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Australia Infrastructure Report Q3 2011
Business Monitor International, May 2011, Pages: 77
Business Monitor International's Australia Infrastructure Report provides industry professionals and strategists, corporate analysts, infrastructure associations, government departments and regulatory bodies with independent forecasts and competitive intelligence on Australia's infrastructure industry.
BMI View: Despite strong growth in Australia’s construction industry in 2010, we still expect to see a slowdown in 2011. Confidence in the country’s construction sector ebbed away over late 2010 and early 2011, in tune with falling contract awards. While we still believe there is significant medium-term potential in Australia, and while certain sectors are still going strong, the short-term outlook is for only muted growth in the construction sector as a whole.
Australia’s construction industry net output surprised to the upside in 2010, with real industry growth of 5.7%. Although we were optimistic at 3.7%, growth accelerated significantly in the second two quarters of the year, with 8% y-o-y growth recorded in Q3 and Q4.
Despite this strong growth trajectory, we expect this to slow significantly over the second half of the year, as the impact of falling contract awards, which started in June 2010, starts to hit industry net output. As of March 2011, new orders in the construction industry had declined for 10 consecutive months according to the performance of construction index (PCI), compiled by the Australian Industry Group and Housing Industry Association. This will eventually seep through into construction industry value growth, and, consequently, 2011 looks likely to be a difficult year for the sector. We forecast growth of just 0.8%. Although short-term woes are weighing down the industry as a whole, there are a couple of sectors which are currently outperforming. Transport infrastructure is perhaps the most dynamic sector in an industry which is seeing little in the way of contract awards. The key source of demand is the private sector, specifically the mining industry. This has catalysed demand for freight transport infrastructure, with the expansion of port capacity across Australia, and the upgrading of rail track, to cater for strong demand from China.
Indeed, the infrastructure sector has outperformed the construction industry as a whole on the PCI, with it being the only sector to register an increase on the index over the past six months.
Consequently, in 2011 we expect the subsector to register stronger growth than the sector as a whole, with real growth of 3% forecast. Whilst the residential sector, which accounts for around a third of the market is expected to experience a price correction as demand cools, and the non-residential building sector suffers from reduced private sector investment, the infrastructure sector should outperform. This is partly due to demand for freight transport improvements, but also due to public sector investment into urban road and rail projects. However, we expect the level of investment to fall over 2011, as fiscal stimulus is wound down, and as infrastructure funding, originally earmarked for other projects already in the pipeline, is re-distributed for flood reconstruction, following the devastating floods in Queensland.
Long-Term Optimism Still In Place Despite the weak short-term outlook, we are still bullish about the medium term, with construction industry real growth expected to average 3.6% a year between 2013 and 2020. There are a number of factors guiding our optimism:
- Mining sector investment has been expanding rapidly in Australia, as a result of rising demand for coal and iron ore from China. Although this is expected to slow over the coming years, it is resulting in substantial investment in the freight transport network, which is underdeveloped, especially in Western Australia, where the iron ore mines are located.
- Required investment in the electricity sector, running to an estimated AUD100bn between 2010 and 2020, will necessitate investment into electricity infrastructure. In addition, it is likely that over the medium term some form of carbon reduction policy will come into place. If introduced, this could significantly increase investment over coming years, as Australia's power mix is heavily reliant on coal.
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