The report showed activity in Australia’s major projects sector - defined as projects valued at $A100 million or above - rose by an estimated 22 per cent across the 2021-22 financial year. Cost escalations were a factor in the increase. Rail was the biggest driver with roads, hospitals and electricity also contributing.
All states and territories are expected to see major project investment rise strongly over the next two to three years, aside from Western Australia which outperformed in 2019-20 and 2020-21 on the back of several multi-billion-dollar iron ore projects.
There are some encouraging signs supply constraints have started to ease. ANZ Research suspects overall inflation may have peaked for construction inputs - but does not expect prices to return to anywhere near previous levels.
Constraints are clear: labour markets have tightened significantly, energy and material prices have spiked, and shipping costs and delivery times have blown out. In the second quarter of calendar 2022, 90 per cent of construction firms reported labour was a constraint on output, according to NAB’s business survey. Capacity utilisation was above 85 per cent.
Despite the huge pipeline, particularly across residential and infrastructure, AiG’s Performance of Construction Index is in contractionary territory, while the input price index is near series highs.
Australia’s producer price index (PPI) was up around 9 per cent year on year for engineering construction in the second quarter, easily exceeding the overall PPI (5.6 per cent year-on-year) and CPI (6.1 per cent).
Construction insolvencies were 11 per cent higher in the second quarter of 2022 compared with the same period in 2019. While many are in the residential sector, the challenge of fixed price contracts in an environment of extreme input price growth is not isolated.
Some inputs, like oil, are experiencing outright deflation. While overall inflation may have peaked for construction inputs, there will be volatility and ANZ Research does not expect prices to return to anywhere near previous levels.
One reason for this is even as supply chains normalise, demand will continue rising strongly, requiring supply to catch up. Not only is there a synchronised upswing in demand for infrastructure domestically but global competition for the limited pool of workers, materials and equipment is also increasing.
The significant drag on China’s economic growth from COVID-19 restrictions has prompted the Chinese government to frontload infrastructure projects, including investment in renewable energy and smart grids. Plans in the US and Europe will release trillions of dollars in infrastructure spending over the medium term. This will put upward pressure on input prices.
Globally, the acceleration in decarbonisation plans will add to infrastructure activity. In Australia, rebuilding after widespread flooding earlier in 2022 is also adding pressure. One headwind is rising interest rates, which increase the cost of debt, and tighten access to finance.
This story is an edited excerpt from ANZ’s most-recent Australian Major Projects report. You can read the original article on ANZ Institutional.
Catherine Birch is a senior economist at ANZ.