Macro gloom bears on WA projects

ECONOMIC uncertainty and volatility in commodity markets are prompting major Western Australian capital projects and related management companies to cut costs, says Deloitte.
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Justin Niessner

In its monthly WA index, the consultancy group said the Australian economy’s ability to sustain the resources boom was being tested, with $A130 billion in capital investment decisions for new projects due before 2015.

The market capitalisation of companies listed on the WA index closed the month of April at $142.5 billion – a decrease of 1.9% over the past six months.

A special edition of the report intended to focus on companies providing services to major capital projects flagged fears of a Chinese manufacturing slowdown as the cause of iron ore and base metal price drops which in turn pressured the funding of major prospects in the state.

“Volatile commodity prices, a strong Australian dollar, falling productivity and rising labour costs are just some of the issues at the core of capital project decisions,” Deloitte WA lead audit partner Tim Richards said.

“Energy and resource companies, as well as the construction and engineering services companies who guide them through the development and production process, will need to ensure that they understand volatility risks and execute more efficiency in their project deployments to succeed.”

The report highlighted Clough, Forge Group, MACA, RCR Tomlinson and Mineral Resources Limited as standout performers over the six-month period.

“Growth over the last six months has been more sporadic, impacted by global economic concerns and volatility in commodity prices, resulting in the postponement of various projects and increasing pressure on margins,” Richards said.

“Given the global financial downturn and poor economic outlook, the strong performance experienced by the movers and shakers over the last six months is certainly an achievement to be celebrated.”

Richards said, however, that softening market conditions will leave companies with no choice but to create strategies that cater to and insure against “the worst of the worst-case scenarios”.

The forecast came with an overview of falling commodity rates over the last half-year, with increased business confidence pushing down gold prices and lower European manufacturing undercutting copper and nickel markets.

Deloitte said that while iron ore has so far bucked the trend and was encouraged by a $150 billion infrastructure plan in China, it was projected to fall in price to about $US85 ($A86) per tonne by December 2014.

Fortescue Metals Group’s market cap was $10.9 billion in April, down 11.2% from the previous month while Iluka Resources’ value in April was $3.7 billion, down 4.2% compared to the previous month.

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