Famine and feast for resources services sector as pressures squeeze opportunities

TWO weeks ago, the Australian Bureau of Agricultural and Resource Economics released some staggering numbers demonstrating the unprecedented rate of investment in the resources sector as the commodities boom gathers pace.

According to Abare, the value of resources projects under development across the nation hit $132.9 billion in October, a 21 per cent rise from just six months earlier.

At the same time, actual capital spending in the current financial year was forecast to rise 58 per cent to $54.8 billion, a number expected to double by 2014.

That is reflective of the $280 billion in resources projects either under way or planned for Western Australia over the next few years.

With that volume of money flowing into the sector, the bulk of it in WA, you would think last year’s triumphant claim by Premier Colin Barnett that every workshop in the country would soon be full should be starting to bear fruit.

But as a group of leading resources services chief executives explained at a recent WA Business News forum, the reality is starkly different for many companies, depending where they sit in the services chain.

For while investment capital has started flowing to project developers following a GFC-inspired freeze, the perennial boom-time issues of labour shortages, cost escalation, margin pressure and local fabricators’ inability to compete with cheaper overseas rivals have returned with a vengeance.

The net result is that companies offering services that compete directly with foreign counterparts in areas such as detailed engineering and fabrication are facing famine as an ever-diminishing pool of work winds up in the hands of local providers.

Further exacerbating the situation, many contractors now find themselves under intense pressure as escalating costs eat into the tiny margins they accepted in order to win work during the downturn; hence the rash of profit downgrades and warnings in recent weeks by mining contractors such as Macmahon Holdings, VDM Group, Clough and Leighton Holdings.

Conversely, for those involved in work that can only be done locally, like earthworks, there is a feast of opportunities.

Making hay

According to Forge Group managing director Peter Hutchinson, the outlook for companies such as his have rarely been as good.

Forge, which provides project engineering, construction and maintenance services to the mining and energy industries in Australia and Africa, last month bucked the trend of most of its peers by upgrading its expected profits this half to between $25 million and $27 million.

That is 42 per cent more than its profit in the same period last financial year, and only just shy of the $29.5 million it posted for all of 2009-10.

Mr Hutchinson said Forge had experienced a wild ride over the last couple of years as it moved without pause from the “extremely depressed” conditions of the GFC to unprecedented opportunities.

“There wasn’t a transition into better times, it was straight into better times for some bizarre reason,” Mr Hutchinson told the forum. “It’s not the same everywhere round the world, it’s unique to Western Australia I think, and probably Queensland as well.

“These are halcyon days right now, so let’s enjoy them while they last.”

However, thriving in the current circumstances presented significant and quite different challenges to those that prevailed during the downturn.

“To gear up from a low base to get to where we are now has been very challenging, and for a lot of us, to get to where we need to be in a year’s time, I think will be even more challenging,” Mr Hutchinson said.

People in short supply

The principal challenge was finding enough appropriately skilled people to undertake the work associated with the resurgent commodities boom, according to Mr Hutchinson.

“The restriction to growth 12-24 months ago was capital,” he said. “It is no longer the restriction, there is capital available to mining services companies at a fairly reasonable price. The impediment to growth, the impediment to execute work, is clearly people. And its people at all levels.”

Mr Hutchinson said though Forge had been reasonably able to find the blue-collar workers it needed, finding the white-collar professionals required was posing a particular challenge.

“Where I think the previous boom was a blue-collar issue, with respect to 457 visas and the like, we are looking for white-collar people,” he said.

“White collar is very hard – we are both the pincher and the pinchee. We try to pinch as many people as we can from someone else, but every time we do that, someone gets pinched from us.”

Noting the sector was “very mercenary and very inflationary”, Mr Hutchinson said one of Forge’s responses had been to look to traditionally higher priced sources of professional labour, such as the US, where the economic outlook was not as appealing as that in WA.

Regardless, the rising need for workers was fuelling significant wage inflation for both blue collar and professional workers needed by the resources sector.

The scale of the challenge is reflected in recent Chamber of Commerce and Industry WA estimates that the state’s resources industry will need at least a further 26,000 skilled workers on the books by 2014. By 2020, that figure rises to 488,500 workers, against expectations there will likely be a shortfall of at least 210,000 based on current training and immigration rates.

Paul Dalgleish, managing director of diversified engineering, heavy fabrication, mechanical and electrical contracting group RCR Tomlinson, echoed those concerns, particularly at management level.

