Mining and heavy industry construction set to fall in 2010/11

Industry analyst and economic forecaster, BIS Shrapnel, is forecasting a decline in mining and heavy industry construction activity in 2010/11, the first such decline since 2004.

According to BIS Shrapnel’s Mining and Heavy Industry Construction in Australia, 2009/10 – 2023/24 report, overall mining and heavy industry construction is expected to fall 3 per cent in 2010/11. The mining and heavy industry sector currently accounts for 33 per cent of all civil construction work done during 2009/10 ($25 billion), up from 13 per cent ($3.7 billion) in 2000.

“Despite further robust growth in oil and gas construction, led by the Gorgon LNG project, the completion of major alumina refineries, and iron ore and coal projects, as well as a slump in other mineral commencements through 2009 will drive a fall in work done in the coming year,” BIS Shrapnel’s infrastructure and mining unit senior manager, Adrian Hart said.

Given its size and importance to related segments such as ports and railways, the forecast decline in mining and heavy industry construction is expected to drive a broader fall in overall civil construction work in 2010/11. This forecast flies in the face of Treasury’s projections that a boom in mining-driven engineering works will help restore the Commonwealth Budget to surplus within three years.

According to Budget Paper No. 1, new engineering construction investment from the private sector is forecast to rise by around 20 per cent per annum in both 2010/11 and 2011/12, due to a “significant increase in investment in Australia’s resources sector”. This will see private new engineering construction surge above $60 billion by 2011/12.

By contrast, BIS Shrapnel is forecasting private sector funded engineering construction to waver around the $48 billion to $50 billion range for the next two years, with a decline slated for 2010/11.

“Combined with recent March quarter data, which showed another consecutive decline in privately funded engineering work, our analysis suggests that activity in this segment will trend lower through 2010/11, and not experience the overly-optimistic boom being modelled by Treasury,” Mr Hart said.

BIS Shrapnel expects mining and heavy industry construction activity will eventually pick up again, with the report predicting double digit growth in work done over 2012/13 and 2013/14, following a mild recovery in 2011/12.

“The key difference is that we expect the stronger growth to come through later in the forecast period, not earlier,” Mr Hart said. “Over the next one to two years the sector will be hit by the completion of projects that served us well through the GFC and also by the lack of commencements through calendar year 2009. By 2012/13 we expect the next round of projects will be well underway across iron ore, coal and oil and gas. By the middle of the decade, this is expected to be joined by an upswing in base metals investment.”

BIS Shrapnel is quick to point out the weaker outlook for mining and heavy industry construction is not the consequence of the proposed Resources Super Profit Tax (RSPT).

“We were already factoring in a weakening in mining and heavy industry construction prior to the announcement of the RSPT,” Mr Hart said. “While the RSPT has increased uncertainty in the mining sector in the short-term, we believe this is more the result of a lack of effective communication and consultation between the Federal Government and the mining industry about aspects of the tax, not its fundamental structure.

“Ideally, we would like to see the Federal Government and the mining industry resolve their differences on the RSPT sooner rather than later. However, we do not believe that recent decisions taken to delay or cancel mining projects have been solely driven by the proposed RSPT. Nor do we believe that the tax, once finalised and implemented, will weaken overall mining investment in Australia.”