Australian Markets Weekly

As part of the current local reporting season last week, we heard that both the Gladstone and Australia Pacific LNG projects are on track and on budget.


LNG spend peaking

As part of the current local reporting season last week, we heard that both the Gladstone and Australia Pacific LNG projects are on track and on budget. During this past half year, the Gladstone LNG project has moved ahead from being 75% complete six months ago to now being approximately 85% complete with production and exporting set to start in the first half of 2015, probably the first quarter. The Australia Pacific LNG project has gone from 60% complete in the previous half to 75% and is on track to begin production and export later in 2015.

Combined, these are $42.7bn projects. Along with the other five LNG projects that are currently underway, LNG project Capex by our estimates might have been up to $A10bn this past quarter which is just under half of what total ABS Capex survey reported as Mining industry spending in the first quarter of the year. Bearing in mind the inclusion of on-going ‘maintenance’ spending as part of ABS Capex spending, current LNG spending would likely account for well in excess of half of total capacity-expansion spending.

Major resource capex profile

As LNG projects are completed over the course of the next one to two years, capital expenditure spending will decline at a more rapid rate. The fastest rate of decline of LNG spending may not be evident for a few quarters yet, becoming more prominent through 2015 and 2016. This will come with a decline in the order of up to 3% of GDP. For this week’s Q2 release, we expect total Mining Capex declined again after an 8.7% Q1 fall as iron ore project expansion was completed with spending in the coal industry constrained by low coal prices, restricting cash flow.

Against that Mining decline, there are some tentative signs investment in other industries may be stabilising. The NAB Business Survey measure of Capex expectations for the following 12 months has picked up from an index reading of 10 at the end of 2012 to 21 by the June quarter 2014 survey. The Monthly NAB Survey Capex spending index has recovered somewhat from having been negative at -2 as recently as last October to +4 by July 2014. Not a breathtaking rise, but some welcome improvement nevertheless. An update of 2014/15 expectations will be examined for any clues on this front.

Week ahead – Construction, Capex and Credit

Overall, taking into account the above, for the ABS New Private Capital Expenditure Survey for the June quarter (released on Thursday), we look for a decline of 2% in the quarter. Before then on Wednesday comes the Construction Work Done release. That release is a composite of residential, non-residential building and engineering construction, the release encompassing both private and public sector spending and thus feeding into several related spending estimates in GDP. The positive story in the report will be in dwelling investment, with non-residential building and engineering spending likely lower.

The other release for the week is RBA credit on Friday. NAB’s estimate is a low 0.1% that comes after last month’s higher 0.7%. That strong outturn resulted from the temporary impact of a large business credit bridging loan with payback expected in July. Housing credit is set to continue rising at recent rates.