Large capital projects defining Australia s investment challenge. Business Council of Australia

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1 Large capital projects defining Australia s investment challenge Business Council of Australia 24 April 2012

2 Contents Glossary...i Executive Summary...i 1 Introduction Overview of capital investment Recent trends in capital investment This report Methodology Identified projects Longer term requirements Investment in the resources sector Status of projects The import share of resources investment Projected benchmark levels of investment Investment in infrastructure Australia s infrastructure backlog Status of projects Transport Utilities Telecommunications The import share of infrastructure investment Broader implications of investment References Appendix A : Investment Monitor project list Charts Chart 1.1 : Investment by sector, real... 2 Chart 1.2 : Investment by sector, nominal... 3 Chart 1.3 : Gross fixed capital formation by industry, real... 4 Chart 1.4 : Value of investment pipeline by industry, nominal (Investment Monitor)... 5 Chart 1.5 : Value of definite projects by State, nominal (Investment Monitor)... 6 Chart 1.6 : The skewing of Australian investment (Investment Monitor)... 6 Liability limited by a scheme approved under Professional Standards Legislation. Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity. Please see for a detailed description of the legal structure of Deloitte Touche Tohmatsu Limited and its member firms Pty Ltd

3 Chart 2.1 : Total value of investment pipeline by status, Investment Monitor... 9 Chart 2.2 : Transition path for projects within Investment Monitor Chart 3.1 : Value of resources projects underway and in planning, March Chart 3.2 : Value of definite resources projects by sector Chart 3.3 : Value of resources projects under consideration by sector Chart 3.4 : Value of possible resources projects by sector Chart 3.5 : Value of oil and gas projects by State Chart 3.6 : Value of coal and metal ore projects by State Chart 3.7 : Definite mining projects by sector, Chart 3.8 : Expected mining investment, ABS CAPEX survey Chart 3.9 : Value of advanced minerals and energy projects, BREE Chart 3.10 : Urbanisation rate Chart 3.11 : Growth in commodity demand (consumption), Chart 3.12 : Investment in the mining sector, including indicative projections Chart 4.1 : Value of infrastructure projects underway and in planning, March Chart 4.2 : Value of transport projects underway and in planning, March Chart 4.3 : Value of definite transport projects by sector Chart 4.4 : Value of planned transport projects by sector Chart 4.5 : Investment in the transport sector, including indicative projections Chart 4.6 : Value of electricity projects underway and in planning, March Chart 4.7 : Value of electricity projects by type Chart 4.8 : Electricity generation (coal fired) and transmission projects by State Chart 4.9 : Electricity generation (renewable and gas fired) projects by State Chart 4.10 : Value of water projects underway and in planning, March Chart 4.11 : Value of definite water projects by State Chart 4.12 : Investment in the utilities sector, including indicative projections Chart 4.13 : Investment in the telecommunications sector, including indicative projections Chart 5.1 : Investment by sector, history and forecasts Tables Table 3.1 : WA local content reports cumulative outcomes - % of contract, Table 3.2 : WA local content reports cumulative outcomes - % of contract, Table 4.1 : Infrastructure Australia s Infrastructure Priority List, value and number of projects by theme ($m),

4 Table 4.2 : Case studies of the local content of major projects Table 5.2 : Top 20 resource and infrastructure projects, Investment Monitor, March

5 Glossary BREE ABS ACT ANZSIC BCA CAPEX CPI GDP ICN LNG NBN NSW NT QLD RBA SA TAS VIC WA Bureau of Resource and Energy Economics Australian Bureau of Statistics Australian Capital Territory Australian and New Zealand Standard Industrial Classification Business Council of Australia Capital expenditure Consumer Price Index Gross Domestic Product Industry Capability Network Liquefied Natural Gas National Broadband Network New South Wales Northern Territory Queensland Reserve Bank of Australia South Australia Tasmania Victoria Western Australia

