Corrs High Vis: Episode 22 – Construction Market Forecast - 2018 and beyond

Ben Davidson: Corrs Chambers Westgarth – National Practice Group Managing Partner

David Hastie: Corrs Chambers Westgarth, Associate

Owen Cavanough: VEC Civil Engineer, Project Manager

BEN: Hello and welcome to our first Corrs High Vis podcast – my name is Ben Davidson, Partner in Corrs’ Construction practice group and I’m joined today by Corrs Construction Associate David Hastie and VEC Civil Engineer, Project Manager Owen Cavanaugh. It is an opportune time to take a closer look at the Australian construction market and consider first how the industry performed in the 2016/2017 financial year and second, consider whether the industry is forecast to grow or contract in the short, medium and long term. Before we throw to Owen who is in a position to give our listeners a particularly focused and insightful industry perspective, I might ask David to give us a quick overview of how the Australian construction industry performed last financial year. David let us know …

DAVID: Thanks Ben. Well before I start I might just point out that the numbers I am going to rely on are from the recent Australian Construction Industry Forum Report at the tail end of last year. In terms of a national snapshot from the 2016/17 financial year, nationally the spend in the industry amounted to around $218 billion which was about 4% down nationally. The way that is broken down is firstly engineering construction – residential building and also non-residential building. Just to break those numbers down, so with regards to engineering construction that was down about 10% last financial year to around about $85 billion. Non-residential building was – it was down about 1.5% to around $36 billion and residential building, as I’m sure people wouldn’t be surprised was actually up 1.6% and has peaked at about $96 billion. In terms of looking forward and the ACIS’ forecast that they’ve given they are actually looking at a retraction – sorry I should say for the market to retract, by about 4% this current financial year to around about $210 billion with a further 3% down on that figure in the financial year after that. So when you look into those figures it looks like tough times ahead, but what’s really interesting and I’ll ask Owen to talk about this – the number is going to be down, basically and that’s attributable to a decline in residential building. As I said that spiked at about $96 billion, but in the short to medium term that is forecast to dip, basically on the back of perceived over supply of apartments in the capital cities and as such there has been I guess you would say a diversion of funds – particularly foreign funds from the residential sector probably into the non-residential sector so we are looking at things like hotel builds, things like pubs and even land banking of industrial land so a considerable amount of money has been pumped into non-residential and is going to continue to be pumped in over the short to mid to long term.

BEN: That was fantastic, thank you for the insight to the more macro level about what is going on in the industry at the moment. I might now turn to Owen and ask him to share his views about how those macro events are driving the more micro level in terms of his business VEC and how that is actually playing out in terms of the execution of their jobs. Perhaps Owen if you could start by telling us a little bit about yourself and a little bit about VEC.

OWEN: I’m part of the organisation under Downer’s Infrastructure Group and VEC Civil provide infrastructure, delivery, projects such as bridges, rail, roadworks and we are seeing a significant growth in the opportunities available in the market right now. That’s also combined with a big uplift in activity across the larger projects, that we’re not in but the majors are certainly playing in at the moment and that’s driving a lot of competition out there for resources so while the construction market report is indicating there might be a dip off in activity we are actually seeing significant competition for resources such as skilled people, equipment – we are seeing issues with pricing jobs out in the future for cement supply pricing, aggregate supply – so these are real issues that we are seeing in Tasmania, Victoria, New South Wales, we are noticing them up in Queensland. It’s not a huge issue right now, but we can all see that it is going to become a bigger issue later on in the year, so we think that we’re coming out of what was the mining boom in construction and potentially that’s translated into those projects are now delivering windfalls to government in the way of royalties and taxes coming along because they are now all in production – you look at Roy Hill ripping along – Fortescue have dropped their productivity costs down, they’re moving good material, BHP are moving good material so there’s a lot of money starting to flow through and governments have got that available in what is effectively a very strong election cycle both State and Federally coming up and there’s promises coming out there that we are quite happy to try and fulfil.

BEN: It’s interesting that you flagged the political cycle and you did mention roads there earlier. The report actually pointed to a 14% increase last financial year in road spend nationally. Up to around $17 billion and is actually forecasting a peak at around 2019/20 at around $20 billion and that will be the highest spend nationally on record, so again is this something that you are seeing?

