22 Sep 2021
Engineering construction data for the second and third quarter of 2021, released since ANZ Research’s Major Projects report in September, holds some positive news for the sector.
Victorian infrastructure activity continued to lift in the third quarter despite the Delta lockdowns. Electricity investment (largely in renewables and supporting infrastructure) has continued to pick up and road and rail work done has moved higher.
" Completed work isn’t rising quickly enough to meet the ambitious 2021-22 infrastructure agenda set by governments and the private sector alike.”
The bad news is completed work isn’t rising quickly enough to meet the ambitious 2021-22 infrastructure agenda set by both governments and the private sector. And some of the issues previously highlighted around domestic capacity to complete the volume of work, cost management and supply-side challenges are getting worse.
Data from the Australian Bureau of Statistics (ABS), Australian Industry Group (AiG) and National Australia Bank (NAB) consistently show very strong cost growth. Even before the pandemic, the Grattan Institute noted Australia’s transport infrastructure costs exceed the OECD average.
NAB’s fourth quarter 2021 business survey showed the construction industry recorded the highest capacity utilisation since 2008. In a good sign, capital expenditure has risen to a quarterly average of $A1.8 billion over the first three quarters of 2021, the second-strongest run on record, and firms expect a further rise over the next three quarters. This will expand the industry’s capacity but it’s unclear whether it is fast enough.
Labour was reported as a constraint on output by almost 86 per cent of construction businesses in the fourth quarter. The job vacancy rate is at a record high across industries. These labour trends limit how much work can be done.
ANZ Research also notes some significant updates to key major projects since the September 2021 report. The largest commitment, the $A16.5 billion Scarborough liquefied natural gas (LNG) project and Pluto expansion, received final approval in November, firming up the major oil and gas project pipeline. But a number of projects have been slower to get underway than ANZ Research had factored in.
Positive charge for electricity
Wind and grid solar energy generation in the National Electricity Market (NEM) increased by 20 per cent in 2021, according to the Australian Energy Market Operator (AEMO). This now makes up 17 per cent of the NEM generation mix.
Over the past four years, wind generation in the NEM has more than doubled and grid solar generation has increased almost 14-fold.
After a decline in electricity investment over the past couple of years, activity is turning around. Third quarter work done increased to the highest level (nominal terms) in Victoria and Queensland since late-2018. Work done in New South Wales remained elevated and the state has the largest pipeline of work yet to be done thanks to Snowy Hydro 2.0.
Since the Major Projects report in September, the Victorian government gave final approval for the $A2 billion Golden Plains wind farm, the Victorian Big Battery was completed and early works have begun on the first stage of the Goyder Renewables Zone in South Australia. But the New South Wales-South Australia interconnector and QLD’s MacIntyre wind farm look like they’ll start construction a little later than ANZ Research had factored in, making it difficult to realise the near-term potential pipeline.
The Offshore Electricity Infrastructure Bill 2021, passed by Parliament in November, will enable the development of offshore renewable energy projects, including wind farms, wave and tidal power, and ocean thermal energy facilities. The most immediate effect will be on offshore wind farm development, with a number of projects already in planning, increasing the potential major renewable project pipeline over the medium-to-long-term.
A change in federal government, should it occur, could hold some upside risk for the major projects outlook. Aligning federal policy more closely with state-level policies on things like electricity grid investment and 2030 emissions reduction targets will provide greater certainty for the sector.
Catherine Birch is Senior Economist at ANZ
The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.
22 Sep 2021
15 Feb 2021