6 Executive Summary has been commissioned by the Business Council of Australia (BCA) to define the anticipated scale and scope of major capital investments in Australia, both underway now and projected over the longer term. The past decade has seen a significant increase in investment in Australia. Public investment has lifted relative to GDP, while real private investment has averaged 8% growth per annum over the decade to , easily outstripping the growth in real GDP. Adding in housing investment saw overall investment spending account for 27% of GDP in An increase in mining investment has largely driven the surge in private investment over the past decade. Mining investment has risen from as low as around 1% of GDP at the beginning of the 2000s to around 5% of GDP in The investment pipeline has also skewed towards much larger projects over time. The average value of a resource and infrastructure project in Investment Monitor database has risen from $294 million in 2001 to $1.5 billion in The move towards larger investment projects will present new challenges for the delivery of resource and infrastructure projects. The March 2012 issue of Investment Monitor reported a total value of projects underway or in planning of $921.2 billion. The focus in this report is on resources and infrastructure projects, where there is a pipeline of projects underway and in planning with a value of $790.4 billion. The difference between the figures reflects the broader coverage in Investment Monitor, notably the inclusion of non-residential building projects in the latter. Investment in the resources sector Investment Monitor shows a very large value of resources projects currently under construction or committed. In total, $412.5 billion of resource projects are currently shown within the Investment Monitor database. Of this amount, about 54% ($222.8 billion) are definite, i.e. under construction or committed ; 31% ($125.8 billion) are under active investigation for a decision in the reasonably near future, i.e. in the under consideration category; and 15% ($63.8 billion) are in the possible category. Within resources investment, liquefied natural gas (LNG) is the current wonder child. By value some 55% of all resources projects in the Investment Monitor database at present are LNG projects. Outside of oil and gas, resource projects underway are led very much by iron ore projects in Western Australia. Evidence from the ABS CAPEX Survey, the Federal Treasury, and the Reserve Bank of Australia are consistent and, like Investment Monitor, point to a surge in mining investment in the next two years. i

7 The expected surge in investment in the resources sector will be a key driver of economic growth in Australia in the near term. However, some of the capital and labour associated with the investment will be imported, which will result in the investment having a smaller immediate impact on the Australian economy than if all domestically sourced. The import share of investment projects therefore dilutes the contribution of the construction of projects to GDP. It appears as though current and prospective LNG projects in particular may have a lower local content share than has typically been the case for resources projects. In light of this issue, the Reserve Bank of Australia recently made an estimate of net mining investment in Australia (total mining investment less the imported component). This assessment suggests that around half of the cost of current mining projects will be local content, with the remainder imported. Overall levels of resources investment by current status are shown in Chart i, along with the matching levels for infrastructure projects. Chart i: Value of resources and infrastructure projects underway and in planning, March 2012 $m 250, ,000 Resources Infrastructure 150, ,000 50,000 - Under construction Committed Under consideration Possible Source: Investment Monitor Investment in infrastructure Infrastructure plays a key role in supporting economic activity and in enabling economies to grow and expand. In recent years, high world commodity prices and the associated mining boom highlighted an infrastructure deficit in Australia, particularly in relation to export infrastructure such as railways and ports. At the same time, rapid population growth also exposed the need to ii

8 upgrade and expand Australia s urban infrastructure, including transport systems and utilities services. These challenges add to an existing infrastructure backlog in Australia. While there is some potential to alleviate the shortfall through more efficient use of existing capital, significant investment will be required to close the current infrastructure gap. In total, $378 billion of infrastructure projects are currently shown within the Investment Monitor database. Of this amount, about 38% ($144 billion) are definite, i.e. under construction or committed ; 10% ($39 billion) are under active investigation for a decision in the reasonably near future, i.e. in the under consideration category; and 52% ($195 billion) are in the possible category. By major infrastructure sector: The value of definite transport projects is $84.0 billion, with these projects largely spread across road transport (41%), rail transport (28%), and air transport (22%). The value of definite utilities projects is $23.1 billion, led by power generation and desalination projections. Over time, the profile of power generation projects recorded in Investment Monitor has transitioned towards gas-fired generation and renewable projects, and away from coal-fired generation. Future investment in communications is dominated by the Federal Government's $41 billion National Broadband Network (NBN), the largest single infrastructure project currently under construction in Investment Monitor database. In terms of local content, examples across infrastructure projects suggest much higher local content than is the case for resources projects. Broader implications of investment The projects recorded in Investment Monitor as underway now and in planning would sustain high levels of investment in key sectors for some time: for resources it is indicatively six years of investment; for transport infrastructure it is indicatively nine years of investment; and for utilities infrastructure it is indicatively two years of investment. The Investment Monitor data is benchmarked to indicative investment projections, which for key sectors locks in the gains in investment levels seen of late and then allows for some further growth relative to output over time. This is consistent with some redressing of the infrastructure backlog over time. projections for the Australian economy are that investment will continue to account for a high share of overall activity over the coming years. iii

9 Chart ii: Investment by sector (real), history and forecasts 35% 30% 25% Per cent of GDP Dwelling investment Private business investment Public investment Forecast 20% 15% 10% 5% 0% Source: ABS, As shown in Chart ii, the projected rise in total investment is largely driven by private business investment. Private business investment is expected to increase to around 20% of GDP by the middle of this decade. Note that the forecasts shown in Chart ii are based on analysis of the overall macroeconomy, rather than a review of the likelihood of projects proceeding on an individual basis. The view that investment in Australia sustains a high level for some years to come is certainly consistent with the large number of investment projects underway and in planning at present. However, as has historically been the case, not all projects in planning will actually occur, and for some projects which do occur, there will likely be significant delays in implementation. If Australia were not to achieve these indicative high rates of investment it would mean a constraint on the economy over time: curtailing short term activity at a time when business investment is the key driver of activity in the Australian economy (and so potentially place the Australian economy in a significant pothole in the short term); and reducing the long term productive capacity of the Australian economy. A key challenge for the Australian economy then is to ensure that impediments to a lift in major project investment over the next few years are minimised. David Rumbens Director Pty Ltd iv

