major project update -march 2013

CONTRIBUTORS

Dylan Eades Economist +61 2 9227 1062 [email protected] Ivan Colhoun Chief Economist, Australia +61 2 9227 1780 [email protected]

AUSTRALIAN MAJOR PROJECT UPDATE

ANZ RESEARCH

MAJOR PROJECTS PIPELINE REVISED LOWER AGAIN: MINING AND RESOURCES INVESTMENT EXPECTED TO DECLINE SHARPLY FROM H2 2014

We have again revised lower the potential pipeline of major projects in Australia to AUD440bn as at March 2013 from AUD474bn in October 2012 and AUD498bn in July 2012. These downgrades reflect the additional cancellation and indefinite delay of a number of uncommitted projects, in the mining and resources sector. A considerable degree of uncertainty remains for currently uncommitted projects with only 60% (i.e. AUD270bn of the AUD440bn total) of the potential pipeline either committed or already under construction.

An estimated AUD75bn of mining projects have been removed from the potential investment pipeline over 2013-2016. However, these downgrades have been partially offset by the addition of some new projects to the pipeline, as well as cost upgrades to existing projects, particularly in the LNG sector. We now expect overall mining and infrastructure investment to peak around the middle of 2013, remain at a relatively high level until the end of 2013, before declining. We expect that investment in the mining and resources sector will decline particularly sharply over the second half of 2014 and 2015 and at a somewhat quicker pace than the RBA is currently anticipating, underlining the importance that other sectors of the economy strengthen over the next 12-18 months.

Investment in the energy sector remains elevated. There are currently seven mega-LNG projects under construction, with an estimated capital expenditure of AUD130bn between 2013 and 2016. However, we expect that investment in this sector will peak at the end of 2013 and decline thereafter. Furthermore, the possible next wave of LNG investment in Australia faces a variety of challenges related to escalating labour costs, the high Australian dollar and the potential competitive threat of LNG exports from the United States. As a result, there is now only a very small likelihood of further onshore greenfield LNG developments being commissioned. We expect that companies will instead prefer to expand existing LNG facilities as well as employ more cost effective FLNG technology for offshore LNG developments.

Investment in Western Australia is likely to decline more quickly than in Queensland, mostly due to the differing capital expenditure profiles for these states’ respective LNG projects.

Our bottom-up analysis of major projects jars somewhat with the most recent ABS capital expenditure survey. Firms’ first estimates of capital expenditure intentions for 2013-14 implied that investment in the mining and resources sector will continue to rise over the course of 2013-14. We remain somewhat sceptical of this result, given the large number of projects that have either been cancelled or deferred, and the shift in the focus of resource companies to controlling costs rather than pursuing expansion and growth opportunities. Furthermore, there has been a clear shift in the funding environment, with a number of projects finding greater difficulty in obtaining finance.

Australian Major Project Update / April 2013 / 2 of 28

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MAJOR PROJECTS UPDATE: PIPELINE REVISED LOWER AGAIN

We have revised lower the potential pipeline of major projects in Australia to AUD447bn from AUD474bn in October 2012 and from AUD498bn in July 2012. In total, project cancellations and indefinite delays have reduced the potential project pipeline by around AUD115bn since July 2012. However, these downgrades have been partially offset by the addition of some new projects to the pipeline, as well as cost upgrades to existing projects.

Indeed, the sharp decline in bulk commodity prices in the second half of 2012 resulted in mining and resource companies, particularly coal and iron ore firms, scaling back their investment intentions as expected returns on projects declined and project financing became more difficult to secure. Since July 2012, an estimated AUD75bn of mining and resource projects have been removed from the potential investment pipeline over 2013-2016. As a result, we now expect investment to peak around mid 2013 (remaining at a relatively high level until the end of 2013) before declining. We anticipate that investment within the mining and resources sector will decline particularly sharply over the second half of 2014, underlining the importance that other sectors of the economy strengthen over the next 12-18 months. FIGURE 1: TOTAL INVESTMENT BY STAGE

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2011 2012 2013 2014 2015 2016Under construction Committed Under consideration Possible Cancelled/Indefinitely delayed

AU

Dbn

Potential investment pipeline excluding projects that have been either cancelled or indefinitely delayed since July 2012 Investment pipeline for

projects that are either under construction or

FIGURE 2: TOTAL MAJOR PROJECT INVESTMENT PIPELINE

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2012 2013 2014 2015 2016

July 2012 October 2012 March 2013

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Dbn

Sources: Access Economics, BREE, state government budget papers, company reports, ANZ


