Mining And Construction Industries Preview

Submitted by Jim Thesiger on 4 June, 2008 - 15:20

Australian mining and construction industries preview from sharemarket analyst Macquarie Research Equities.

The Mining & Construction Affair

Residing at the forefront of current economic analysis is the topic of cost-push inflation. More specifically, many government bodies and industry groups are assessing the impacts of the mining boom and spiking world commodity prices on the construction sector. Given the abundance of natural resource firms within Australia this discussion is quite topical; and Macquarie Research Equities (MRE), therefore, have examined the pipeline of work in the mining and construction industries. So what are the implications of this trend? Furthermore, in alliance with yesterday’s “Gold Article”, are there opportunities to hedge against these rising costs?

Market Impact

MRE indicate that the current pipeline of work in the construction of residential and non-residential buildings remains reasonable. The risk, however, for this pipeline lies in those projects affiliated with the mining sector. Due to spiking commodity prices, projects continue to rise rapidly, yet resources are starting to become stretched.

Analysis

One interesting statistic is the $47bn in value for approved building work yet to be started. The monetary tightening that we have seen this year will likely restrain these projects further. MRE, conversely, highlight that engineering projects will remain very healthy driven purely by the mining boom. A recent ABARE report indicates just how large the project pipeline has become, and currently stands at a record of 341 major projects. This pipeline equates to around $16bn of spending.

In light of this healthy pipeline, the conundrum stems from the shortage of skilled labour and the difficult in obtaining equipment. Lead times for the projects have been growing and will most likely continue to grow considerably. This then has direct implications for the cost of projects, and based on current forecasts would more than double expenditure from 2008 – 2011. MRE close by emphasising that the competition for skilled labour will remain intense and obviously amount to wage pressures. These increased wage costs and the difficulty in completing projects on time would have implications then for company profits.

In closing

The above analysis raises a number of questions about the direction of these sectors. MRE continue to discuss the strong demand for resource stocks as well as the implications of increasing inflationary pressure. Gold is often talked about as a possible inflation hedge and as we witnessed recently gold hit record prices but has since fallen back to around $US900/oz.

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