Robert Mellor will bring out his barometer at the IQA conference to discuss the national outlook in construction activity to 2024. While it might all seem doom and gloom, he predicts the picture beyond the horizon is bright if the industry plans ahead.
Robert Mellor is the executive chairman of BIS Oxford Economics, based in Sydney. He has 40 years’ experience in forecasting building activity, specialising in prospects for the residential property market. He joined (the then) BIS Shrapnel in 1984, was appointed a company director in 1987 and became managing director in July 2007.
In March 2017, Oxford Economics took majority control of BIS Shrapnel and it became BIS Oxford Economics. Mellor continued as managing director until August 2019 when he became executive chairman.
At the conference, Mellor will provide an economic overview of the Australian economy for the next five years, including a discussion of the demographic drivers of construction activity and anticipated performance by states and sectors.
What will be your key message to the quarrying audience?
We are going into a “gap” period in the engineering construction sector, when some of the big projects are coming through but not bringing enough growth. That’s happening at the same time as a downturn in the residential construction market (Figure 1). All the evidence is that players like Adelaide Brighton, Boral, Hanson, Holcim, etc, are seeing a significant correction in demand. So, life will be tough for the next 12 to 18 months. However, residential building and engineering construction activity will rise solidly again in the early 2020s.
The downturn in residential building alone isn’t impacting the aggregates companies – that accounts for 25 to 30 per cent of their demand. There are significant corrections in the engineering construction sector that people didn’t expect.
The industry has also been caught out by a drop in roads activity, which is a big user of quarrying materials, over the past year. We were doing $21 billion of road construction work per annum and we estimate it finished 2019 at $19 billion. So it’s fallen 10 per cent, accounting for a big chunk in demand in quarrying materials. I can understand why quarrying companies are wary.
In your view, how is the Australian economy tracking?
The current numbers are pretty weak, with annual GDP growth as of June 2019 at just 1.4 per cent. We’re fortunate that there is a stimulus of public infrastructure activity happening in markets like New South Wales. If there wasn’t, economic growth would be even weaker. The public infrastructure work is the good news part of the story.
In percentage terms, how much of Australia’s construction activity to 2025 will be public infrastructure, as opposed to private investment?
If you’re basing the question on how much construction activity – ie across residential, non-residential and engineering construction – is publicly funded versus privately funded, then three quarters of that activity is privately funded. Only a quarter of the total construction market is publicly funded. It would be higher for the engineering construction component but that is mostly transport – about 70 per cent of transport work is publicly funded because there are some big road and rail projects that the public sector funds.
However, once you’re outside of transport, every other segment is dominated by the private sector. The utilities sector is 70 per cent privately funded, and that’s including the National Broadband Network. Three-quarters of the non-residential building space is privately funded.
The public sector gets more attention because it drives a big chunk of transport infrastructure. Outside of the NBN, transport projects tend to be the biggest projects of all, and they also include roads – which are highly important to the quarrying industry.
The Federal Government has committed $75 billion in the budget to funding nationwide infrastructure to 2025. However, the Reserve Bank and Infrastructure Australia are urging it to commit as much as $600 billion in the next 15 years. If private enterprise is doing most of the “heavy lifting”, do state and federal governments need to “lift their game”?
The Federal Government accounts for a sixth of all infrastructure spending by governments. It’s the state government programs that mostly drive the public infrastructure spend. The Federal Government contributes to that spend on some major projects, and provides equity in projects like Inland Rail and Western Sydney Airport. Otherwise, most engineering construction infrastructure is state-funded.
When you look at publicly funded engineering construction for the next 15 years, $600 billion is the figure we expect will be spent across all tiers of government. When we look at that on annual average terms, that’s about $40 billion per annum – and we’re not far off that now. In 2018, there was $37 billion of publicly funded engineering construction work. In 2019, we estimate that’s dropped to $34 billion.
What Infrastructure Australia and the Reserve Bank are saying is correct though – we need to lift that spend. We [BIS Oxford Economics] believe that will happen. However, there will still be challenges about how funding is maintained at the state level. How do governments maintain infrastructure spending when the economy goes through a downturn?
Unless governments can find further assets to sell (or go further into debt), they will struggle to fund significant increases in infrastructure work. If the NSW Government, for example, decides in the next three or four years – as the last stage of WestConnex is completed – to sell off that asset completely, then that could free up money to spend on the next significant project. The recycling of assets will continue to be a critical factor for state governments to undertake significant infrastructure investment.
Which sectors of the economy will see the most growth/activity to 2024?
Residential building will still be the fastest sector of growth, from late 2020 to 2024. Based on the net overseas migration data for the first six months of the 2018-19 financial year, it looks like it could have finished around 260,000, which is still a high number. Due to high levels of international student arrivals and some recovery in the number of working visas, we’re probably going to average somewhere close to 250,000 per annum over the next five years to 2023-24. That’s driving very strong underlying demand in dwellings.