10 1 Introduction has been commissioned by the Business Council of Australia (BCA) to define the anticipated scale and scope of major capital investments in Australia, both underway now and projected over the longer term. 1.1 Overview of capital investment Economists have long known about the importance of investment in physical capital to economic growth. Indeed, the level of spending on capital is an important determinant of the future productive capacity of the economy. In this way, investments in capital help drive productivity and ultimately improvements in our standard of living. Modern theories of economic growth maintain a key role for physical capital in determining economic growth, while also emphasising the role played by other factors (including human capital, social and political institutions, and the determination of technical progress). It is therefore of vital importance that we have an understanding of the outlook for capital spending in Australia, and the extent to which investment in capital is meeting Australia s needs. This report looks at capital investments in the resources and infrastructure sectors. In this report, capital investment is the term used to describe investment spending by the private and public sectors. It comprises outlays on fixed assets with a life of a year or more. Specifically, capital investment covers discrete private and public engineering construction, non residential building and equipment investment projects in all Australian industries. The projects form part of gross fixed capital formation as defined by the Australian Bureau of Statistics (ABS). The scope of the report is limited to projects in the resources sector, and to infrastructure projects in the transport, energy, water, and telecommunications sectors. The scope is also limited to projects which are being developed within Australia (regardless of whether the project proponent is an Australian entity or not). 1.2 Recent trends in capital investment The past decade has seen a significant increase in total capital investment. This is shown in Chart 1.1 below, which shows the level of investment by sector in real (or constant price) terms as a share of real GDP. Investment by the public sector has grown at a slightly faster rate on average than real GDP over the past decade. In part, that reflects the Federal Government s fiscal stimulus in response to the global financial crisis which included a large investment in infrastructure such as school halls. While that investment has been controversial, it resulted in real public investment growing by almost 25% in Excluding that anomalous year, real public 1

11 investment grew by around 6% per annum over the decade to , slightly faster than real GDP growth. Looking back further, public investment grew at a slower rate during the 1990s. The slower growth in public investment during the 1990s partly reflected the privatisation of many State-owned assets during the 1990s, which led to a portion of investment spending switching from the public to the private sector. Chart 1.1: Investment by sector, real 35% Per cent of GDP 30% 25% Dwelling investment Private business investment Public investment 20% 15% 10% 5% 0% Source: ABS In contrast, real private investment has surged over the past decade, reaching around 15% of GDP in The average annual growth in real private investment over the decade to was around 8%, easily outstripping the growth in real GDP. Real housing investment as a share of GDP has averaged around 6% of GDP across the past two decades. Over the past two decades, its share of GDP has varied from 5.2% of GDP in the early 1990s to 6.4% of GDP in the early 2000s. Since that surge in the early 2000s, housing investment has been subdued despite strong population growth, and its share of GDP declined to 5.4% in In total, these three components of investment public investment, private business investment, and housing investment accounted for 27% of real GDP in Chart 1.2 below shows the equivalent data over time in nominal (current price) terms. There is a broadly similar story in nominal terms, with the level of total investment rising from 22% of GDP in to 27% of GDP in This increase was largely driven by the rise in private business investment which increased its share of GDP by 3.7 percentage 2

12 points over that period, although rises in public investment and dwelling investment also contributed. Chart 1.2: Investment by sector, nominal 35% 30% 25% Per cent of GDP Dwelling investment Private business investment Public investment 20% 15% 10% 5% 0% Source: ABS However, the level of nominal investment as a share of nominal GDP declined from to , with private business investment accounting for the decline. In turn, this was driven by subdued prices for private business investment compared with the GDP deflator during this period. In part, the higher $A and technology gains have translated into lower prices for business investment. Hence, from to while the quantity of investment produced has risen as a share of the economy (the rise in real terms seen in Chart 1.1), slower relative price growth has seen the nominal share decline (Chart 1.2). The remainder of this report focuses on the resources and infrastructure component of overall investment. As Chart 1.3 makes clear, an increase in mining investment has largely driven the surge in private investment over the past decade. Mining investment has risen from as low as around 1% of GDP at the beginning of the 2000s to around 5% of GDP in That represents an annual average growth rate in real mining investment of around 18% over the decade to