OWEN: Definitely seeing that and we can see it is a broad ranging set of opportunities. It’s not just mega projects there is certainly good opportunities in many different areas including rural projects, there seems to be a fair distribution of that spend and it is providing opportunities not just for the major companies but a lot of the smaller companies in there so there is a skills transfer coming out of working in the mining projects for instance that we are quite happy to accept as well, so rail workers for instance with all the main rail projects on.

BEN: Just commenting on those major projects Owen at the moment, if you see a number of those projects that are currently ramping up particularly on the eastern seaboard. You’ve indicated that there are some long lead procurement items that are going to become difficult. Do you see the possibility of significant contractors having better buying power in respect of some of that stuff and making it particularly difficult for the mid and the smaller sized contractors to actually get and procure long lead items?

OWEN: Difficult question – thanks Ben. I do think that some of the long lead items the smaller guys will be a bit more nimble in their ability to act contractually. It is a strong area that they’ve got especially smaller private companies where the buck stops with the owner and they can move and move quickly on things whereas larger companies are often bound by corporate governance on long lead time procurement issues, so they are going to have to adjust their attitude and thinking on those sorts of things to compete because the smaller companies do have that ability where the boss sits in the meeting and says “right, I’ll buy it”. Whereas even in our group we have very strong governance we have to work we are an ASX company owned ultimately and we have to make sure we follow very tight governance rules on how we spend our money.

BEN: Yes I think the contractors are going to find themselves under significant pressure for the next cycle at least. Do you think that there’s going to be interesting impacts in terms of labour?

OWEN: Yes the labour side of it is challenging right now and it’s across all aspects of labour. So whether it’s finding suitably skilled workforce to perform tasks that we are after or whether we are looking at the really strong issues when it comes to professionals in the industry and holding on to them as well so we’ve been under salary pressure, wages pressure for a number of years now. People have taken a lot of haircuts around the industry and all of a sudden there’s an opportunity that a lot of people are grabbing and moving around.

BEN: That’s interesting, so taking all those things into account we have seen in UK the failure of one of the big contractors Trillion up there – across there. The result of that seems to be a range of forces that came to play that caused that potential for that failure. You talked today about a compression in the market, lots of new players out there – we’ve got some labour force issues, we’ve got procurement issues – particularly on the east coast a number of very good projects that have been let which are sensitive in terms of price – do you see the possibility of contractor failure or you think everyone is well enough managed around the Australian market that that is unlikely?

OWEN: I think we are still a little bit gun shy from the failure up in the north west. We’ve had a major contractor already go under here and everyone jumped on their equipment and their jobs and their contracts like vultures and quite enjoyed that, so I think we are still quite wary of it – I think the businesses are strong – what is going to be interesting is where they are under pressure for people and they end up having not enough experience at the coal face towards the end of the jobs and they leave people there to run them out at the critical stage who don’t have that core level of financial experience but also client relationships where they can manage at the end I think that’s where they are going to get burnt and they all have to be careful because when their resource constrained and a project is finishing then if you can’t say to your A-Team that’s finishing the job or here’s your next job, they all go and they look after themselves – Paul Keating was right never underestimate the power of self-interest. People will move on very quickly and companies have to make sure they get that attention at the end of the projects to protect themselves because loyalty did go out the window a lot over the last ten years in this industry because it is a two-way thing – so it’s going to be tricky.

BEN: Thank you David and to Owen for their time today it’s been fantastic David to hear about the year in review and in particular to get your take on ACIS views about the market coming forward it’s fascinating to hear that. We can expect to see different types of the market move in quite interestingly different ways. Particularly to hear that the engineering part of the market is stabilising and indeed in some States is seeing a significant resurgence. Owen thank you for your insights into practically what you’ve seen in the market and what’s happening it is fascinating to hear how important contract administration will be to managing those challenges particularly around long lead procurement items and people. Thank you for your time and thank you for listening to Corrs Construction.

This podcast is for reference purposes only it does not constitute legal advice and should not be relied upon as such. You should always obtain legal advice about your specific circumstances.