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Adrian Hart, associate director, BIS Oxford Economics.
Adrian Hart, associate director, BIS Oxford Economics.

Construction market trends: What does it mean for the quarrying, concrete and cement industries?

As eastern Australia enjoys an ‘infrastructure boom’, economist Adrian Hart discusses the capacity and capability challenges for the construction materials industry over the next five to 10 years.

Adrian Hart is the associate director of BIS Oxford Economics. He manages the company’s building, and infrastructure and mining units, which provide research and forecasting studies for the building and construction, civil infrastructure, and maintenance and mining sectors across Australia.

Hart is also involved in privately commissioned research studies and consulting exercises, including construction costs analyses, escalation forecasts and workforce capability studies.

He regularly presents to senior management of organisations operating in engineering construction, maintenance and mining, and has been a presenter at industry events for Roads Australia, the Australasian Railways Association, the Civil Contractors Federation, and Infrastructure Partnerships Australia.

What is the key message that you will deliver at the conference?

The key issue is one of capacity and capability. We still have a lot of construction work expected. It’s going to rise much further over the next five years, particularly in road, rail and non-residential building. A lot of these construction sectors tend to be quite materials-heavy when it comes to quarry products, so the demand for these construction materials won’t abate anytime soon. We have to make plans for the best access of these materials without blowing out the cost of projects and ensuring we have a sustainable industry into the future.

Could you explain what BIS Oxford Economics’ building and infrastructure and mining units do?

BIS Oxford Economics is an economics consultant forecaster but to understand the economy well you have to understand how investment moves. Investment is the big swing variable in the economy. It can go up and down sharply, so what we do is concentrate a lot of attention on investment.

We’ve set up the building, mining and infrastructure units to understand the outlook for building activity. Construction is the real economic consequence of investment, it has the biggest pull on local skills and resources and the biggest multiplier impacts on the economy.

"Construction is the real economic consequence of investment, it has the biggest pull on local skills and resources and the biggest multiplier impacts on the economy."

If we can understand the outlook in a very detailed way for construction activity through the work of these units, not only is that great for an understanding of the construction industry and all its suppliers, it also makes us pretty good economic forecasters because when investment is rising, the economy is generally going well. We’ve seen it in the boom and bust states, it’s usually a matter of what’s going on in investment at that point in time.

Apart from very detailed construction forecasts by region, sector and by who funds and does the work, we also provide high level advice to the public and private sectors. We do a lot of workforce capability and capacity pieces and analyses, and we also report on price escalation because that tends to be the consequence if we don’t get the demand/supply balance right. We do a lot of work in cost escalation at the national, state and even local levels.

We did a major piece of work on the New South Wales construction industry for Infrastructure NSW1 earlier this year – its message applies equally to other jurisdictions, ie construction materials was one of the areas where there were fears, from contractors and suppliers, about whether or not we could meet the demand going forward.

While the private sector generally feels confident about being able to meet demand, it recognises that if we try to do things too quickly, we will increase costs because we have to transport materials from further away and work out how to deliver them. Having a good plan and pipeline and industry certainty is important but we also need to have supply in the right places.

Australia is experiencing an infrastructure boom, particularly in the eastern states. However, the building unit is warning that Australia will experience from 2019-20 its sharpest contraction in residential building commencements since the GFC. How do you explain this apparent contradiction?

The construction industry has a lot of different segments. We expect high density residential building commencements will fall about 50 per cent nationally over the next two years, driving a 10 per cent decline in total residential starts. That’s quite significant but at the same time we have other parts of the building and construction industry that are going to power ahead.

Non-residential building will rise because there’s a lot of investment taking place in commercial and industrial building, as well as social and institutional building, and there’s also continued growth in segments of the engineering construction market. Here, transport continues to grow. We’re still bubbling along at $20 billion per annum in road construction work and we think it could get as high as $24 billion over the next few years. In rail construction, we’re going to see a near doubling of activity over the next five years.

