Pete Wargent blogspot

Co-founder & CEO of AllenWargent property buyer's agents, offices in Brisbane (Riverside) & Sydney (Martin Place), and CEO of WargentAdvisory (providing subscription analysis, reports & services to institutional clients).

5 x finance/investment author - 'Get a Financial Grip: a simple plan for financial freedom’ (2012) rated Top 10 finance books by Money Magazine & Dymocks.

"Unfortunately so much commentary is self-serving or sensationalist. Pete Wargent shines through with his clear, sober & dispassionate analysis of the housing market, which is so valuable. Pete drills into the facts & unlocks the details that others gloss over in their rush to get a headline. On housing Pete is a must read, must follow - he is one of the finest property analysts in Australia" - Stephen Koukoulas, MD of Market Economics, former Senior Economics Adviser to Prime Minister Gillard.

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Wednesday, 2 July 2014

Mining boom?

Interesting release today from the ABS detailed engineering (i.e. mining) construction work done. 

Firstly, the good news, and that was that although construction declined as expected, the falls were relatively muted, a tame enough 2% q/q seasonally adjusted:
  • The trend estimate for the value of total engineering construction work done fell 0.9% in the March 2014 quarter
  • The seasonally adjusted estimate for the value of total engineering construction work done fell 2.0% in the March quarter to $31,572.5m.
Over the past year, engineering construction work done has fallen by a grand total of just 0.8% y/y.

The chart below shows that although many commentators called the peak of the mining & engineering construction boom back in 2012, the sector had something of an unexpected and welcome second wind, and in fact the value of work done still sits higher than it was at two years ago (click chart):

That's the good news.

What the chart does show visually, however, is the sheer magnitude of the mining construction boom, and the extent that this economic activity has helped to fuel the 22 continuous years of economic growth in Australia.

Indeed, the level of work in the pipeline implies that construction is going to tail off quite sharply in the coming years.

It is this very fact which says to me that interest rates are as likely to be adjusted downwards next as they are upwards. It's more or less an each way bet. 

What is certainly the case is that we are not looking at rate hikes any time soon.

In terms of the data by state, the chart over the very long run shows the huge - nay, colossal - boom in engineering construction in Western Australia and Queensland (click chart):

It's interesting to note how, despite a very intensive spruiking campaign about a resources construction boom in South Australia, engineering construction activity in that state has actually dwindled by 15% over the past two years. 

In fact, of all the states, today's print was the most disappointing for SA. 

The fall of work done in Queensland of 6% q/q may not have been altogether unexpected, but work done in SA tanked by 11% q/q.

Not good.

It's not all doom and gloom for South Australia, though, since the state does have some massive untapped deposits (Woomera, Olympic Dam expansion etc.).

Moreover, it's just that with commodity price indices having sagged badly in recent times, the local economy could get plenty worse before it gets better.

Zooming in the chart to start from the turn of the century i.e. just before the construction boom began, and excluding the minnow states, shows that today's release was a good one for Western Australia with a nice uptick in work done for the quarter.

Western Australia still leads the way in terms of total value of work done, with Queensland a close second.

That said, this also implies that these states have the most to lose when the construction boom eventually comes off in full (click chart):

One of the nice things for New South Wales has been that its economic growth has not been mining construction dependent, and the NSW economy looks set to record robust 3% growth in 2015 and 2016 to match the state's strong 2014 performance.

In spite of all of the above, let's not forget why these resources projects are getting constructed in the first place - exports - and bulk exports are booming which has offset declines in commodity date, anyway.

Bulk Commodity Exports graph