We’re predicting that nationally the demand for dwellings in the next five years could be above 206,000 per year, which is way above the likely through this financial year. The trough in terms of commencements might be down at about 153,000 in the current financial year to June next year, which means there then should be a very strong recovery, with demand pressures. There’s a strong likelihood that we could be up above 230,000 starts per year by the 2022-23 financial year and a bit higher after that, possibly 237,000 starts per annum by 2023-24.
Non-residential building will be at a sustained level of activity. Given the ageing population, there will be very high levels of construction activity in health over the next 10 to 15 years. Education should also pick up strongly. Again, state governments have a responsibility in rolling those out.
From a long-term perspective, population growth within 10 to 15 years will be a major driver of strong non-residential building. I suspect engineering construction infrastructure will be a major focus because if we are going to be a country with stronger population growth, then rail, not more roads, will have to be a solution to transport congestion.
On the engineering side, and probably on the total construction side, the strongest growth prospect is in rail, which we expect will nearly double in work done terms over the next five years.
The other sector, apart from roads and rail, is mining. The Australian dollar has fallen yet a lot of commodity prices, apart from iron ore and coal, haven’t lost value. We’re starting to see strong profitability flowing into the mining industry, and you’d expect that will lead to more projects. The states that will most benefit will be Western Australia and Queensland.
So, the growth prospects over the next five years are in transport (road and rail), mining and on the non-residential building side, segments such as health and education.
Are Victoria and New South Wales still likely to be the drivers of construction activity?
Based on the growth rate on the residential front, Queensland will be strongest, followed by WA, which is recovering from a 50 per cent decline in dwelling starts. While WA won’t return to the 32,000 dwelling starts per year it enjoyed in 2014-15, it could be back to 27,500 by 2022-23. Queensland from the end of next year will likely enjoy a 50 to 60 per cent growth rate in activity levels.
There will be recoveries in NSW and Victoria in 2021-22. However, NSW’s past boom was so strong that the next peak won’t be so high. In fact, it could be up to 12 per cent lower. Victoria by 2023-24 will be three per cent below the previous record peak of 2017-18.
Your BIS Oxford Economics colleague Adrian Hart has warned that even if the economy tracks well, there will be challenges in ensuring a steady pipeline of non-residential builds to avoid constraining construction industry capacity. Do federal and state governments need to be more active and collaborative in how they fund projects and co-ordinate investment in built assets?
In the transport infrastructure stakes, there is a mega-pipeline of projects. As Adrian would say, “We’re only at base camp when it comes to the big mountain of transport infrastructure that we’re going to be building over the next decade.” Rail construction is $7.5 billion per annum right now. That’s about double what it was four years ago, and in another three or four years we expect it to nearly double again – to as much as $13 billion per annum. Every state government and the Commonwealth Government have big rail projects they want to roll out.
At the same time, we have road construction, with about $20 billion per annum of work done, and over the next five years that’s going to grow to $27 billion per annum. Again, that’s because of big projects like North East Link in Melbourne, Western Harbour Tunnels, Beaches Link and the F6 in Sydney, major Bruce Highway projects in Queensland, and so on.
Governments are more aware that they can’t tick a box and go “Let’s just accelerate this project” or “Let’s just add another one”. They’re recognising that there is already strain in the market to supply all the resources and skills to deliver these projects. That’s why the NSW Government in the past year came out with a 10-point plan for a more collaborative approach with the construction industry, to build skills and capabilities, and procure projects that encourage participation and make sure the contractor isn’t bearing all the risk.
It’s going to be a challenge for governments to stick to those principles over the next five years. They will need a very healthy major projects industry to deliver big transport projects over the next five to 10 years, and they won’t get that unless they work with industry to ensure there is the capacity and capability to deliver.
What advice can you give producers to take advantage of renewed construction activity?
I urge them to prepare for the next upturn in 2021-22. Yes, there is probably another 12 to 18 months where the downturn in residential construction is going to take the heat out of demand but there is a synchronised upswing set to happen from 2022 to 2024.
Strong transport growth, coupled with a residential building recovery, equates to a cycle for more aggregates demand. The challenges for the industry will be two-fold. Will the industry have the capacity to deliver on that? And – I’m sure the quarrying companies are onto this – can the process for approving new quarries and getting materials ready in time for ongoing developments be streamlined?
When we look at the transport pipeline, it’s a long-term one. The Victorian Government, for instance, is talking about a suburban rail loop program over generations.
Road maintenance is another area – worth $7.5 billion worth of work in 2019 – that is highly quarrying and aggregates-intensive. In the next five to 10 years, there needs to be a lot more work on the rehabilitation of roads. We are seeing a lot more road assets ageing and we’re just patching the roads rather than fixing the roads structure.
I wouldn’t be surprised if there’s a need to increase rehabilitation works, which would be very close to construction work, in terms of their impact on demand for quarrying materials. We have growth in our forecast for road maintenance activity and that’s another reason the transport sector is going to be a positive in the next five years.
Governments will have to devise a resource demand plan and work with companies to make sure they are bringing quarries on in time to meet those demands. Sometimes governments seem to operate in a jurisdictional bubble – they might think about what’s happening in their jurisdiction and that’s important for quarries – but we see this as a national issue later because we’re going to need to bring in more quarry materials from further afield to deliver these projects.