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FIGURE 3: MAJOR PROJECTS CANCELLED / INDEFINITELY DELAYED SINCE JULY 2012 (CAPITAL EXPENDITURE GREATER THAN AUD1BN)

Company Project Total cost (AUD) State Industry Details

Cancelled / Indefinitely DelayedBHP Olympic Dam Expansion $30bn SA Mining Project indefinitely delayedBHP Port Hedland Outer Harbour

Expansion$30bn WA Ports Project indefinitely delayed

Woodside Pluto 2 $14.9bn WA Energy Woodside did not find enough gas for second train. Other options are being considered

Port of Hastings Development Authority

Port of Hastings $9.4bn VIC Ports Project indefinitely delayed

Aqulia Resources West Pilbara Iron Ore Project $7.4bn WA Mining Project put on hold due to difficulty in securing financing

Xstrata Wandoan Coal Project $7bn QLD Mining Project delayed due to market conditions and difficulty in securing financing

Western Australia Government Anketell Port Expansion $7bn WA Ports Project indefinitely delayedWaratah Coal China First Coal Project $8.3bn QLD Mining Project delayed due to market

conditions, as well as difficulty in securing infrastructure approvals and financing

Mitsubishi Oakajee Port and Rail $5.9bn WA Rail/Port Project indefinitely delayedMitsubishi Jack Hills Iron Ore Project $4.3bn WA Mining Project indefinitely delayedHydro Aluminium Kurri Kurri Aluminium Smelter $4bn NSW Manufacturing Project cancelledChina Metallurgical Group Cape Lambert Iron Ore Project $3.7bn WA Mining Project put on hold indefinitelyAtlas Ridley Magnetite Project $3bn WA Mining Project cancelledGrange Resources Southdown Magnetite Project $2.9bn WA Mining Project delayed with the company

significantly cutting staff. Project will not proceed in the near to medium term

Aquila/Vale Belvedere Coking Coal Project $2.8bn QLD Mining Project put on hold indefinitelyGunns Bell Bay Pulp Mill $2.8bn TAS Manufacturing Project cancelledBHP Peak Downs Expansion $2.2bn QLD Mining Project cancelledBHP Goonyella Rail Project $2bn QLD Mining / Rail Project cancelledWaratah Coal Galilee Basin Rail Project $2bn WA Mining Queensland government has stated

that GVK's multi-user rail line is their preferred development option for the Galilee Basin

Alcoa Wagerup Alumina Refinery Stage 3 $1.7bn WA Manufacturing Project has been put on holdQueensland Government Toowoomba Bypass $1.7bn QLD Roads Project has been described as

commercially unattractiveJupiter Mines Mount Ida Magnetite Project $1.6bn WA Mining Project indefinitely delayedAGL Dalton Power Project $1.5bn NSW Electricity Project suspendedAREVA/CS Energy Solar Dawn Project $1.5bn QLD Electricity Project cancelled CopperString Townsville to Mount Isa

Transmission Link Project$1.5bn QLD Electricity Project cancelled

Heron Resources Goongarrie Nickel Project $1.4bn WA Mining Project on hold until market conditions improve

Alcoa Alumina Smelter Upgrade $1.4bn VIC Manufacturing Project cancelledSunWater Connors River Dam & Pipelines $1.3bn QLD Water Project cancelledXstrata Surat Basin (Southern Missing Rail

Link) Rail Line$1bn QLD Rail/Port Project cancelled

Sinosteel Midwest Corporation Weld Range Project $1bn WA Mining Project cancelled FIGURE 4: MAJOR PROJECTS ADDED TO DATABASE AND COST INCREASES SINCE JULY 2012 (CAPITAL EXPENDITURE GREATER THAN AUD1BN)

Company Project Total cost (AUD) State Industry Details

Projects added to the pipelineChevron/Shell/Exxon Mobil Gorgon 4th Train $10bn WA Energy Final investment decision due in

2013New South Wales Roads and Maritime Services

West Connex Project $10bn NSW Roads Debates occurring between state and federal government over project financing.

