The bushfires were just the latest problem: The slump started well before them and also affects states unaffected by them.
By Nick Corbishley, for WOLF STREET:
Construction activity in Australia slumped by 3% quarter on quarter in the fourth quarter of 2019, the Australian Bureau of Statistics (ABS) reported this week. Compared to the same quarter of 2018, construction activity fell 7.4%. It was “a weak end to what was a weak year for the construction sector,” said Westpac senior economist Andrew Hanlan. The sector, which accounts for 13% of Australia’s GDP, has been in cyclical decline since mid-2018, as the Australia’s housing bubble began to deflate and feed through into the construction industry.
The residential building segment has borne the brunt of the pain, with a 4.6% drop in the fourth quarter from the third quarter. On a year-over-year basis, residential construction slumped by 12.6%:
Given the scale of the housing bust that has swept through Australia’s core markets from late 2017 through mid-2019, with prices down by as much as 14% in Sydney and 10% in Melbourne, it’s hardly surprising that residential building is in the doldrums. Despite a rebound over the second half of 2019, property values across most regions remain below their previous record highs, set in 2017.
Disruptions from the extensive bushfires that decimated more than a fifth of Australia’s forests also had an impact on construction activity. New South Wales, the worst-hit state, suffered big year-over-year declines in both residential building (-21%) and total building (-11%) in the fourth quarter. Bushfire rebuilding and recovery activity is likely to have a positive impact on construction activity in the coming quarters, ABS says, though stiff regulatory obstacles could make it more difficult to get permits to build in fire-prone areas.
But significant year-on-year falls across all regions, including ones that were either just mildly impacted by the bushfires (Tasmania, south-eastern Queensland and south-western Western Australia) or not impacted at all (Northern Territories), suggest that the problems besetting Australia’s construction industry extend far beyond the disruption caused by the wildfires.
Work on “non-residential buildings” (mainly commercial real estate) decreased by 3.4% in the fourth quarter from the third quarter, although year-on-year it was up just over 3%. BIS Oxford Economics says the recent decline was probably due to patchy quarterly activity since there is a strong pipeline of office, hotel and hospital projects.
Also in the dumps is the “engineering construction” segment — a category that includes the design and delivery of industrial plant, such as the construction of structures for the oil and gas industries, power generation, processing, mining and manufacturing industries, and water and environmental works. According to the ABS data, the volume of engineering construction work performed during the fourth quarter of 2019 dropped by 8% year on year.
The declines affected all of the country’s regions including Western Australia (down 9.8% year on year) whose massive mining boom turned to bust a few years ago, leaving the region’s economy and housing bubble in tatters. Growth in lithium mining initially helped pick up some of the slack for a while but even the lithium mining sector has been in a bear market for a year.
As construction in Australia slows, more and more companies in the sector appear to be engaging in the high-risk supply-chain finance technique of “reverse factoring” to improve the outward appearance of their cash flow situation.
Australia’s largest construction company, CIMIC has made liberal use of “reverse factoring.” Its stock has plunged over 50% since last April, wiping close to AU$8 billion (US$5.3 billion) off its market value. The initial trigger was a report that accused CIMIC of using reverse factoring agreements with financial institutions to create the illusion of cash flow, reduce the appearance of debt, and lower its leverage ratios — a charge the company has since admitted.
“Reverse factoring” was in part responsible for the recent collapse of companies like Spanish energy giant Abengoa and UK outsourcing behemoth Carillion, and is a key issue in the scandal surrounding NMC Health, whose shares were suspended in London today.
CIMIC can’t seem to get a break. In January, CIMIC announced it was abandoning its Middle Eastern operations and booking a AU$1.8 billion ($1.2 billion) charge-off.
Now, it could face a similar problem with a major project in Australia: the construction of the $6.7 billion West Gate Tunnel, which has been brought to a grinding halt following a dispute between the state government, the toll road company, Transurban, and the project’s builders, including CIMIC, over who should pay the extra costs of dealing with large amounts of contaminated soil. As the delays drag on, the likelihood of the construction companies walking away from the project altogether, citing “force majeure”, grows — which could all culminate in costly litigation. And that is the last thing that CIMIC needs right now. By Nick Corbishley, for WOLF STREET.
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