Infrastructure and mining to drive construction sector forward

Following a strong year in 2018, the construction and economic outlook for FY19 is expected to weaken as activities shift from residential to non-residential and infrastructure, said BIS Oxford Economics Associate Director for Construction, Maintenance and Mining, Adrian Hart.

Speaking at the recent National Construction Equipment Convention, Hart said the sector is currently experiencing different waves of activity which subsequently drive where investment goes and where economic activity will rise and fall.

“We might be able to sustain growth through this financial year but we've got some big shifts happening in the construction industry,” he said.

“We've got residential likely to fall quite significantly over the next couple of years, but we've got continued growth in non-residential building.

“Even in the civil industry, it’s a bit of a mix in the outlook between transport, utilities and mining.”

According to Hart, non-mining engineering construction has risen by 22 per cent to hit $75 billion in FY18, and is expected to peak at $80 billion in FY19.

In particular, transport construction such as road and rail projects are expected to be the key drivers of activity in the sector, with the value of rail projects expected to double to $10 billion by FY23.

“We're currently in the era of the mega projects. I haven't seen so many big transport projects around the country,” Hart said.

”The next five years is purely focused on road, rail and bridges, so there is a very high demand for construction equipment to deliver them.”

However, construction work relating to utilities and telecom will start to slow down.

“For one, the NBN roll out has been going on for about five years and it's peaked, so over the next few years it will start winding down,” Hart said.

“The other concern is in electricity, although we’ve seen growth in this area especially in renewable energy such as the construction of wind and solar farms.

“The issue we've got going forward is that we don't have a policy for energy on a national level. We need a national energy policy to guide investment in this space because a lot of it is privately driven.”

Along with infrastructure construction, another surprise driver in construction activity in the next few years is mining, which boomed and then fell spectacularly several years ago.

“We're not going anywhere near historic levels of mining activity but we will see an upswing coming through over the next few years in Western Australia,” Hart said.

“We've got three simultaneous iron ore projects aimed at sustaining capacity or improving quality such as in the cases of Fortescue, all very large projects taking place with lithium as well as gold and copper, even coal.

“I will say that a lot of the growth in mining production over the next five years is really driven by oil and gas where the big LNG plants are being built.”

As to what this all means for construction equipment suppliers, Hart said it will be challenging conditions ahead but there will be no shortage of demand for equipment.

“When mining went bust, we saw a lot of construction contractors compete aggressively for work just to stay in business. They're getting zero margins even in complex engineering projects where you might be able to squeeze a positive.

"A lot of engineering companies right now are wearing a lot of cost increases and it’s going through to their bottom lines.

“So contractors are going to be very tight to deal with as they will be trying to squeeze these costs as far down the supply chain as they can.”

While there is a large number of new projects being carried out over the next few years, Hart said a big chunk of work will be focused on maintenance, particularly in road, rail and mining over the next five years.

“And what that means of course, is demand for equipment to deliver that,” he said.