Australian Economic Developments

Key data was released this week on Australian business investment. Private capital expenditure data for Q1 confirmed mining investment continued to slow in early 2014, but there are some signs that non-mining investment may be strengthening. Construction data highlighted that residential investment is thriving, while commercial and engineering construction is weak (as confirmed also in the latest Ai Group-ACA Construction Outlook, released last week). Finally, a government report on resource projects detailed where resource sector investment is slowing but also showed a high level of investment particularly in LNG continues to take place across the country.

Building and structures investment by businesses fell by 7.4% q/q in seasonally-adjusted and inflation-adjusted terms in the March quarter. Spending was down by 2.5% over the year. The majority of mining investment belongs in this category (i.e. building or expanding new mines known as ‘engineering construction’) but there has also been weakness in commercial construction, as evidenced in other data released this week by the ABS.

Across the states, NSW posted a strong quarter of capital spending, with CAPEX rising by 7.6% in the quarter. South Australia also clocked a rise of 4.9% q/q and Tasmania saw a 3.2% q/q rise in the March quarter, although both have been weak over the past year.

Western Australia still accounts for the largest state share of national CAPEX (36.4%), despite the slowing in mining investment which resulted in a decline of 2.1% q/q in March. Queensland experienced an 11.1% q/q decline in quarterly investment, but still accounted for 28.6% of national investment in the quarter. Victoria recorded a small fall of 1.0% q/q in the quarter in real investment.

ABS Construction Work Done, Q1 2014

The total volume of construction work done increased by 0.3% q/q (to $53.6 billion, seasonally adjusted) in the March quarter 2014 to be up 2.6% p.a. Residential construction underpinned the increase in work done in Q1 2014, consistent with the solid lift in building approvals observed over the past year.

Private sector construction work increased by 2.0% q/q in Q1 to be up by 5.0% over the year. In contrast, public construction decreased by 6.8% q/q in Q1 (-7.4% p.a.) reflecting lower social infrastructure works, constrained public sector financing and the completion of some major projects. In a positive sign for the economy, the volume of residential work done rose by 6.8% q/q in Q1 2014, the strongest quarterly growth rate in more than three years. Within the residential construction sector, “other residential building”, including multi-unit dwellings led growth, rising by a solid 12.7% q/q in Q1. Detached house building construction lifted by +4.7% q/q while ‘alterations and additions’ work was broadly unchanged (+0.7% q/q) after rising by close to 3.0% q/q in Q4 2013.

The volume of non-residential work done (including offices, hotels and industrial premises) declined by 1.5% q/q in Q1, but was still 3.1% higher over the year to Q1. However, this segment is highly volatile. The Q1 decline follows growth (albeit modest) in the preceding three quarters, consistent with the recent improvement in the value of non-residential approvals (up by 4.3% over the six months to March 2014).

The volume of engineering construction (mainly resources and transport investment) fell by 1.6% q/q in Q1 to be broadly unchanged over the year. This is further confirmation of a weakening in mining-related engineering construction as resources investment winds back from peak levels. According to the Australian Bureau of Resources and Energy Economics semi-annual Resources and Energy Major Projects publication released this week, the value of committed resources and energy projects has now fallen from its peak of $268 billion in April 2013 to $229 billion at the end of April 2014. The non-mining states were the major contributors to the national growth in construction in Q1 with NSW.

The Mining Investment Slowdown

Mining and resources companies have pulled back from investing in new projects and/or expanding capacity, given the large increase in the supply of commodities seen globally over the past year. Demand for commodities from emerging economies like China and India has remained firm, and in fact continues to rise. But the global boom in investment experienced over the past five years is now yielding greater output, with the increase in supply now hitting markets and depressing commodity prices, despite the strength of demand.

Mining companies first began pulling back on coal projects and more recently on iron ore investment, which means that LNG, gas and oil projects, valued at $197 billion account for 86% of investment currently underway. However, the Bureau of Resources and Energy Economics (BREE) expects further declines in the years ahead as high value LNG projects currently underway like those in Queensland’s Bowen and Surat Basins, Curtis Island, as well as WA’s Gorgon and Wheatstone projects are completed. Despite the slowdown in mining investment, mining sector output will stay firm in the coming years, with BREE reporting Australia currently now has an annual production capacity of 215 million tonnes of iron ore, 43 million tonnes of coal and over 1100 petajoules of gas. Consequently, the economy will continue to benefit through export income, employment, royalties and taxes paid to governments.