13 Chart 1.3: Gross fixed capital formation by industry, real 6% Per cent of GDP 5% 4% 3% 2% 1% 0% Source: ABS Mining Utilities Transport Media and Communications Other sectors of interest in this report have also shown a relatively high rate of growth during the 2000s (relative to GDP). Investment in the transport sector has increased from around 1.4% of GDP in the 1990s to 2.4% in Likewise, investment in the utilities sector (electricity, gas, water, and waste services) has increased from around 1% of GDP at the beginning of the 2000s to around 2% of GDP in However, investment in the Information, media, and telecommunications sector has remained close to (or slightly below) 1% of GDP. Chart 1.4 shows the total value of the investment pipeline (including projects at various stages, from the early stages of planning to under construction) for the key sectors examined in this report. Although the investment pipeline differs conceptually from the actual amounts spent on investment shown in the earlier charts (the investment pipeline is forward looking), similar trends are evident. 4

14 Chart 1.4: Value of investment pipeline by industry, nominal (Investment Monitor) 400 $b Mining (oil and gas) Electricity, Gas & Water Transport & Storage Communication Mining (minerals and other) Jun-01 Jun-03 Jun-05 Jun-07 Jun-09 Jun-11 Source: Investment Monitor The investment pipeline for mining investment has surged over the past five years and the pipeline for transport has also increased substantially. In contrast, the investment pipeline for electricity, gas & water has declined slightly over the past couple of years, although it did increase over most of the past decade. The investment pipeline for communications remained modest in comparison, until the announcement of the Federal Government s National Broadband Network. Chart 1.5 shows the value of definite projects over time (those projects classed as under construction or committed) by State for the five largest States. In terms of definite major projects, Western Australia and Queensland lead the other States by a significant margin. 5

15 Chart 1.5: Value of definite projects by State, nominal (Investment Monitor) 160 $ billion New South Wales Victoria Queensland Western Australia South Australia Sep-06 Mar-07 Sep-07 Mar-08 Sep-08 Mar-09 Sep-09 Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Source: Investment Monitor This produces a lopsided result when the location of major investment projects is compared with the location of employment in Australia. The historic Brisbane Line can be used to characterise Australia s economy. Today it is economic activity to the north and west which is defining Australia s prospects, and protecting the country against the weak global economic environment. Chart 1.6: The skewing of Australian investment (Investment Monitor) North West of Brisbane Line 20% of employment 53% of investment projects South East of Brisbane Line: 80% of employment 47% of investment projects Source: ABS , Investment Monitor 6

16 Chart 1.6 shows that the area north and west of the Brisbane Line accounts for only 20% of its employment. Yet when it comes to major investment projects under construction that part of Australia above the Brisbane Line dominates, with $490.8 billion of investment, or 47% of the total. Investment Monitor also reveals a change in the composition of the investment pipeline over the past decade towards larger projects. The top 20 projects now account for 54% of the value of the resource and infrastructure investment pipeline, compared with 40% five years ago and 36% ten years ago. In line with this, the average value of a resource and infrastructure project in Deloitte Access Economics Investment Monitor database has risen from $294 million in to $1.5 billion in The size of the projects on the agenda at present is also unprecedented in terms of Australia s history. The largest discrete investment project completed in Australia is the $14 billion Pluto LNG project just completed. The current planning pipeline has 12 projects with a capital expenditure equivalent to or more than the Pluto project. Note that the North West Shelf Venture involved an investment totalling more than $27 billion, but this was split into many stages (involving separate investment decisions) over many years. Evens so, the current planning pipeline has six projects of greater value than the North West Shelf. As a point of comparison, the Snowy Mountains Hydro-electric Scheme was built from 1949 to 1974 at a cost of $820m (or around $8 billion or so in today s dollars). Of course, that was a very labour intensive project compared to today s projects, at a time when labour was relatively less expensive. The move towards larger investment projects will present new challenges for the delivery of resource and infrastructure projects. These trends and the outlook for capital investment for these key sectors will be considered in further detail later in the report. 1.3 This report This report has five chapters: Chapter 1 is the introduction to the report. Chapter 2 describes the methodology that has been used to estimate the existing pipeline of capital investment in the resources sector, and in infrastructure, as well as the methodology used to develop indicative forward-looking benchmarks for investment in those sectors. Chapter 3 and Chapter 4 then discuss the outlook for the resources sector and for infrastructure respectively. Included is a discussion of the imported component of capital investment, and a discussion of Australia s infrastructure backlog. Chapter 5 provides conclusions for the report. 1 $311 million in 2011 prices 7