Victorian Government East-West Link Tunnel $10bn VIC Roads Project remains highly uncertainVictorian Government Melbourne Metro Rail Project $5.5bn VIC Rail Project is currently in planning

stagesPort Waratah Coal Services Kooragang Island Expansion $5.1bn NSW Ports Project started construction in

2012Australian Rail Track Corporation

Hunter Valley Capacity Increase $3.2bn NSW Rail Project scheduled to begin in 2014

Australian Rail Track Corporation

Melbourne to Brisbane Inland Rail Alignment Project

$2.3bn Aust Rail Project scheduled to begin in 2015

Iron Road Central Eyre Iron Ore Project $2.6bn SA Mining Project is currently in planning stages scheduled to start in 2015

Hydro Tasmania King Island Wind Farm $2bn TAS Electricity Project scheduled to begin in 2015

Transport New South Wales Circular Quay to Central Light Rail Project

$1.6bn NSW Rail Project scheduled to begin in 2014

Western Australia Government Perth Light Rail Project $1.6bn WA Rail Project scheduled to begin in 2016

Qcoal Byerwen Coal Project $1.6bn QLD Mining Project is currently under consideration

Queensland Government Nathan Dam and Pipeline Project $1.4bn QLD Mining Project scheduled to begin in 2014

Rio Tinto Marandoo Iron Ore Expansion $1.1bn WA Mining Project started in 2012Suzlon Group Yorke Peninsula Wind Farm $1.3bn SA Electricity Project scheduled to begin in 2014

BHP/ESSO Longford Gas Plant Upgrade $1bn VIC Electricity Project scheduled to begin in 2014


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Company ProjectTotal cost

(AUD) State Industry Details

Cost IncreasesChevron/Shell/Exxon Mobil Gorgon LNG Project $52bn WA Energy Increased project cost estimate to

$52bn from $43bnOrigin/ConocoPhillips/Sinopec Australia Pacific LNG $24.7bn QLD Energy Increased project cost estimate to

$24.7bn from $23bnHancock Prospecting Roy Hill Iron Ore Project $9.5bn WA Mining Increased project cost estimate to

$9.5bn from $7.2bnNew South Wales State Rail Authority

West (Epping to Rouse Hill) Metro Rail Link

$9.2bn NSW Rail Increased project cost estimate to $9.2bn from $8.5bn

CITIC Pacific Sino Iron Ore Expansion $7.4bn WA Mining Increased project cost estimate to $7.4bn from $6.1bn

Rio Tinto Cape Lambert Port Expansion $3.7bn WA Ports Increased project cost estimate to $3.7bn from $1.2bn

Australasian Resources Balmoral South Project $3.3bn WA Mining Increased project cost estimate to $3.3bn from $2bn

Rio Tinto Nammuldi Iron Ore Expansion $3bn WA Mining Increased project cost estimate to $3bn from $2.1bn

Rio Tinto Kestrel Coal Mine expansion $1.9bn QLD Mining Increased project cost estimate to $1.9bn from $1.2bn

Xstrata Ravensworth Underground Coal Project

$1.4bn QLD Mining Increased project cost estimate to $1.4bn from $750m

Main Roads WA Gateway WA - Perth Airport and Freight Access

$1bn WA Roads Increased project cost estimate to $1bn from $387m

Projects RestartedFortescue King's Project $1.6bn WA Mining Project is expected to be

completed by end of 2013 Sources: Access Economics, BREE, state government budget papers, company reports, ANZ

Uncommitted coking and thermal coal projects have been particularly subject to deferrals and cancellations. The sharp deterioration in coal prices, despite some recent improvement, has been compounded by the stubbornly high Australian dollar and elevated labour costs, which has increased capital costs for both new and expansion projects. Indeed, BHP has announced the suspension of its Goonyella rail project and the cancellation of its Peak Downs coal mine expansion, while Waratah Coal has struggled to attain project financing and infrastructure approvals for its AUD8.3bn China First Project. Furthermore, with coal prices forecast to increase only marginally from their current lows, it’s unlikely that such price levels will be sufficient for mining companies to recommence deferred projects. That said, we continue to attach a greater likelihood to both GVK’s Alpha Coal Project and Adani’s Carmichael Coal Project proceeding and have not removed these projects from our potential investment pipeline.

