In 2009 resources projects comprised approximately one third (ie $23bn) of total engineering construction. Roads, bridges, ports and railways together make up another third. Water, electricity and telecommunications make up the final third.

Now back to ABARE's list of resource projects. Currently there are 361 projects listed, each greater than $50m. Of these projects $109bn are committed, in other words they are management and government approved, financed and underway. That's close to five years worth of construction work by 2009 levels. Furthermore another $249bn are waiting in the wings for approval - more than ten years worth of work by 2009 levels.

The committed projects include: -

 ·     $70bn energy projects including

o        $43bn Gorgon Liquefied Natural Gas LNG

o        $12bn Woodside Pluto LNG

o        $5bn North West Shelf Rankin B

·     $10bn Coal and coal infrastructure projects

·     $24bn minerals projects including

o        $5.2bn CITIC Sino Iron project

o        $5.7bn BHP Billiton iron ore rapid growth project

The projects waiting in the wings for approval include 16 LNG projects. Several of these are Gladstone coal seam methane projects, where coal seam gas will be liquefied for export. Further WA based LNG potential projects include Pluto2, Wheatstone, Browse, Icthys and Sunrise projects.

BHP's massive Olympic Dam expansion is still undergoing feasibility studies but the whole project and subsequent stages could cost $10-20bn. Another nine iron ore projects each worth $1.5bn+ are under consideration. A further 71 coal projects are under consideration.

This massive backlog of projects will place considerable stress on Australia's ability to build it all. Obviously not all projects will proceed and some may fall victim to changing economic circumstances. There are many threats to these projects including:-

• Weakness in the Euro zone slowing the global economy and placing further constraints in finance. However gradual strengthening of the Asian and US economies is likely to stop the Euro contagion spreading globally.
• The Resources Super Profits Tax. As discussed last week, the miners have a strong case for arguing that the RSPT will deter projects.
• A downturn in Chinese demand. Some commentators claim the Chinese economy is a bubble, the next Dubai, and due for a slowdown. We do not agree but we'll look at this in a future CostWeb.

 Forecasts by the Construction Forecasting Council (CFC) for overall engineering construction capital expenditure are shown in the following graph. These show engineering capital expenditure growing from $67bn in 2011 to $93bn in 2018. The CFC bases its forecast on those projects that are most likely to proceed.

 

Engineering capex set to grow

The additional capital expenditure will require a growth in the workforce of engineers, trade labour, supervisors, contract administrators and procurement.

Our estimates indicate that by 2014 a 20% growth in the engineering construction workforce will be necessary, and a 34% increase by 2018, to deliver the projects in the forecast. In other words the construction workforce will need to keep growing by close to 5% per annum. This compares with total employment growth of around 2% per annum.

The degree to which additional workers in these sectors may be sourced will be heavily dependant on: - 

• Skilled migration. However individual migration quotas will limit the extent to which various occupations can arrive.  Currently skilled migration may add 1% per annum to the workforce.
• Ability to use foreign contractors and labour. In some cases an overseas contractors may be allowed to temporarily import skilled labour for a task, where local equivalents are not available. This is likely to be subject to stringent scrutiny and negotiation with the unions.
• Migration of workers from other sectors of the economy. Given the harsh conditions and remoteness of many mining and energy projects, wages and allowances will increase to attract labour.
• Ability to move the work offshore e.g. offshore fabrication and offshore engineering and design.  Where workers, managers and engineers are needed locally at the workplace or nearby there are still likely to be shortages.

Without the ability to easily increase the workforce the cost of manpower is likely to continue pushing up especially for contractors. Skilled labour generally operates under negotiated time based awards, which helps control labour rates for the duration of the award, giving certainty to projects. With contractors this may not be possible. Organisations such as the Housing Industry Association are already indicating that labour skill shortages are at pre-GFC levels. Once the dust settles over the RSPT and the Euro crisis the demand for workers is likely to re-emerge as as major issue, Manpower shortages will once again apply substantial upwards pressure on construction prices. 

 By Gary Emmett