Expanding all over

AUSTRALIA'S engineering construction boom shows no sign of abating, putting increasing pressure on project delivery schedules and budgets as available technical service stocks thin and labour, materials and transport costs rise.
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Courtesy Wambo Coal.

Richard Roberts

“Bursting at the seams” is how the business development manager at one major Australian-based engineering firm described the current state of the key service sector. And he was not just referring to the bustling, crowded Perth and Brisbane offices of the country’s leading engineering organisations.

Massive investment in mineral production capacity and infrastructure is driving an unprecedented engineering construction frenzy in Australia, parts of South America and Asia. It has also spurred expansion of mines in Africa and North America.

From exploration and project studies, environmental assessment work and engineering design activity, to earthmoving and engineering, procurement and construction management (EPCM) contracts, there has been no shortage of work for engineering consulting and design firms, and EPC and mining contractors.

And that was before the latest announcements from BHP Billiton and Rio Tinto that they would spend a further $US2.65 billion between them to expand the capacity of their Pilbara iron ore operations in Western Australia. It isn’t receiving the same media attention, but BHPB is also spending up big on the other side of the country on its export coal production capacity: it plans to increase this to about 100 million tonnes per annum by 2010, from 58Mtpa in 2004.

The mining goliaths are leading a national betting plunge on continued economic growth in China – fuelling its huge appetite for Australian minerals and fuels by investing massively in iron ore, coal and alumina/aluminium mines, processing plants and transport infrastructure.

BHPB has another “mega-project” on its hands, the $2.37 billion Ravensthorpe nickel development in WA (including expansion of the Yabulu nickel refinery in Queensland) and, in the wake of its $9.2 billion takeover of WMC Resources, it has added the $5 billion expansion of the Olympic Dam copper-uranium-gold mine in South Australia to a deep pipeline of growth projects. The expansion will include development of Australia’s biggest openpit mine – a project so big (and remote), some international mining equipment suppliers are examining the feasibility of local manufacturing facilities to support it.

The iron ore, coal, alumina/aluminium and nickel projects make up a substantial part of the more than $11 billion of mineral and coal projects currently committed or being developed around Australia. About $11 billion of oil and gas projects are also slated for development.

Mitchell Hooke, chief executive of the Minerals Council of Australia, told a business forum in September that real spending on fixed mining, smelting and refining assets in Australia in 2005 was likely to top $8 billion for the first time since 1998.

The activity is underpinning strong growth in the value of engineering construction work completed nationally – up again in the June quarter, according to the Australian Bureau of Statistics, to $8.1 billion, including $4.7 billion of private-sector work – and record order levels for most Australian publicly and privately owned engineering and construction companies.

After projecting some hesitation earlier this year in predictions about whether the pace of construction investment and activity could be sustained into 2006 and beyond, construction and engineering industry leaders now express few doubts.

“As far as the outlook for the resources sector, we don’t see any let-up coming for a long time yet,” said Wayne Anderson, general manager business development at Brisbane-based Ausenco.

“Before people were talking three years (duration), but I think at the moment you’d feel pretty comfortable forecasting a 5-7 year cycle, and we’re only in the second year of it at the moment.”

Recognised for its successful approach to exporting Australian process engineering expertise offshore as it doubled its revenues to $100 million in the 18 months to the end of 2004 and secured new contracts in Asia and Africa, Ausenco has derived a higher proportion of its turnover from the domestic market in 2005, despite the pace of its offshore activities not letting up.

“In the past four years or so about 70% of our work has been offshore,” Anderson said.

“Now the workload is more balanced between Australia and offshore. There are more projects in Australia than there ever used to be. And I can see it continuing like that for a while.”

The view was echoed by a number of industry spokespeople. Added to a long list of new projects recorded by the Australian Bureau of Agricultural and Resource Economics (ABARE) earlier this year, engineering consultants and construction contractors are being kept busy by the latest Rio Tinto and BHPB iron ore expansion projects and a string of smaller projects headed by the $66 million Macarthur River redevelopment in the Northern Territory (owner Xstrata is also looking at potential sites for a zinc refinery), the $60 million Jaguar zinc-copper project in WA and the $40 million Angas zinc venture in South Australia.

Looming on the horizon are massive new projects such as the Olympic Dam expansion, the $750 million Boddington gold project and the $2.2 billion Hope Downs iron ore development.

The weight of projects, and pressure for rapid development, has sparked concerns about delays and cost overruns caused by labour and skills shortages, transport bottlenecks, high fuel and transport charges, and a sustained and unprecedented run on available supplies of equipment and materials from projects around the world. Orders for vital plant and equipment, and some materials, are being placed up to two years before projects get underway as proponents and contractors seek to avoid start-up delays.

But the strain on labour supplies, and in particular the finite pool of skilled labour and high-level engineering expertise, is expected to hamper development of mining and mineral processing projects in coming months.

Already, increased labour and materials costs have been blamed for delays and budget blow-outs at several projects, most noticeably the 30% increase at BHPB’s Ravensthorpe project. The company’s stainless steel materials president Chris Pointon told an analysts’ briefing in Sydney the original capital cost estimate for the project had been made in 2003, prior to a “paradigm shift” in labour and raw materials prices and availability.

“Constructors and sub-contractors have difficulty getting sufficient quality personnel,” Pointon said. “Productivity is generally lower as less experienced people are attracted to the industry.”

He said first nickel from Ravensthorpe was still expected to be shipped in the second quarter of 2007.

Hatch and GRD are joint EPCM contractors at Ravensthorpe. Peter Eggleston, corporate affairs manager at GRD, said that while he couldn’t comment on individual projects he expected cost overruns could occur as a result of rising pressure on project input costs.

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