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Investment Monitor March 2012: Supply challenges await


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2 May 2012: The March 2012 issue of Investment Monitor saw the total value of projects in the database continuing to increase.  The value of projects rose by $8.4 billion, or 0.9% in the March quarter, and has increased by 20.0% over the past year.

As has been the case for the past few quarters, major investment projects have continued to transition through planning stages.  In March 2012, the Chevron consortium’s $29.0 billion Wheatstone LNG project in the Carnarvon basin got underway, while Inpex Alpha’s $30.8 billion Darwin LNG project transitioned to committed status.  

The near term outlook for engineering construction activity in Australia has therefore received yet another boost, lifting again from what had already been a high level.  Engineering construction activity is the key driver of Australia’s economic growth at present.

These numbers highlight that the challenge for Australia is not finding investment options.  However, the smooth delivery of Australia's massive pipeline of investment projects is not guaranteed.  A range of supply side challenges await.

At present, cost inflation is a key issue for the mining sector, both globally and in Australia.  Over the past year engineering construction price growth in Australia was still relatively subdued, but it is now trending up.  Australia’s experience over the past decade is that cost growth here over time can be substantial.

Going forward, cost inflation will be driven by a number of factors including shortages of key production inputs as projects compete globally for resources and inputs.  If operating and capital costs continue to increase, there is a risk that some marginal projects in the investment pipeline may become uneconomic.

Some 45% of projects in the Investment Monitor database by value are from the mining sector, and it has clearly dominated investment growth over recent years.  

Investment in economic infrastructure (covering transport, ports, energy, water and telecommunications projects) is also benefiting from the mining boom, particularly port and energy projects.

Non-residential building activity is being weighed down at present by soft job markets, rising office vacancy rates and weak retail turnover growth.  With demand drivers still generally weak, that suggests a pickup in non-residential building activity is still some way off.

As has been the case for some time now, resource rich Western Australia and Queensland are well ahead of the other States so far as Australia’s pipeline of major investment projects is concerned.  However, the approval of Inpex Alpha’s $30.8 billion LNG project will soon see the Northern Territory experiencing a mining investment boom of its own.  The expansion of Australia’s investment boom could soon also expand to South Australia, with the decision from BHP Billiton on Olympic Dam expected in the coming months.

A reasonable level of infrastructure investment and some mining investment is underway in the southeast of Australia.  But New South Wales and Victoria are continuing to experience weak levels of commercial construction – new investment in retail, offices and tourist facilities.

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