17 2 Methodology This chapter sets out sources and methods for the key areas of analysis for this report: providing a summary of identified major projects which are being planned; and projecting longer term investment requirements which are consistent with expected rates of economic growth. 2.1 Identified projects The data presented in this report on the current pipeline of major investment projects is drawn from publicly available information. Where possible the following sources of information are examined: Investment Monitor database The BREE investment project database The ABS CAPEX Survey Analysis by Treasury, the Reserve Bank of Australia, Infrastructure Australia, and other organisations Investment Monitor A starting point for this assessment comes from Investment Monitor database of major investment projects. Investment Monitor covers discrete private and public engineering construction, non residential building and equipment investment projects in all Australian industries. The projects form part of gross fixed capital formation as defined by the Australian Bureau of Statistics (ABS). Investment Monitor only records projects which are being developed within Australia (regardless of whether the project proponent is an Australian entity or not). The focus is on discrete projects where capital expenditure is confined to a single location or purpose. Investment Monitor does not include expenditure programs which cover a large number of separate small scale capital expenditures. Residential housing projects are not included. Investment Monitor lists individual projects with a gross fixed capital expenditure of $20 million or more. Stated costs are intended to reflect only the investment component of projects (and not, for example, the purchase price of land). Investment Monitor uses four definitions of project status: Projects under construction are those where work has commenced on the project. Projects where a decision to proceed has been announced but construction has not yet started are shown as committed. 8

18 Projects under consideration are those where a decision whether to proceed with the project is expected in the reasonably near future. Projects with possible status are those projects which have been announced but where no early decision on whether to proceed with the project is likely. Projects classed as definite cover those under construction plus committed. Projects classed as planned cover those under consideration or possible. Projects are listed according to the industry of use, based on the Australian and New Zealand Standard Industrial Classification (ANZSIC). The information within Investment Monitor is collected by from a variety of media, government and private sources. A list of the top 20 resource and infrastructure projects currently in Deloitte Access Economics Investment Monitor database is included in the Appendix. Chart 2.1 shows the value of investment projects by status over time as recorded in Investment Monitor, with a significant lift in the value of projects recorded over the past few years, reflecting the trend identified in Chapter 1. Chart 2.1: Total value of investment pipeline by status, Investment Monitor 450 $b Jun-01 Jun-02 Jun-03 Jun-04 Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Under construction Committed Under Consideration Possible Source: Investment Monitor The March 2012 issue of Investment Monitor reported a total value of projects underway or in planning of $921.2 billion. The focus in this report is on resources and infrastructure projects, where there is a pipeline of projects underway and in planning with a value of 9

19 $790.4 billion. The difference between the figures reflects the broader coverage in Investment Monitor, notably the inclusion of non-residential building projects in the latter. The evolution of projects within Investment Monitor It is well known that large investment projects in their initial planning stages often do not proceed to construction. Indeed, some announced projects may be better regarded as aspirational. How likely are the projects in Investment Monitor to progress through to construction and eventual completion? Researchers at the University of Western Australia have investigated this issue by estimating the probability that a project within Investment Monitor will progress to eventual completion (Clements and Si, 2010). Specifically Clements et al. examined the progress of 154 mining and energy (i.e. electricity, gas, water) projects from their initial inclusion in the Investment Monitor database to their eventual completion or deletion over the 36 quarters from 2001 to Chart 2.2: Transition path for projects within Investment Monitor Multiperiod Transition Probabilities: From State i to Completed (τ) Probability, P i, completed Source: Clements and Si (2010). Under construction Committed Under consideration Possible Horizon τ (Quarters) Their results are shown in Chart 2.2 above, which shows the probabilities that projects of different status will progress to completion over time. For example, a project that commences as under consideration has an 80% chance of completion after 36 quarters. In contrast, projects commencing with the more aspirational status of possible have only a 54% chance of completion over that time frame. Projects that commence as committed or under construction have a greater than 90% chance of being completed. Although the analysis covers a period of 36 quarters, the chart shows that most projects are likely to proceed to completion within three to four years. The chart also shows that projects commencing in more advanced states are likely to be completed earlier. 10

20 2.1.2 Other estimates While Investment Monitor is a key source of information for this report, other sources of information are also considered. Key sources are briefly described below. The ABS CAPEX survey - Private New Capital Expenditure and Expected Expenditure, ABS Cat. No , is a widely-quoted survey of businesses investment intentions. It provides estimates of expected new capital expenditure by type of asset (new buildings and other structures/equipment, plant and machinery), as well as by industry. The survey provides an indication of investment intentions for the current and next financial year, but not for years further ahead. The survey data are reported at an aggregate level, rather than for individual projects as in Investment Monitor. Each quarter, surveyed businesses provide three figures - an estimate of actual expenditure during the financial year to date (Act), a short term expectation of expenditure (E1), and a longer term expectation of expenditure (E2). The timing of the reported data are shown in Figure 2.1. Figure 2.1: ABS CAPEX Survey Period to which reported data relates Survey quarter Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Dec-09 Act Act E1 E2 Mar-10 Act Act Act E1 E2 Jun-10 Act Act Act Act E1 E2 Sep-10 Act E1 E2 Dec-10 Act Act E1 E2 Mar-11 Act Act Act E1 E2 Jun-11 Act Act Act Act E1 E2 Source: ABS As Figure 2.1 shows, the first estimate for was provided in December 2009, the second estimate in March 2010, and the sixth (and final) estimate in March The actual expenditure is then reported in June Because businesses have historically tended to underestimate or overestimate their capital expenditure (depending on the timing of the estimate), the first to sixth estimates of capital expenditure are typically adjusted using historical realisation ratios to provide an indication of future investment. The Bureau Resource and Energy Economics (BREE) publish a semi annual listing of major investment projects in the minerals and energy sectors. This listing has a number of similarities with Investment Monitor, but there are also several differences. 11