FIGURE 5: SPOT BULK COMMODITY PRICES AND AUD

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07 08 09 10 11 12 13Iron ore (lhs) Met coal (lhs) Thermal coal (lhs) AUD/USD (rhs)

USD

/t

AU

D/U

SD

Sources: Bloomberg, ANZ

Conditions in the iron ore market have improved markedly over the past three months, with prices bouncing back sharply to a high of USD158 per tonne from a low of USD86.7 per tonne in September 2012. Despite the rebound in prices, to date there has been little evidence of mining companies


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restarting deferred iron ore projects. At this stage, Fortescue’s decision to resume work on its Kings deposit (AUD1.6bn), is the only major deferred iron ore project to have been reinstated. The reluctance on the part of mining companies (and investors) to recommit to deferred projects most likely reflects their uncertainty over the sustainability of the recent gains in iron ore prices coupled with the continuing high AUD. In fact, prices have already recently declined to around USD140 per tonne.

While domestic demand conditions have improved in China, part of the recovery in iron ore prices is likely the result of strong re-stocking activity by Chinese steel mills. Importantly, Chinese steel prices have not improved by the same magnitude, suggesting that iron ore prices are more likely to ease from their current levels than rise over the course of 2013. Furthermore, our commodity strategists are forecasting seaborne iron ore supply to increase by a cumulative 160 million tonnes over the next two years, which will place further downward pressure on prices. ANZ forecasts that iron prices will decline to USD125 per tonne by Q4 2014, which is a little higher than current iron ore swaps that have prices falling to USD110 per tonne by December 2014.

Nonetheless, given Australian iron ore mining operations tend to be at the lower end of the global cost curve, some deferred iron ore projects could potentially be restarted. Companies are likely to favour smaller expansions of existing projects, however, where existing infrastructure can be utilised, rather than greenfield developments with higher capital expenditure requirements.

There has also been a marked shift in the focus of mining and resource companies to controlling costs rather than pursuing expansion and growth opportunities. Both BHP and Rio Tinto have recently appointed new CEOs with a clear remit to reduce costs in an environment of thinner margins. Rio Tinto, for example, has announced it is targeting around AUD5bn in cost savings over 2013 and 2014. This shift has been driven by the decline in bulk commodity prices, the persistently high Australian dollar and elevated labour costs, which have lowered profits and squeezed margins. BHP, for example, reported that the margins (earnings before interest and tax) on thermal coal had declined to around 10% down from around 35% in 2009. This shift in focus to controlling costs has also resulted in reduced demand for labour. Indeed, in Western Australia and Queensland, the Seeks Job Ads series (an indicator of labour demand) has weakened markedly.

FIGURE 6: SPOT IRON ORE VS. STEEL PRICES

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130

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Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13

Chinese iron ore (Tianjin port, 62% Fe) Shanghai steel (rebar)

USD

/met

ric

tonn

e CN

Y/metric tonne


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FIGURE 7: IRON ORE COST CURVE

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0 200 400 600 800 1,000 1,200 1,400

USD

/ton

ne

Perceived China Iron ore floor price - $120/t

Accumulative Production (m tonnnes)

Permanent closures - $110/t

AustraliaBrazilChinaOther

Source: Metal Analytics

FIGURE 8: GROSS OPERATING PROFITS

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00 01 02 03 04 05 06 07 08 09 10 11 12

MiningTotal (excluding mining)

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n)

Source: ABS

FIGURE 9: GROSS OPERATING PROFIT / SALES

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0.35

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0.45

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0.55

01 02 03 04 05 06 07 08 09 10 11 12

Mining

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Source: ABS


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FIGURE 10: SEEK JOB ADS BY STATE

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04 05 06 07 08 09 10 11 12 13

NT QLD WA AUS

Inde

x, a

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002-

04 =

100

(s.

a.)

Source: Seek

In contrast, investment in the energy sector remains elevated. There are currently seven mega-LNG projects under construction, with an estimated capital expenditure of AUD130bn between 2013 and 2016. We anticipate that capital expenditure on LNG projects will peak later this year, before also declining in 2014. At this stage, it is unclear how quickly investment in the LNG sector will decline given the uncertainty over whether the Browse, Arrow and Scarborough projects and the Gorgon expansion will proceed:

Browse LNG project: The decision by Woodside to cancel its onshore Browse LNG project on James Price Point did not come as a surprise to us. Both Woodside and Shell (its joint venture partner) have been backing away from the onshore processing plan due to cost pressures, environmental concerns and the low rates of return associated with the project. If the Browse project proceeds, we think the joint venture partners will likely employ floating LNG (FLNG) technology, given its lower cost and likely better economic returns. However, a North-West Shelf tie-back also remains a possibility. If the project proceeds using FLNG technology the Australian economy will receive very little benefit during the construction phase of the project as around 90% of construction will occur offshore.

