federal Government infrastructure funding and a mild recovery in mining investment.”

Winners and losers by engineering construction sector
 
With sustained high levels of public investment expected by BIS Oxford Economics over the next five years, the main sectoral winners in the engineering construction market are railways, roads and water supply and storage.
Meanwhile, a strong cycle now playing out in renewables energy investment is also expected to see higher average levels of electricity-related construction, although investment remains at risk longer term given uncertainty over future energy policy.

A mild recovery in mining investment, following stronger global growth and higher commodity prices should also see higher levels of (non-oil and gas) mining and heavy industry construction (MHIC).
By contrast, the biggest headwinds facing the engineering construction market remain the completion of the $200 billion phase of LNG construction (impacting oil and gas work) and the winding down of work on the NBN (affecting telecommunications).