21 BREE list of major minerals and energy development projects The full list The BREE list of major minerals and energy projects expected to be developed over the medium term is compiled every six months. Information contained in the list spans the mineral resources sector and includes energy and minerals commodities projects and mineral processing projects. The information comes predominantly from publicly available sources but, in some cases, is supplemented by information direct from companies. The list is fully updated to reflect developments in the previous six months. The projects list is released around May and November each year. What s in the list? The latest projects list contains information on 399 projects, providing the following details: project name location expected start-up date capital cost of the project proponent company or joint venture project status additional output capacity additional employment, where available. With one industry exception, the BREE list provides details of each announced project for which total capital expenditure is expected to exceed $40 million. The exception is the gold industry, which typically has a relatively large number of smaller projects. For gold, the expenditure threshold for inclusion in the list is $15 million. In general, included projects are at relatively advanced stages of planning. That is, for new projects, stage of planning categories range from pre-feasibility study underway through to under construction. Source: BREE [2011] Differences between the BREE listing and Investment Monitor reflect several factors. These include: Differences in the coverage of projects included BREE s minimum value threshold for projects is $20 million higher than for Investment Monitor, with the exception of gold projects where BREE s threshold is $5 million lower. 12

22 Differences in timing BREE s listing is based on information to April and October, compared with Investment Monitor s quarterly release in March, June, September and December (Investment Monitor is also updated on a monthly basis for some subscribers). Differences in judgements made about the status of projects (e.g. whether a project should be classified as possible, under consideration, committed, under construction or completed ). In particular, differences in the classification of large, multi-billion dollar projects of which there are many in both databases can lead to significant differences in the total value of the advanced investment pipeline. Differences in the research process the nature of the research exercise is such that some discrepancies may be expected, with research uncovering different information about projects, depending on the exact research process undertaken. Conflicting information may also be treated differently. This can result in differences in the number of projects in the database, as well as in details such as the cost of a project, and expected completion date of a project. That being said, the BREE listing and Investment Monitor tend to show similar trends in planned investment in the minerals and energy sectors over time. The Federal Treasury and the Reserve Bank of Australia publish short to medium term estimates of planned investment in Australia. These estimates incorporate information from a variety of sources, including the ABS CAPEX Survey, Investment Monitor, BREE, as well as other sources and the application of judgement. These estimates shed additional light on the outlook for investment in Australia. 2 Beyond these sources, this report also examines other information from organisations such as Infrastructure Australia which discuss specific longer term investment requirements which are not necessarily in active planning at present. 2.2 Longer term requirements How much should Australia be investing over the longer term? This is an open question as it depends on society s preferences for the goods and services it wants to deliver. We have arguably seen in recent years a public backlash against under-investment in urban infrastructure. Hence it is now attracting additional funding, and the rate of investment relative to overall GDP is rising. Longer term requirements for new infrastructure will also be influenced by how effectively infrastructure is utilised. When it comes to resources investment, the ideal level to a large extent depends on the opportunities available (based on Australia s endowment of particular commodities) and the state of global demand for those commodities. Given sharp increases in demand for commodities emanating from China in particular, Australia needs to make substantial investments in its ability to supply resources just to maintain its current global market share in the supply of commodities. 2 For example, the Reserve Bank of Australia s forecasting process also draws upon information on the levels of mineral and petroleum exploration expenditure, as well as information from its liaison with businesses. See Connolly and Glenn (2009). 13

23 For this report we have developed rule of thumb estimates of the rate of new infrastructure investment over time which would be required to support given rates of population and economic growth, and are consistent with recent trends. Investment is projected using the following calculations: Net Capital Stock t = k t-1 β Output t Investment t = Net Capital Stock t D t - - Net Capital Stock t-1 Where: k is equal to the capital-output ratio, defined as the Net Capital Stock divided by Output in a given period; β is equal to the trend change in k; and D is equal to depreciation (consumption of fixed capital). D is projected forward according to historical trend. Forecasts for output growth for the various key sectors examined are drawn from the March 2012 issue of Business Outlook publication. 14