Arrow LNG project: At this stage, we think it is increasingly unlikely that Shell and PetroChina will pursue Arrow as a stand-alone project, mostly due to elevated construction and capital expenditure requirements. Instead, we think that the joint venture will favour a third party agreement in which the Arrow development is combined with one of the other LNG projects already under construction. While such an agreement would likely involve the construction of an additional LNG train, the required capital expenditure would be significantly lower than the estimated AUD25bn for the Arrow project. Shell has intimated that it will delay the final investment decision on this project until the end of 2013/start of 2014.

Gorgon 4th train expansion: We remain of the view that Chevron will approve the AUD10bn expansion of the Gorgon project, given the expansion would improve the overall economics of the project.


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Scarborough LNG project: BHP Billiton and ExxonMobil hope to begin advanced engineering studies on a Scarborough LNG Project by the middle of 2013. Floating LNG is now considered the most likely development path as discussions with Woodside and Chevron to supply gas to their Pluto and Wheatstone LNG projects respectively appear to have stalled. A floating LNG development is estimated to have a capital cost of AUD10 billion. However, we don’t expect this project to begin until 2017.

In general, the possible next wave of LNG investment in Australia faces a variety of challenges related to escalating labour costs, the high Australian dollar and the potential competitive threat of LNG exports from the United States. As a result, there now seems to be a fairly small likelihood of further onshore greenfield LNG developments being commissioned. We expect that companies will instead prefer to expand existing LNG facilities as well as employ the more cost effective FLNG technology for offshore LNG developments.

FIGURE 11: ENERGY INVESTMENT BY STAGE

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2011 2012 2013 2014 2015 2016Under Construction Under Consideration Possible Completed Cancelled

AU

Dbn

Investment pipeline excluding projects that have been either cancelled or indefinitely delayed since July 2012

Ivestment pipeline for projects that are either under construction or

committed

FIGURE 12: MAJOR LNG PROJECTS

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2011 2012 2013 2014 2015 2016 2017

Scarborough (Possible)Arrow (under consideration)Gorgon (4th train - under consideration)Browse (Possible)North RankinWheastoneQLNG (BG Group)GLNGGorgonAPLNGIchthysPrelude

AU

Dbn

Investment pipeline for projects that are either under

construction or committed

Sources: Access Economics, BREE, company reports, ANZ


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FIGURE 13: LNG PROJECT BREAK-EVEN COSTS

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ude

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uto

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hys

APL

NG

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atst

one

LNG

GLN

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FOB B

reak

even

Pri

ce (

USD

/mm

btu)

Source: Wood Mackenzie

We would caution, however, that while the aggregate capital expenditure numbers in the LNG sector are impressive, their impact on domestic GDP growth during the investment phase is expected to be lower than equivalent-sized iron ore or coal projects due to the higher import content of LNG projects. The RBA has suggested that imports account for around 70% of total construction costs for LNG projects in north-west Western Australia; the import component of gas projects in Queensland is likely to be lower (although there is a high degree of uncertainty around these estimates). For projects utilising floating LNG technology, however, such as the Prelude project and potentially the Browse LNG development, the import component is closer to 90% of total construction costs. As such, the impact of LNG investment (excluding imports) on GDP is considerably smaller than estimated by the headline project costs (both during the run up and subsequent windback phase). Figures 11 & 12 underscore the drag that mining and resources investment will play on Australian GDP in 2014 and 2015.

FIGURE 14: MAJOR LNG PROJECT CAPITAL EXPENDITURE

Company Project Cost (AUD)

Import Content

Domestic Capital

Expenditure (AUD)

State Stage Details

ConventionalChevron/Shell/Exxon Mobil Gorgon 52bn 70% 15.6bn WA Under Construction Project to be completed in 2014

Total/Inpex Ichthys 34bn 70% 10.2bn NT Under Construction Project to be completed in 2016Chevron/Apache/Shell Wheatstone 29bn 70% 8.7bn WA Under Construction Project to be completed in 2016

