Construction Outlook: Solid pipeline to lift costs and test capacity

Australia’s leading construction companies are forecasting a continued solid uplift in major non-residential project work over the course of 2018 and 2019, according to the latest Australian Industry Group/Australian Constructors Association Construction Outlook survey released today.

After recovering by 5.2% in 2017 (current prices), the total value of non-residential construction work is forecast to rise by 9.3% in 2018, followed by a further lift of 8.0% in 2019.

Growth will be led by a strong pipeline of non-mining infrastructure work in line with the significant growth impetus from public sector spending on transport infrastructure projects. The actual value of this growth, however, is likely to be tempered by rising cost pressures – particularly escalating energy input costs and supplier price hikes related to the relative strength in commodity prices.

Australian Industry Group Chief Executive, Innes Willox, said: “Australia’s major constructors are building on the increase in activity seen over the past eighteen months with further gains expected for the rest of this year and into 2019. With the wind-down in mining and energy-related engineering work all but complete, new activity – particularly in road and rail transport projects, other civil works, apartment building, telecommunications and commercial construction – is not just filling the void; it is underwriting aggregate growth in the activity of the major construction companies and in the size of their workforces. While the composition of activity is set for further changes heading into 2019 – most notably with a significant fall in multi-level apartment building – overall growth in both business activity and the construction workforce is set to continue. With conditions buoyant, there are clear signs of emerging supply constraints, input price rises and wage pressures and increasing reports from constructors about their difficulties finding skilled staff,” Mr Willox said.

Australian Constructors Association (ACA) Executive Director, Lindsay Le Compte, said: “Implementation of the projected forward pipelines of government
infrastructure projects would enable the industry to plan its activities with some level of comfort over at least the next decade. It certainly seems that governments are committed to working with industry to ensure that there is adequate capability and capacity to deliver the large pipelines of infrastructure projects now being announced. An example of this is the NSW Government’s recently released ten-point Action Plan for collaboration between the Government and industry. This is a refreshing development on the part of the NSW Government that will lead to greater certainty in the delivery of infrastructure projects over the longer term. The announcement also complements the work the ACA has undertaken in conjunction with key NSW and Victorian government agencies through the recently formed Construction Industry Leadership Forum,” Mr Le Compte said.

In other survey findings, Engineering construction is forecast to remain a key driver of growth, with total turnover rising 8.4% in 2018 and 12.6% in 2019. This reflects continued high levels of work done on major road and rail projects, led by various big-ticket projects across the eastern states, with solid support from telecommunications infrastructure.

Strong growth is also projected to continue in the multi-level apartments sector in 2018 (+14.8%), but the value of work is set to turn down sharply in 2019 (-16.6%). Key Points from the Ai Group / ACA Construction Outlook survey:

 The latest Australian Industry Group/Australian Constructors Association Construction Outlook survey of the non-residential construction industry found that after recovering by 5.2% in 2017 (current prices), the total value of turnover from major project work is forecast to rise by 9.3% in 2018, and a further 8.0% in 2018-19.

 While the mining investment downturn remains a drag on industry conditions, its negative impact is diminishing with a marked slowdown in the rate of decline in resources-related engineering construction expected in 2018. Weakness will be
concentrated in the oil and gas processing sector (-55.6% in 2018 and -35.8% in 2019) as major LNG projects are completed. A slower fall is predicted in turnover derived from mining projects, with a decline of -10.1% in 2018 improving to a slight upturn of 2.7% in 2019.

 Higher workloads and increasing investment demand will also lead to further workforce expansion, with total employment in major construction expected to rise by 2.9% in 2018 and by a further 2.7% over the first half of 2019 (this follows a rise of 4.3% in the year to February 2018).

 Businesses are reporting worsening labour shortages, with 66.7% of respondents reporting either ‘major’ or ‘moderate’ difficulty in recruiting skilled labour in the six months to March 2018, up from 63.6% in the previous six months. Sourcing of sub-contractors has also grown as a key concern, with the proportion experiencing ‘major’ or ‘moderate’ difficulty increasing to 66.7% in the six months to March 2018, up from 50.0% in the previous six months.

 Pressures from labour costs are increasing, with 57.1% of respondents reporting either ‘major’ or ‘moderate’ increases in direct labour rates in the six months to March 2018, while 47.7% also reported ‘major’ or ‘moderate’ increases for sub-contractor labour rates – up from 54.5% and 45.5% respectively in the previous six months.

 The sourcing of building materials remains a key concern for the industry, with 38.1% of respondents citing ‘major’ or ‘moderate’ difficulty in the six months to March 2018, although this was down from 45.5% six months earlier.

 Reports of increases in construction material costs have also become more widespread, with 47.6% of businesses citing ‘major’ or ‘moderate’ increases in the costs of materials in the six months to March 2018, compared to 45.5% six months earlier. This reflects higher commodity prices and a lift in demand requirements due to the continuing rise in infrastructure investment activity.

Link to full report

Further Comment:

Ai Group: Tony Melville – 0419 190 347
ACA: Lindsay Le Compte – 0417 481 500

Background: The Australian Industry Group Construction Outlook survey was conducted in March/April in association with the Australian Constructors Association, the peak industry body representing the nation’s major construction contractors. The major construction companies surveyed employed approximately 43,000 persons with combined turnover of almost $25 billion.