Pete Wargent blogspot

CEO AllenWargent Property Buyers, & WargentAdvisory (institutional). 6 x finance author.

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Friday, 15 January 2016

Resources construction declines again

Resources construction bust continues

Engineering Construction Activity in chain volume measures terms declined by a seasonally adjusted 6.3 per cent in the September 2015 quarter to $25.4 billion to be down by 9.9 per cent over the year. In trend terms the quarterly decline was a more sedate 1 per cent, to be 8.1 per cent lower than a year before. 

Interestingly, although the construction boom is now inevitably morphing into a spectacular capex bust, engineering construction activity actually increased in four states or territories over the past year.

The below chart presents an overview of some of the challenges facing Western Australia and the Northern Territory over 2016, with activity remaining way above their long run averages at $10.3 billion and $2 billion respectively.

Both states have ongoing mega-projects, including the Inpex Ichthys LNG project in the Northern Territory, which are eventually set to dry up.

By contrast much of the pain for Queensland is now in the rear view mirror with quarterly activity having sunk below $5 billion (from a quarterly peak of more than $11.5 billion), to be a massive 42 per cent lower over the year to September 2015.

Pain follows decline

This is not to downplay the catastrophic impact of the decline in demand in parts of regional Queensland. Far from it.

For example, house prices in regional towns such as Moranbah and Dysart are down by 80 to 90 per cent from their peak, while there will no doubt be plenty more horror stories in the post from resources regions.

Sadly some investors (a term used advisedly here) were pushed vigorously by some property advisors into those towns in order to chase fast riches, and are now sitting on capital losses measured in millions of dollars, while rents in some cases have fallen from up to $3000/week to perhaps one tenth of that level, where a tenant can even be found.

With prices rising at an unbelievable and unsustainable pace, developers converted plots in Moranbah which had been worth less than $100,000 just a matter of a few years before, and sold them on at astronomically high prices for a one-industry regional town.

Note how the dates of the most exuberant sales prices of close to $1 million coincide neatly with the peak of the resources construction boom, which finally topped out at an incredible quarterly peak of $33 billion in calendar year 2012 (click to expand).

When the inevitable eventually played out it was a textbook example of supply responding to transient demand in a small town, where activity at the margin inevitably has a considerably greater impact.

Revisiting some of the marketing and sales documents pushed by property groups at the time makes for deeply uncomfortable reading today, not least the derisive comments aimed at "so called property property experts" who warned that it would end in tragedy.

Sadly a sweeping range of mining towns across the country from Port Hedland, South Hedland, Newman and Karratha, to Gladstone, Emerald, Bowen, Dalby, Chinchilla and others have befallen broadly similar fates, albeit some of them to a less dramatic extent.

Moving on

At least with the bulk of resources construction declines fading into the rear view mirror Queensland is now setting about building up its monthly trade balance into a tidy surplus, a trend which is set to continue as LNG production exports come onstream.

As noted above the other resources states are lagging some way behind in this regard, and their downturns in demand will thus have longer to run.

The share prices and valuations of the resources index have copped an absolutely hammering since 2012 as production volumes have flooded commodities markets, thereby depressing prices.

Australian Share Price Indices graph

And for property investors? I recommend taking a look here at the long run projections for infrastructure and population growth, which should guide you as to where returns can be achieved with a much lower risk. Slow and steady wins the race.