Unconventional - CSGOrigin/ConocoPhillips/Sinopec Australia Pacific LNG 23bn 50% 11.5bn QLD Under Construction Project to be completed in 2016

BG Group Queensland Curtis LNG 20bn 50% 10bn QLD Under Construction Project to be completed in 2014Santos/Petrona/Total/Kogas Gladstone LNG 18.5bn 50% 9.2bn QLD Under Construction Project to be completed in 2015

Shell/PetroChina Arrow LNG 25bn 50% 12.5bn QLD Under Consideration Project yet to be approvedFloating LNG (FLNG)

Shell/Inpex Prelude (Floating LNG) 12.6bn 90% 1.3bn WA Under Construction Project to be completed in 2016Woodside/BP/Shell/PetroChina Browse 35bn 90% 3.5bn WA Possible Project yet to be approved

BHP/ExxonMobil Scarborough LNG project 10bn 90% 1.0bn WA Possible Project yet to be approved Sources: Access Economics, BREE, company reports, ANZ


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FIGURE 15: INVESTMENT PIPELINE (PROJECTS UNDER CONSTRUCTION AND COMMITTED)

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2010 2011 2012 2013 2014 2015 2016

Projects under construction and committed (ex-LNG imports)Projects under construction and committed

AU

Dbn


OUTLOOK BY STATE

Investment in Western Australia is likely to remain elevated until the end of 2013 due to additional work on both the Gorgon and Wheatstone LNG projects as well as a number of smaller iron ore projects. At present, our estimate of the total potential pipeline of major project investment for Western Australia is around AUD160bn across 2013-16, with about 60% of these projects either under construction or committed to. Around 65% of committed investment is concentrated in the LNG sector. How quickly investment activity in Western Australia declines from the end of 2013 will be dependent on whether the 4th train at Chevron’s Gorgon project and the Browse LNG project and are approved.

As noted earlier, if the Browse LNG project is eventually approved, it will most likely be developed using FLNG technology. If FLNG is utilised, the benefits to the Western Australia economy during the construction phase of the project would be extremely limited, given that around 90% of the construction would occur offshore.

Despite the strong investment pipeline in Western Australia, a significant number of projects have been either indefinitely delayed or cancelled. This includes BHP’s Port Hedland Outer Harbour Expansion, Woodside’s Pluto 2 LNG project and Mitsubishi’s Oakajee Port and Rail Project. Overall, we would estimate that around AUD45bn of projects have been either cancelled or indefinitely delayed between 2013 and 2016.


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FIGURE 16: WESTERN AUSTRALIA - MAJOR PROJECT INVESTMENT BY STAGE

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Potential investment pipeline excluding projects that have been either cancelled or indefinitely delayed since July 2012 Investment pipeline for

projects that are either under construction or committed

FIGURE 17: WESTERN AUSTRALIA - ENERGY INVESTMENT BY STAGE

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Potential investment pipeline excluding projects that have been either cancelled or indefinitely delayed since July 2012

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FIGURE 18: WESTERN AUSTRALIA - MINING INVESTMENT BY STAGE

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Potential investment pipeline excluding projects that have been either cancelled or indefinitely delayed

since July 2012Investment pipeline for

projects that are either under construction or committed



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In Queensland, ANZ’s major project pipeline indicates that investment within the mining and resources sector is likely to contribute to growth only marginally over the course of 2013, but remain at a relatively elevated level over the course of 2014 due to both LNG and mining projects. The outlook for mining investment has deteriorated markedly, following the sharp decline in thermal and coking coal prices at the end of last year, which resulted in a number of projects being delayed. Unlike iron ore, Australia does not enjoy quite the same competitive advantage in thermal and coking coal, with margins across these commodities significantly lower, implying that even if prices increase modestly over 2013 it’s not clear whether such price levels will be sufficient (or sustained long enough) to drive a significant increase in capital expenditure in the coal sector, given the persistently high AUD.

How quickly investment in the mining and resources sector declines from its peak, will be dependent on whether GVK’s Alpha Coal Project, Adani’s Carmichael Coal Project and Shell/Petro China’s Arrow LNG project are approved.