There will be a contraction in residential building but we are still facing a challenge because the non-residential building and engineering construction markets are growing. That’s where the key demand and growth drivers for quarry products and materials will be.

Even after the decline, dwelling commencements will still stay high. We expect the trough in dwelling commencements to be around 170,000 still by 2020, which is a high number historically. If you look at residential commencements in 2009, there were just 132,000. We’re not saying the residential market is going to sharply decline but we point out that we need to be building about 196,000 dwellings a year just to keep up with population growth. So 170,000 is underperforming on that basis and eventually we think the residential market will recover because we’ll be demanding those houses.

The downturn in residential builds is going to be offset by higher non-residential building activity and we’re going to have much higher transport investment over the next five years – and that also is very quarry product-intensive. It’s still a capacity challenge that we’re going to have to meet. We’re still going to see high levels of residential builds in historical terms – except now we have to match it with higher levels of non-residential building and transport investment.

Which sectors of the economy will see higher levels of non-residential commencements? Will Victoria and NSW continue to be drivers of this activity?

What we saw when the mining bust occurred is that the dollar fell, and those state economies which had been damaged by the high dollar during the mining boom – particularly NSW and Victoria – benefitted greatly once the dollar fell. We also saw populations shift around, ie a lot of people moved from Western Australia to Victoria. These states started a strong economic recovery in the wake of the mining bust, and it was accelerated by state government plans to sell assets and build infrastructure to stimulate their economies.

So what you had was a highly stimulatory environment just at the time that these economies were turning around, both in terms of population and economic growth. What the mining boom meant was that we hadn’t invested in NSW and Victoria for up to a decade because basically their economies weren’t performing well and all of the investment attention was being focused in the mining boom states. So there was a situation where a lot of investment was necessary.

In the non-residential building space, there needs to be more investment in office building - we’re seeing more demand for office building space as the economic situation has turned for these states. Finance and a lot of white collar industries that are predominant in NSW and Victoria are booming.

With the lower dollar and China’s rise, tourism and accommodation is going through the roof! And unfortunately we haven’t updated a lot of those roofs - to pardon the pun! - in NSW and Victoria, and indeed around the country. We’re seeing a strong pick-up in the accommodation space because of foreign enrolments in education, which is one of our strongest service exports behind tourism. What we’re seeing in the non-res building space is a lot of building to cater for that transient population of foreign students.

Another area of non-res building that is performing really well is in transport building, ie the infrastructure that supports roads and rail. When we build railway lines, we need to build railway stations and other transfer and other modal interchanges.

Airports are also a significant part of transport builds. There’s a procurement process in place for the new Western Sydney Airport and there’s going to be expansions of existing airports to cater for the growth in tourism and development of freight.

We’re also seeing strong growth in the health and education space. Population growth in Australia has been very strong, and we’re at 25 million people now. You only have to go back to 2002 when we released our first intergenerational report as part of the Treasury modelling that suggested we wouldn’t hit 25 million people until the year 2042!

Here we are in 2018 – and we’re at 25 million already! So the sheer drivers that places on social infrastructure is enormous. We need to build more schools, more hospitals. Some governments are already starting to do that.

We’re not building the social infrastructure to keep up with population growth. Transport is part of it but we have a big jump in health commencements coming through and it’s going to have to be sustained at that high level over the next five years.

Adrian Hart, associate director, BIS Oxford Economics.
Adrian Hart, associate director, BIS Oxford Economics.

Actual and forecasted value of total building commencements to 2023.
Actual and forecasted value of total building commencements to 2023.

What can governments do to co-ordinate investment in built assets and to avoid boom/bust cycles?

When we look at capacity and capability, industry and increasingly government is realising that there is a need for steady investment over time that properly deals with our population and economic growth – not big waves of infrastructure builds and catch-up spending. Unfortunately, our history on this point isn’t a good one because we have severely underestimated our population growth and haven’t put the appropriate funding mechanisms in place to build infrastructure at the right times. It means we go through periods of catch-up. Right now we’re trying to catch up on a lot of infrastructure spend to make up for decades of under-investment.

