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Project pipeline holding steady

Investment Monitor September 2014

30 October 2014: Australia’s transition through the ‘third phase’ of the mining boom is on track; mining-related construction work may be fading, but bulk commodity exports are breaking records. At the same time, low interest rates are underpinning a better performance from the nation’s retailers as well as a recovery in the residential construction sector.

Yet although production is growing at trend rates, income growth is limping from a sharp fall in commodity prices. That pressure is likely to worsen as mining-related construction activity subsides, and may weigh negatively on future growth in retail sales and overall consumer spending activity.

Meanwhile, the $A slipped to well below 90 US cents over the quarter. All else equal, that’s good news for Australian exporters (making them more competitive) and great news for commodity exporters given that our primary commodity exports are priced in US dollars.

However, it is China’s economic growth model that has largely underpinned the investment boom in Australia over the past decade and it is this growth model that will determine the magnitude of the export boom. Australian iron ore exports to China have grown sharply over the last decade. In value terms, total exports of iron ore and concentrates to China over 2013-14 was around $57 billion, equivalent to over 76% of total Australian iron ore exports and 20% of total merchandise exports for the year.

This surge in exports is straining Australia’s current stock of export infrastructure and a number of major port projects are underway across the country to expand capacity. Even so, the looming increase still begs the question of whether Australia’s stock of export infrastructure will be sufficient to support very large increases in mineral and energy exports.

Overall, additional coal and iron ore projects underway are expected to add over 80 Mtpa to total iron ore production capacity and more than 60 Mtpa to coal production capacity. At the same time, coal and iron ore ports currently under construction are expected to add around an additional 110Mtpa to export capacity. All else equal, that suggests that a number of projects in the planning phase will need to go ahead to prevent bottlenecks occurring.

The value of projects in the database increased by $39 billion in the September quarter to $914.4 billion. That represents a 4.4% increase from the June quarter of 2014, and is 4.7% above the level recorded a year earlier.

The value of definite projects in the database (those under construction or committed) increased by over $30 billion compared to the June quarter of 2014, offsetting much of the decline recorded earlier in the year. Overall, the value of definite projects in the database increased by 6.9% compared to the June quarter, though remains 1.2% below the level recorded a year ago.

The value of planned projects in the database (those under consideration or possible) also made ground during the September quarter, up by around $9 billion.

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