24 3 Investment in the resources sector 3.1 Status of projects Investment Monitor Investment Monitor shows a very large value of resources projects currently under construction or committed. In total, $412.5 billion of resources projects are currently shown within the Investment Monitor database. Of this amount, about 54% ($222.8 billion) are definite, i.e. under construction or committed ; 31% ($125.8 billion) are under active investigation for a decision in the reasonably near future, i.e. in the under consideration category; and 15% ($63.8 billion) are in the possible category. This section begins by breaking down planned investments into status (definite, likely, possible) and sector (oil and gas extraction, coal, metal ores, other minerals). Next, we discuss resources investment by State. Finally, some detail on trends in resources investment is provided. $m 180, , , , ,000 Chart 3.1: Value of resources projects underway and in planning, March ,000 60,000 40,000 20,000 - Under construction Committed Under consideration Possible Source: Investment Monitor 15

25 Projects by status and sector Resources investment is dominating the overall investment landscape in Australia at present. And within resources investment, liquefied natural gas (LNG) is the current wonder child. By value some 54% of all resources projects in the Investment Monitor database at present are LNG projects. Work on the monster $43 billion Gorgon LNG project on Barrow Island is well underway and not due to be completed until In Queensland, Santos is leading a consortium which is building a new $16 billion LNG facility at Gladstone which will be based on coal seam methane reserves. Recent additions to the list of definite LNG projects include Origin Energy and Conoco s $20 billion Australia Pacific LNG project, and Inpex Alpha s $31 billion LNG project in the Northern Territory. Work has also recently commenced on the $15 billion Curtis LNG project, which involves an LNG plant and a pipeline to pipe gas from the Surat Basin. Non-LNG projects in the oil and gas sector mostly consists of gas platforms. The biggest of these is a $5 billion construction of a gas platform in Western Australia known as the North Rankin redevelopment. Outside of oil and gas, resource projects underway are led very much by iron ore projects in Western Australia. Some $10 billion worth of the value of current projects is attributable to stages 5 and 6 of BHP s Rapid Growth Project. Another significant project is Gindalbie Gold s $2.6 billion development of the Karara iron ore mine near Geraldton. Chart 3.2: Value of definite resources projects by sector Definite projects 'Under construction' and 'Committed', March 2012 Coal 6% Metal ores 15% Other 1% Oil or gas extraction 4% LNG 74% Source: Investment Monitor 16

26 LNG s dominance is less pronounced when looking at projects classed as under consideration. LNG accounts for 26% of these projects, with metal ores and coal contributing 46% and 23% respectively. The largest project on this list is the $30 billion North West Shelf LNG project near Broome. A total of 38 metal ores projects loom on the horizon these projects are generally small scale compared to the mammoth LNG projects. The biggest contributor to the list is BHP s $20 billion Olympic Dam expansion to mine uranium and copper. The next largest contributor is Aquila Resources $5.8 billion West Pilbara iron ore project. A number of coal mining projects are under active consideration. There are 10 coal projects, with a combined worth of $30 billion, on the horizon. Chart 3.3: Value of resources projects under consideration by sector Likely projects 'Under consideration', March 2012 LNG 26% Coal 23% Oil or gas extraction 5% Other 0% Metal ores 46% Source: Investment Monitor LNG also leads the way on the possible investment front, although its dominance is again significantly diminished relative to definite projects. The biggest possibility for LNG is a potential $15 billion earmarked for Woodside Petroleum s Pluto 2 project. Coal mining projects in the possible category have a slightly larger value than metal ores projects. Leading the way is a possible joint venture between Central Petroleum Limited and Allied Resource Partners to construct a $7.5 billion coal production/clean fuel plant. A number of fairly small scale projects dot the possible landscape for metal ore mining. The biggest of these is a potential second stage of Fortescue s Solomon iron ore project worth approximately $6.2 billion. 17

27 Chart 3.4: Value of possible resources projects by sector Possible projects 'Possible', March 2012 LNG 40.5% Coal 28.5% Metal ores 22.2% Oil or gas extraction 7.9% Other 0.9% Source: Investment Monitor Projects by State The heart of the current LNG boom is Western Australia and, to a lesser extent, Queensland and the Northern Territory. In terms of definite oil and gas projects (i.e. those already underway or due to commence shortly), WA has a 50% share, Queensland 30%, and the Northern Territory 18%. In terms of projects in the pipeline, WA and the Northern Territory continue to dominate, with shares of 78% and 12% respectively, while Queensland has a share of only 2%. 18

28 Chart 3.5: Value of oil and gas projects by State Oil and gas Other 3% Northern Territory 17% Queensland 22% Western Australia 60% Source: Investment Monitor New South Wales and Queensland dominate Australia s coal industry, with 100% of definite coal mining projects in the Investment Monitor database. Looking forward however, South Australia looks set to make an appearance, with around $6 billion worth of projects classified as under consideration or possible. Investment in metal ore mining is dominated by iron ore mines in Western Australia, both now and into the future. The most significant project that is not in Western Australia is the $20 billion expansion of BHP s Olympic Dam site in South Australia which is awaiting final approval. 19