These periods of catch-up can be quite intense and very unco-ordinated. Governments like to think they have a good pipeline going forward but when NSW is competing for the same resources with Victoria and Queensland, we end up butting heads. We’re also not getting the best quality outcomes because we’re stretching industry so hard all at once. For example, we tendered major pieces of work on Sydney Metro and Melbourne Metro and we ended up with sub-optimal outcomes because we didn’t get an appropriate number or high quality of bids.

In terms of overall co-ordination, governments have to think inter-jurisdictionally. They have to recognise they are competing for the same resources when it comes to big, iconic infrastructure projects. Governments can do a lot more to co-ordinate their investment by just being aware of what is going on in the market. Some NSW agencies are recognising that there’s value for money if they can put out a tender at a point in time when there’s not a lot of other work going on.

We really need to concentrate on the construction pipeline, and we need a better funding system that promotes steady investment over time. We need to think about how we can sequence projects effectively so that we’re not going to overstretch the construction industry and its supply chain – particularly the quarrying industry.

We did an expert report for Infrastructure NSW that it relied upon when it developed its State Infrastructure Strategy (in early 2018) and it was specifically geared around capability and capacity. Materials and transport was a big issue, in terms of skills, logistics and ensuring we had a good demand/supply balance for construction materials.

Many governments do not have a good knowledge of the supply/demand balance for construction materials within their jurisdiction. They may not know or have all the information they need to prepare appropriate plans for the timely development of new quarries to support long-term infrastructure projects. They’ve talked up having a long-term infrastructure pipeline and there are projects that go out more than 10 years from now, but have they done the same work in registering a construction materials pipeline?

My argument is no, they haven’t concentrated as much there as they should have.

NSW is now thinking very hard about that supply/demand balance for the next 10 years and how it’s going to solve problems such as the decline in natural sand in the Sydney market. Where do we get sand from? It used to be Kurnell and Emu Plains, now we’re getting it out of Stockton, above Newcastle, and trucking it down. In terms of construction materials, we’re bringing up a lot of it from quarries that have been established down south, and been railed and trucked into Sydney. We need to think a lot more about those plans.

In your expert report for Infrastructure NSW, what were some of your findings and advice?

We definitely recommended a construction materials plan and strategies for developing suppliers or areas where supply could be sought, to make sure Infrastructure NSW could meet those demands.

The other key issue we identified was simplifying approval processes for quarries, concrete plants and other manufacturing facilities. We interviewed construction materials suppliers who told us that generally for a quarry – from the instigation of the plan to the actual production of construction materials – it can take up to 10 years, and I think part of that comes down to the intensity of environmental processes and local impacts.

We recommended bodies such as Infrastructure NSW and infrastructure-equivalent bodies in other jurisdictions could help quarries navigate these hurdles as quickly as possible, even if it means assisting them with their environmental planning and other issues. This would shorten that time frame from 10 years to something lower.

We also discussed whether there was scope for quarries, concrete plants and other manufacturing facilities to move to longer hours of operation. We had several examples of limited hours of operation. If we had 24 hours of operation, that would substantially provide an increase in capacity and create transport logistics benefits because we could deliver more capacity in non-peak periods.

We also talked about strategies for waste products and recycling. All these big tunnel projects, for instance, are going to produce large volumes of spoil. Is there the potential and enough capacity in the recycling industry to recycle and reuse some of this spoil in construction materials?

It’s also worth noting that some construction materials derive from by-products of other industries, eg slag from steel production and fly ash from coal-powered generation. We may not have as much of these by-products in future if there isn’t a future for the steel or coal industries. That means the high intensity of the energy we use to make construction materials becomes a challenge, and we have to rely on overseas supply chains to fill some of the gaps.

Total and projected dwelling commencements by state to 2023.
Total and projected dwelling commencements by state to 2023.

Total and projected non-residential building commencements by state ($Bn, 2015/16 prices) to 2023.
Total and projected non-residential building commencements by state ($Bn, 2015/16 prices) to 2023.

