Regional Market Outlook on Engineering and Construction Industry

The construction industry in Australia is witnessing growth in major project works through mid-2019, following the three years of declining construction activity. A key positive will be strengthening non-mining infrastructure work, in line with significant growth from public sector spending on transport infrastructure projects.

Mining-related construction is expected to recover; commercial construction is forecast to pick up with a strong pipeline of work over the next two years

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Engineering Construction Market Outlook: Australia

Mining and oil & gas work witnessed a decline (particularly in 2018), yet conditions will be supported by a continuation of solid public sector spending on transport infrastructure projects.

Despite a further winding down in mining–related construction, conditions will be boosted by the emerging phase of strong public sector spending on transport infrastructure projects, telecommunications infrastructure, coupled with NBN-related investment.

Engineering Construction Work Done

  • Engineering construction* is expected to rise by 6.5 percent in 2018–2019, underpinned by a sustained upturn in the value of non-mining infrastructure construction work (12.0 percent). Both road (+7.4 percent) and rail (+8.5 percent) projects will build on their current high base of activity. Other key contributors to growth include civil projects (+32.9 percent) and telecommunications infrastructure (+22.3 percent)
  • Resource-related engineering construction is expected to continue to decline during 2018–2019. Weakness will be concentrated in the oil & gas processing sector (-54.8 percent). However, the drag from reduced mining investment (other than oil and gas) is expected to have a slower fall of 7.9 percent during 2018–2019, compared to 13.5 percent during 2017–2018

Porter’s Five Forces Model 

The construction industry in Australia is in the growth phase with large-scale projects are being announced at resource and infrastructure sector. Even though the market has several highly capable suppliers, there will be pressure on the buyers for choosing the best suitable supplier. This scenario will result in higher margins for suppliers and lower bargaining power for buyers.

Supplier Power

  • The engineering and construction market in Australia is highly competitive with large, global firms and regional medium & small-scale firms
  • Supplier power remains medium to high, based on the current economic conditions that are prevailing in Australia
  • The construction market is in the growth phase and hence, the suppliers/contractors are highly competitive in bidding the infrastructure tenders from the buyers
  • Over the next few years, the supplier power in the industry may gradually increase, due to the inflow of various capital projects from both the public and private sectors

Barriers to New Entrants

  • Barrier to entry remains high, due to:
    • High upfront capital required
    • Requirement of skilled workforce in a tight labor market
  • As the engineering and construction market is consolidated, new entrants from other geographical locations via possible mergers and acquisitions, which is less in the sub-sector
  • Building codes and regulations are highly complex, which has further raised the barrier

Intensity of Rivalry

  • The market is highly dominated by top regional and global players (approx. 25 percent of the contractors hold 70 percent of projects in Australia), who has high expertise in the engineering sector
  • As the industry is in the growth phase, there is high competition among regional and global players to acquire new projects and the scenario is expected to prevail for the next few years

Threat of Substitutes

  • Engineering service providers are one of the major essentials for mining and resource industry and hence, there is no substitutes for their role
  • The only alternative position is to manage the engineering requirements internally if there are large investment plans for the near future

Buyer Power

  • Buyer power is directly proportional to their investment and volume of projects compared to the overall investment in the sector
  • Due to the high inflow of investments in mining, resource, and industrial construction, large global suppliers will be not show much interest on low-investment projects. This scenario is expected to prevail for the next few years
  • Increasing the competition among incumbent suppliers to retain the current contract at respective locations will give higher buyer power in small project deals

Engineering Consultancy Firm: Cost Structure

  • Cost structure for Engineering Consultancy (EC) firms is higher in Australia, as employee benefits and allowances are higher
  • Profit margins * vary depending on supply/demand and market structure. As the Australian mining sector is recovering with an inflow of new investments, the profit margins will be higher for top contractors
  • Labor costs (contributing to approx. 50 percent of total costs) can be minimized by sourcing commoditized services with local suppliers
  • Overheads can be negotiated based on experience and size of the firm:
    • Highly leveraged firms typically have high overhead costs
    • Low utilization rates will be passed onto the client in the form of overheads
    • Travel expenses can be minimized by outsourcing to remote locations or by sourcing locally, depending on cost vs. quality benefits