02/02/2009 - 06:11

Project deferrals mount up

02/02/2009 - 06:11

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The value of projects in Australia has declined by $37.2 billion since the September 2008 quarter, with new projects failing to replenish those being completed.

Project deferrals mount up

The value of projects in Australia has declined by $37.2 billion since the September 2008 quarter, with new projects failing to replenish those being completed.

Access Economics' latest issue of Investment Monitor, released today, shows a notable decline in the value of projects in the database with the number of project deferrals mounting up.

However, the latest figures show that Western Australia still comfortably leads the way in the value of definite investment projects, despite major projects now being less profitable, such as the massive $11.2 billion Pluto LNG project and the $2.5 billion 'fifth train' on the North West Shelf LNG development.

Since September 2008, total project values in Australia have moderated from a total of $644.4 billion to $607.2 billion.

"A downturn in investment had certainly been on the cards - Australia's rate of business investment relative to output had moved to an unusually high level, meaning that investment would have to pull back at some point anyway," Access Economics said.

"Accelerating that decline is the global economic crisis which is cutting sharply into capacity utilisation, and hence the need for more investment."

While mining and metals projects had been the growth engine for overall project investment, the value of definite mining and metals projects is now falling, Access Economics said.

A number of major projects have been shelved over the past few months, which is likely to result in a sharp fall in business investment over the next two years despite engineering work holding up over the next six months.

Major projects to be recently shelved include Shell and Anglo American's $5 billion coal-to-liquids project in the Latrobe Valley, BHP Billiton has delayed deciding on its $6.3 billion Olympic Dam expansion until 2010, Aloca's Wagerup alumina refinery expansion has been put on hold, and Western Power has delayed the start-up of the $375 million Cockburn 2 gas-fired power plant by a year.

"But it's not all bad news. One bright spot is that construction costs in Australia will get more affordable. Unfortunately, imported equipment costs will be higher due to the fall in the Australian dollar," Access Economics said.

"The other good news is that governments will keep investing, and indeed may ramp up their investment spend.

"Provided that the projects selected pass the cost-benefit test and can be delivered fast enough to assist in defending against the downturn, then the timing is right to lift government spending on infrastructure.

"Increased government investment won't fully offset the slide in business investment over the next two years - but it will provide decent help."

Under the more subdued investment environment, all states are expected to be affected but it is anticipated to having a larger effect in those where resources investment has been the strongest, namely Western Australia and Queensland.

"Commercial building is solid at present, but is at risk going forward, being hit by both a lack of finance for new projects, and retail and office markets which now look well supplied. Economic infrastructure looks the best chance for investment growth going forward," Access Economics said.

The Investment Monitor report said despite the downturn, mining investment remained "very strong", but the value of definite projects was melting fast amid the slump in commodity prices.

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