We seem to be in a “two-speed economy” again as we were with the mining boom a decade ago. Which states outside of NSW and Victoria will benefit from renewed building activity, and which states will go backwards?

NSW and Victoria will remain very strong. Western Australia and Queensland will start coming back and saying, “We want to build things too”.

Western Australia has been at the bottom of the cycle but they will pick up again. In fact, mining investment is rising again, we’re seeing simultaneous developments of iron ore sustaining capital projects in the $1 billion-plus category. A couple of recent decisions, such as the Federal Government’s decision to award WA more GST-based revenues, means there is a willingness to support further infrastructure spending there. There are further parts of WA’s Metronet system and more road projects coming through. So while they’re at the bottom now, construction activity and economic growth will rise in WA.

Queensland went through the mining bust and probably hit bottom a year to 18 months ago, and started recovering. They’re now seeing pick-ups in non-residential building and engineering construction. Roads have been driving it initially but now they’re going to start work on cross-river rail, so rail is going to pick up. And Queensland also has a renewable energy boom going on. More than 45 separate renewable energy projects – across wind and solar – are being built in Queensland right now.

In the smaller states like South Australia, we’re unfortunately going to see weaker levels of activity just because their population growth is weak and it depends on the timing of a number of key projects. In South Australia, a lot of it is timed around the North-South corridor of road construction that they’ve been building for quite some time. There’s some big projects to come through in that but it will be staggered over a period of time. At the moment, we think SA is probably close to the peak of construction work and it might come back a little bit over the next couple of years.

Tasmania has been strong over the last year or two but probably will ease back.

The Northern Territory is likely to fall into a hole because when it finishes the Icthys LNG project, the total construction market will fall. There are some other mining projects coming through but it won’t be as prolific as it has been while the LNG project was on.

When you go round state by state, there are a couple of really strong states in NSW and Victoria, and they’ll be joined by Queensland and WA. The other smaller states will probably struggle to sustain their levels of construction work into the future.

While at the moment, it’s still “two-speed”, the economy is going to become a bit more balanced in the next couple of years.

Which sectors of the engineering construction sector will be the “big winners” from building activity? How will the quarrying, concrete and cement industries fare?

The big winner in the next five years will be rail, which has been growing over time. It harks back to what I said about catch-up investment. We’re doing a lot of it now – metro rail, light rail, freight rail, inland rail – and over the next decade, it will all stack up and drive an enormous “tsunami” profile of work. It may not be a fault of the quarrying, concrete and cement industries but I’m not sure if we’re going to have all the capabilities across a range of industries to deliver that much rail work – literally because we’ve never done it before. It’s going to be a challenge to do that, particularly if the road industry remains strong.

There’s still a lot of big road projects in the pipeline. NSW is planning for an even bigger project than WestConnex in the Western Harbour Tunnel and Beaches Link – we’re talking another $10 to $15 billion of road construction – and Victoria is talking about Northeast Link. So the roads industry isn’t going away, it will be the biggest pull on the quarrying industry. We’re going to continue to do $20 billion per annum in road construction work as well as $7 billion-plus in road maintenance work.

We’ll also see growth in other engineering construction sectors that are less quarry-intensive, eg mining construction, harbours, water and sewerage, telecoms. There’s going to be a lot of activity in 2019-20 in the electricity market but unless there is a good policy outcome on the National Energy Guarantee, that kind of policy uncertainty will stall future investment. Quite a bit of quarry products go into energy projects, especially the windfarms that require turbines and access roads. That will be an ongoing concern if we don’t get the energy policy right.

Adrian Hart will deliver his presentation at CMIC 18 at the International Convention Centre, Sydney on Thursday, 20 September.


Reference & further reading

1. BIS Oxford Economics, 2018. NSW Construction Delivery Assessment – Capability & Capacity. https://insw-sis.visualise.today/documents/about/NSW_Construction_Delivery_Assessment_Capability_ and_Capacity.pdf



















Wednesday, 14 November, 2018 10:48pm
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