Infrastructure construction work in midst of downturn: Westpac's Andrew Hanlan
Activity: Infrastructure construction work is in the midst of a downturn, from record highs, as the mining boom transitions from the investment stage to the output phase.
Total real infrastructure activity contracted by almost 10 percent in the June quarter 2016, to be 26 percent below the level of a year ago. That was the fourth year of contraction and follows a fall of 9 percent in the year to June 2015, as well as declines of 3 percent in each of the two years prior to this.
Weakness is increasingly centred on the oil & gas sector, as projects in WA and the NT near completion. Work on other mining projects and mining related projects appears to be stabilising, at a low level, as is work in Qld.
Private non-mining infrastructure activity has strengthened, increasing by 13.5 percent over the past year, centred on NSW and Victoria.
Public works are trending higher, up from the low of September 2014. Over the past year, public works rose by 16 percent, with further upside near-term.
Commencements: In the June quarter, some $17.0bn worth of projects began work. This adds to the likelihood that the low point for commencements is behind us. For the 2015/16 year, commencements totalled $65.8bn. That is an increase of 8.8 percent on the 2014/15 outcome of $60.5bn. This represents a modest bounce, with commencements still well below the $118bn in 2012/13.
The turnaround in commencements is being led by the public sector. In 2015/16, public commencements were $32.8bn. That is up $6.2bn on the year prior, centred on roads, rail, and telecommunications.
Private commencements stabilised in 2015/16, at $33.1bn, following $33.9bn in 2014/15, down from $88bn in 2012/13.
Work pipeline: Significant progress has been made in reducing the sizeable work pipeline. The pipeline now stands at $71bn, down from $77bn a year ago and moderating from a peak of $169bn in September 2012.
Prospects are for a further decline in infrastructure activity as work on key gas projects is completed and given the absence of new mega projects. Public works will provide a partial offset as state governments boost spending on major transport projects. Notably, the value of total work done in Q2, at $22bn, would need to fall by around 20 percent to be in line with the current level of commencements.
Activity: overview
In the June quarter 2016, the value of infrastructure activity declined by a further 9 percent. Over the past year, activity contracted by almost 24%, following a 10% decline over the previous year.
In dollar terms, the value of work fell by $2.16bn in the quarter, with a $2.28bn fall in private sector activity swamping a $115mn rise in public works. Over the year, activity is down by $6.75bn.
Private mining
Construction work on oil & gas projects continues to moderate, down $2.55bn in the period, as projects are progressively completed. That brings the decline over the past year to $5.1bn.
Work on other mining projects and mining related projects was relatively stable in the June quarter, declining by only 1%, with a minimal dollar impact. However, over the past year, there was a fall of 50 percent, a decline of $3.2bn. This was as work on pipelines and harbours wound down, as well as a moderation in construction work on coal and iron ore projects.
By way of context to the mining investment downturn, infrastructure work peaked at about $21bn in Q4 2013, is currently around $9.5bn and would fall towards $4bn to be in line with the current level of commencements. On this figuring, close to 70 percent of the downturn in the value of mining infrastructure activity is behind us. (These are Westpac estimates.)
Private non-mining
Private non-resource projects cover roads & bridges, utilities (water supply, sewerage, electricity), telecommunications, and recreation.
Activity in the private non-mining segment strengthened further in the June quarter, increasing by 6.6 percent, a rise of around $300mn. Annual growth lifted to 13.5 percent, up almost $600mn on the level of a year ago. The lift in activity was evident in electricity generation (Victoria) and in sewerage & drainage (NSW).
In the case of NSW, we suspect that there are some positive spill-over effects from the housing boom, boosting the need for infrastructure to service new residential areas. The durability of the lift in private non- mining infrastructure activity remains uncertain. Commencements are yet to establish a clear upward trend.
Public infrastructure, upturn
The public infrastructure cycle has turned, led higher by a commitment by the state governments to spend more on key transport projects. The public sector now accounts for 1/3rd of total infrastructure activity. Public infrastructure activity grew by a further 1.6 percent in the June quarter, the 6th increase in the past seven quarters. Public works were valued at $7.25bn in the June quarter, $1.0bn above that of a year earlier, a rise of 16 percent.
There is further upside to activity near-term. Construction work, at $7.25bn, is still running below commencements, which were around $9bn in both March and June. Moreover, the work pipeline has climbed to $19.7bn, up from $12.2bn at the end of 2014, to be above the previous peak of 2010, of $18.7bn.
The upswing in public infrastructure is a nationwide trend. The work pipeline has expanded over the past one to two years in all states. NSW is leading the way, with a work pipeline now at $8.5bn, a near 100% increase on $4.3bn at the start of 2015, to now account for 43 percent of the national work pipeline. As to the $1.0bn increase in public works nationally over the past year, 40% was due to progress on projects in NSW.
Andrew Hanlan is senior economist for Westpac and can be contacted here.
