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Investment Monitor Dec 2012: Mega-projects - endangered species?


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31 January 2013:  The mega-resources investment projects which accounted for much of Australian economic growth in recent years are hurtling towards a peak, likely in late 2013.  That means Australia’s main growth driver will no longer play that role beyond 2013. (Resources related construction will remain huge relative to times past, but smaller than its 2013 peak).

A key question for the Australian economy over the next few years will be what sort of business investment profile we see after resources investment peaks – one of gradual decline with resources investment remaining at historically high levels, or a much sharper drop-off?

2013 brings with it the due date of final investment decisions for a number of large resources projects.  The top ten projects on this list could potentially provide another $126 billion boost to Australia’s investment agenda.  What happens to this top ten list will go a long way to answering the above question.

The December 2012 issue of Investment Monitor saw the total value of projects in the database rise yet again.  The value of projects increased by $26.9 billion - that’s a 2.9% jump from the September quarter, and a solid 4.5% higher than a year ago.  This is despite some high profile cancellations and a number of large projects moving into the production phase.  However, much of the rise in project values has again been from cost revisions, including a $9 billion blow-out for the Gorgon LNG project.

A handy increase in the value of projects in planning suggests the investment pipeline is being replenished, and across a range of sectors, not just resources.  However, there is a danger that as today’s multi-billion resources projects eventually reach completion, they will be replaced by multi million dollar projects in other sectors.  Indeed, the rollercoaster of commodity prices over the past few months and concerns over cost blow-outs in major projects underway means Australia’s resources mega-projects may soon be an endangered species.

For now the investment boom is led very much by mining projects.  There is still a significant quantity of mining investment projects in the pipeline, though not as many mega projects stand ready to replace the current suite of projects as they reach completion.  The mining sector also faces some key challenges heading into 2013, as capacity constraints manifest into high labour and capital costs, and recent volatility in commodity prices threaten the returns for some projects.  Within mining, oil and gas continues to dominate the investment agenda.  However rising construction costs, including labour costs, may be taking the gloss off some potential new projects.

Economic infrastructure (covering transport, ports, energy, water and telecommunications projects) has a healthy investment agenda underway, with the roll-out of the NBN providing work for much of the next decade.

The soft pace of growth in retail turnover and employment growth (including white-collar employment growth) means non residential building activity is performing far less strongly.  However, there are signs that the pipeline of potential projects is strengthening, and the RBA’s cuts to interest rates should help to stimulate demand for commercial building.

See Deloitte media releases and research at www.deloitte.com.au

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