But amongst the doom and gloom, forecasts last week from industry research firm BIS Shrapnel of a modest recovery in building starts provided welcome news for the construction industry. After falling by an estimated 12 per cent in the financial year just gone, BIS expects the value of building starts in Australia increase by eight per cent in 2011/12. The anticipated recovery in starts will occur despite the winding down of projects associated with the Building Education Revolution program (BER), and will be driven by the commercial and industrial sector (up 21 per cent) along with the healthcare sector, where starts are expected to grow by a whopping 73 per cent.
This is certainly welcome. Economic news of late has not been good. Overseas, France has now joined Italy and Spain amongst the large European countries whose debt situation concerns investors. And despite promises from the US Federal Reserve to keep interest rates low for two years, investors remain concerned about America – especially following that country’s debt rating downgrade.
Back home, things have not been much better. Following an 8.5% plunge in July, consumer confidence fell by another 3.3% to two year lows of 92.8, according to the Westpac-Melbourne Institute. Household savings ratios, now at 11.5%, are now at their highest level since the mid 1980s, according to the Reserve Bank of Australia (RBA). Perhaps most worryingly, figures from the Australian Bureau of Statistics (ABS) show that the unemployment rate has now edged up to 5.1%.
Although these developments have a silver lining – in spite of inflation concerns, it is becoming increasingly likely that the next move in interest rates will be down – the economic weakness implied in the above data is not good news for the building industry. Poor levels of consumer confidence have obvious implications for homebuilding activity, and subdued economic conditions affect demand for office, retail and industrial space.
The good news, at least according to the BIS report, is that the anticipated recovery in the building industry is still expected to take hold in spite of all this.
Downward pressure remains on Aussie
Downward pressure remains on the Australian dollar as analysts shift their views about the likely direction of interest rates in response to some of the weak economic data outlined above.
The dollar stabilised toward the end of last week, ending on Friday at $US 1.029. But it is still well down against major currencies compared with two weeks ago (see charts below).
Much focus this week will be on the Westpac-Melbourne Institute Leading Indices of Economic Activity, considered by many to be a good indicator of likely economic conditions over the next three to nine months. Should that reveal better than expected data, some of the current pressure on the dollar may subside.
Commodity prices plummet
With the notable exception of gold, prices of many commodities continued to fall early last week before stabilising toward the end of the week. For many metals, high inventory levels are causing downward pressure on prices.
In major commodities affecting the construction industry:
• Despite stabilising toward the end of the week, copper prices now at just above US$4.00 per tonne, are around ten per cent off their peak of almost $4.50 reached two weeks ago (see chart). With inventory levels at close to five year highs, downward pressure remains on prices.
• Likewise with zinc, where prices have tumbled from almost US$1.15 per tonne and are now back under $1.00 – almost at six month lows. Global inventory levels now stand at almost 900 million tonnes, according to Metalprices.com – more than four times their level three years ago.
• Steel prices are coming off the boil. In the month of July, the latest for which data is available, the Global Composite Carbon Steel Price stood at US$860 per tonne – well up from the $600-$700 levels seen in recent years but still a fair way down from the $913 peak recorded in April (see chart).
News last week that China boosted purchases of iron ore, the main raw material used in steel manufacturing, by 6.8 per cent in July indicates a degree of upward price pressure on steel due to concerns about the cost and availability of raw materials. Chinese steel output contracted by 1 per cent in July, and steelmakers are said to be concerned about possible future price increases because of expectations of increased seasonal demand in the northern hemisphere autumn.