Construction peak in 2007: BIS Shrapnel

A NEW report from BIS Shrapnel has forecast strong construction levels over the next three to four years, peaking in 2006-07.

The forecasting report, Engineering Construction in Australia 2003 to 2018, points to a major downturn later this decade, with the analyst group predicting construction activity to plunge by 35 per cent between 2007-08 and 2009-10.

BIS Shrapnel has warned that companies should expect large increases in construction costs, project delays and a shortage of labour during the boom, and that the following downturn will erode turnover and potentially catch out companies that have over-extended or invested in new capacity too late in the cycle.

Construction activity has grown strongly during the past two years, with further growth expected as key areas of engineering construction experience strong upturns in investment.

The key drivers of engineering construction activity have been identified as the rolling minerals boom, major infrastructure projects, energy investment, the government funding cycle, telecommunications and housing subdivisions. All these sectors are expected to go through large cycles over the next five to seven years, causing a major boom-bust cycle in the overall civil construction industry.

BIS Shrapnel study leader and senior economist, Nigel Hatcher, said Australia appeared to be stuck in a very cyclical pattern of major infrastructure projects, such as the $1.5 billion Perth Metro Rail and $1.6 billion North West Shelf expansion.

Mr Hatcher said these major projects should be completed at around the same time, leaving a major gap in construction activity between 2007-08 and 2008-09.

“Over the next three to four years, revenues will rise as a result of strong economic growth, and consequently, government capital spending will also steadily strengthen,” he said.

“This will be followed by a downturn as the property markets and the economy weaken around 2007-08.”

BIS Shrapnel has also forecast that investment in electricity infrastructure will further lift construction, as Western Australia faces the necessity of adding to electricity capacity at an even greater pace, including the construction of new base load power stations.

But this cycle will likely come to an end in the second half of the decade.

Mr Hatcher said resource project investment was currently focused on oil and gas, iron ore, coal and alumina refining, where demand from China was particularly strong and where supply was tight.

“But, by around 2007-08, we expect this cycle to have run its course leading to a decline in investment, possibly exacerbated by a post-Olympics slow-down in China,” he said.

Mr Hatcher warned that the boom-bust cycle expected this decade had serious implications for all types of businesses operating in the construction industry.

“A significant challenge will be rising construction costs, including materials, wages, equipment hire, and sub-contractor rates,” he said.

“Another issue is slippage of work schedules at a time when industry resources will be stretched to the limit.”

Mr Hatcher said these factors posed a significant potential threat to construction companies that commit to medium or long-term contracts on a fixed-fee basis, with penalties for late completion.

He said the forecast bust would force companies to face the reality of sharp falls in work orders and revenues.

“The danger is in over-committing in the upturn, without a strategy for maintaining work levels or being able to downsize in the bust.”

Mr Hatcher said that, for businesses such as materials companies, investing in additional capacity in order to meet levels of demand during the boom could be hazardous due to the long lead times, and the likelihood that the new capacity will only come on-line just in time for the downturn.

“Investment ideally would take place early, in anticipation of the boom, not in response to it once it arrives,” he said.

“The danger is in over-committing in the upturn, without a strategy for maintaining work levels or being able to downsize in the bust.”

- Nigel Hatcher