“The market here is so busy that trying to get good senior people is really hard,” Mr Dalgleish told the forum. “And with all the people that are coming in offshore, some are good … (but) others have embellished their resumes and are still getting good work because things are so tight here.”

Looking east

Executive director and founder of engineering and construction contractor VDM Group, Jim van der Meer, said the related problems of skills shortages and rising labour costs in WA, coupled with the difficulties in attracting east coast workers to the state, was especially difficult to overcome.

“What we are finding is the eastern staters don’t want to come to WA ... and that is a major problem for us,” he said.

Consequently, VDM was increasingly hiring skilled professionals in lower-cost regimes such as NSW and Victoria and allowing them to work electronically from their home base.

“Our big saviour is that with the internet and the modern office we can now use Victoria and New South Wales as low-cost bases for staff,” he said.

“They get paid considerably less than WA staff, so we are going to use them in our consulting area. We are going to use them more and more as the back room part of our business when we need numbers. If you can go up to the client and say you’ve got 400 people ready to go, you’ve got a very good chance you are going to pick up some work because they are looking for that sort of horsepower.”

Retention challenge

Chris Tuckwell, managing director of newly-listed mining and crushing contractor MACA Limited, said it was not only finding skilled workers that was hard, but keeping them in a highly competitive market.

MACA, which listed last month after raising $60 million, has been one of the year’s best floats to trade at just under $1.50 per share, well above the stock’s $1 issue price.

“As far as looking at either blue collar or white collar (labour), the pressure is on in both for us, and I don’t see that getting any easier,” Mr Tuckwell told the forum.

He said it had got to the point where some contractors were now reportedly handing out flyers to mine workers at Perth Airport offering to pay more money to those workers willing to change employers.

“If that’s true, then we are already in trouble,” Mr Tuckwell said.

It was particularly concerning when workers, who had been trained at considerable expense by one firm, were subsequently poached by another, he said.

Such competition for labour also led to cost escalation and skills shortages in other industries, he said, as workers left their own sectors for higher paid work in the resources sector.

Training for the future

With a rapidly growing shortfall in skilled workers re-emerging as a major impediment to growth in the resources services sector, encouraging education and training is clearly pivotal.

Hertel Modern managing director Andrew White said laying the foundations to organically grow WA’s skilled workforce was vital to take long-term advantage of the state’s opportunities.

Malaga-based Hertel Modern is a specialist cryogenic insulation provider to the LNG and petrochemical industries, and a large scale heating and ventilation (HVAC) specialist, that is now part of Dutch offshore services giant Hertel.

Mr White said encouraging sector-specific, on-the-job training, was central to building the state’s skills capability to the level needed to restrict the importation of expertise to a minimum.

One way of encouraging such progress would be to decentralise training away from large organisations, as currently prevails, and provide financial incentives such as tax breaks to private employers to train workers directly.

“I don’t think just deciding to have a training school, which is proposed in government circles now, is the answer,” Mr White said. “Give them a real job and train them on the job. This is a plan to increase the opportunities for training and skills development within our own workforce, and not have to import it.”

That view was endorsed by Mr Hutchinson, who said training was a vital component in maintaining the long-term competitiveness of Australian industry across the board.

Local content

Another key issue for local resources services companies is the increasing outflow of contracts to rival firms overseas, particularly in the fabrication and high-end engineering sectors.

While past LNG developments in WA, such as Train Four at the North West Shelf, boasted local content levels as high as 72 per cent, current projects are unlikely to do better than 50 per cent.

Supporting such a gloomy outlook, a report by a WA parliamentary committee earlier this year found more than 90 per cent of all engineering and design work on new LNG plants planned in WA was likely to be carried out overseas.

Mr van der Meer said the scale of imminent LNG development made direct government action imperative if WA was to avoid wasting this once-only opportunity to make the most of the boom, even if that meant mandating a minimum level of local participation in all aspects of a project, notably engineering.

“If we don’t get support, especially for the white-collar engineering side, from government ... we’ll be left with holes in the ground and nothing else to show for it,” he said.

Mr White echoed those sentiments, arguing mandated local content requirements would ensure that Australia received a lasting benefit from its resources wealth.

“It all comes back to really having a strong policy on local content and having some (key performance indicators) around that ... to actually force the issue,” Mr White said.

RCR chief Paul Dalgleish agreed, noting that local fabricators currently had virtually no chance of competing with foreign fabricators with lower labour costs.

“We are too expensive compared to offshore ... so I think it’s a fact of life that there’ll be no fabrication done in Australia within a few years,” Mr Dalgleish said.