29 Chart 3.6: Value of coal and metal ore projects by State SA 14% Other 13% Coal Other 9% SA 21% Metal Ores NSW 12% Qld 58% WA 72% Source: Investment Monitor Trends over time Chart 3.7 shows the remarkable growth in LNG projects over the past five years. Today, the value of oil and gas projects either under construction or soon to commence is more than double the value of all resources projects only five years ago. At the same time, investment in coal mining has stagnated. In the March 2007 edition of Investment Monitor we noted that the trend toward coal fired electricity generation is being met with environmental concerns, which may restrict the sector in the long term. Investment in metal ore mining has also grown strongly over the past five years, most of which is attributable to continuing investment in iron ore mining in Western Australia. 20

30 Chart 3.7: Definite mining projects by sector, $ billion Oil & gas extraction Coal Metal ores Other Source: Investment Monitor These trends have resulted in a shift in the composition of the investment pipeline in the resources sector towards larger projects. The average value of a resource project in Investment Monitor database has risen from $342 million in to $2.9 billion in Other estimates We now turn to consider other sources of information from: the ABS CAPEX survey; Treasury and the RBA; and BREE. The ABS CAPEX survey suggests a strong increase in mining investment in , following major gains in Specifically, the actual level of mining investment in was $47.2 billion, or a 34% increase on the previous year, according to the ABS CAPEX survey. Mining investment is then set to ramp up further in The fifth estimate of mining investment in was $94.6 billion, a 66% increase on the equivalent estimate for The fifth estimate for a financial year has historically tended to slightly overestimate the actual level of investment for that year. While realisation ratios can vary from year to year, applying the commonly used five-year average realisation ratio for the fifth estimate suggests that mining investment may be expected to increase to around $84.0 billion in $400 million in 2011 prices 21

31 Looking further ahead, the first estimate of mining investment for was $119.8 billion, a 52% increase on the first estimate for Applying the five-year average realisation ratio would imply mining investment would reach $136.8 billion in , or around 10% of GDP. Chart 3.8: Expected mining investment, ABS CAPEX survey 160 $b Expected full year Actual Implied by historical realisation ratio Source: ABS, The Federal Treasury incorporated information from the ABS CAPEX Survey in its estimate of the outlook for mining investment in the Federal Budget. At the time of the Federal Budget (May 2011), the Federal Treasury stated that record mining profitability and continued strong demand for Australia s non-rural commodities would continue to support strong levels of mining investment. It expected mining investment to reach record highs as a share of GDP in the next two years, with mining investment at around 6% of GDP in The expected increase in mining investment underpinned the Federal Treasury s forecast of a surge in growth in engineering construction of 56% over the next two years, driven by the LNG, iron ore, and coal sectors. The Reserve Bank of Australia stated in its Statement of Monetary Policy for August 2011 that it expected mining investment to rise from around 4% of GDP in to more than 6% in The RBA s figures would imply that mining investment will lift from around $48 billion in to around $85 billion in This estimate is largely consistent with the Federal Treasury and the level of mining investment implied by the ABS CAPEX survey. In short, evidence from the ABS CAPEX Survey, the Federal Treasury, and the Reserve Bank of Australia are consistent and, like Investment Monitor, point to a surge in mining investment in the next two years. 22

32 BREE provides an alternative listing of the pipeline of investment projects in the mining and energy sectors. Chart 3.9 shows a huge increase in the value of advanced projects in the BREE listing in recent years. The increase is largely driven by an increase in the value of energy projects, although minerals and infrastructure projects have also increased significantly. Chart 3.9: Value of advanced minerals and energy projects, BREE Source: BREE. Notes: dollars. Advanced projects are projects that are either committed or under construction. The total value of advanced projects in the BREE listing was $231.8 billion in October 2011 compared with a total value of definite mining projects of $222.8 billion in Investment Monitor. The total value of less advanced projects in the BREE listing was $224.2 billion. This estimate of the less advanced pipeline is somewhat larger in size than the $189.7 billion pipeline of possible mining projects in Investment Monitor (though the BREE estimates include some infrastructure projects). That being said, and as noted earlier, the BREE listing and Investment Monitor are showing similar trends in planned investment in the minerals and energy sectors both are currently showing a very large increase in the mining and energy sector s investment pipeline. 3.2 The import share of resources investment The expected surge in investment in the resources sector will be a key driver of economic growth in Australia in the near term. However, some of the capital and labour associated with the investment will be imported, which will result in the investment having a smaller immediate impact on the Australian economy than if all domestically sourced. The import share of investment projects therefore dilutes the contribution of the construction of projects to GDP. 23