FIGURE 19: QUEENSLAND - MAJOR PROJECT INVESTMENT BY STAGE

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since July 2012



FIGURE 20: QUEENSLAND - ENERGY INVESTMENT BY STAGE

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Under Construction Under consideration

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Potential investment pipeline



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FIGURE 21: QUEENSLAND - MINING INVESTMENT BY STAGE

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Potential investment pipeline excluding projects that have been either cancelled or

indefinitely delayed since July 2012



Sources: Access Economics, BREE, company reports, ANZ

The investment pipeline in the Northern Territory will be almost entirely dominated by the AUD34bn Ichthys LNG project, which will account for almost 80% of the total potential investment pipeline across 2013-16. Capital expenditure on this project is expected to peak this year, before declining slightly over the course of 2014 and more sharply thereafter.

FIGURE 22: NORTHERN TERRITORY – ICHTHYS PROJECT VS. OTHER INVESTMENT

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2012 2013 2014 2015 2016Ichthys Other

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NON-MINING STATES

The investment pipeline for New South Wales appears to be improving, with around AUD50bn of major projects in the pipeline across 2013-16. Encouragingly, the New South Wales government has signalled its intention to increase infrastructure investment, with a number of large-scale projects earmarked. These projects include the North West Metro-Rail Link (AUD9.2bn) and WestConnex Road Project (AUD10bn). As such, the strength of infrastructure investment from 2014 onwards will be highly dependent on whether or not the government commits to these projects. New South Wales is also benefiting from its limited exposure to both the gas and coal sectors.


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FIGURE 23: NEW SOUTH WALES - MAJOR PROJECT INVESTMENT BY STAGE

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since July 2012




There is a high degree of uncertainty surrounding the major infrastructure pipeline for Victoria. Overall, the pipeline looks reasonably healthy with just under AUD40bn worth of projects possible across 2013-16. Of these projects, however, only 40% are either committed or under construction. Much of the uncertainty surrounds a number of large-scale projects including the Melbourne Metro Rail Link (AUD5.5bn) and the East-West Link Tunnel (AUD10bn). At this stage, these projects are only in the early planning phase, and there has been no firm commitment by the government that these projects will proceed. Indeed, Tony Abbott has intimated that if the Coalition were to win the election it would provide federal funding for the East-West Link Tunnel, but not the Melbourne Metro Rail Link project. The near-term 2013 weakness in Victoria’s investment profile reflects the completion of a number of large projects such as the Wonthaggi Desalination Plant. The indefinite delay to the Port of Hastings Development (AUD9.2bn) was also a significant negative development recently for the Victorian pipeline.

FIGURE 24: VICTORIA - MAJOR PROJECT INVESTMENT BY STAGE

0

2

4

6

8

10

12

14

16


AU

Dbn

Potential investment pipeline excluding projects that have been either cancelled or indefinitely

delayed since July 2012



AU

Dbn



15


The cancellation of BHP’s AUD30bn Olympic Dam project was a significant negative for South Australia, given the major benefit this project would have had on the economy. While major project activity is likely to remain contained over the next 12 months, there is some scope for an upswing in construction activity in 2014, with a number of resource projects currently under consideration.

The outlook for both Tasmania and the Australian Capital Territory remains subdued, with the latter economy likely to be affected by significant cost cutting of government expenses if there is a change of federal government in September this year.

FIGURE 25: SOUTH AUSTRALIA - MAJOR PROJECT INVESTMENT BY STAGE

0

2

4

6

8

10

12


AU

Dbn


indefinitely delayed since July 2012




FIGURE 26: TASMANIA - MAJOR PROJECT INVESTMENT BY STAGE

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8


AU

Dbn


indefinitely delayed since July 2012 Investment pipeline for projects that are either under




16


FIGURE 27: AUSTRALIAN CAPITAL TERRITORY - MAJOR PROJECT INVESTMENT BY STAGE

0.0

0.1

0.2

0.3

0.4

0.5

0.6

2011 2012 2013 2014 2015 2016

Under Construction Under consideration Possible

AU

Dbn


construction or committedPotential investment pipeline


OUTLOOK BY INDUSTRY

ENERGY

Australia’s energy sector is undergoing a significant transformation with a number of mega-projects LNG currently under construction. Our forecasts for investment in the energy sector between 2013 and 2016 have been revised downward to AUD168bn from AUD191bn in Q2 2012 due to the cancellation of Woodside’s Pluto 2 project as well as the decision to push out the starting date of a number of projects, offsetting cost upgrades to existing projects and new additions to the pipeline.

As noted earlier, the potential next wave of LNG investment in Australia appears to face a variety of challenges related to higher labour costs, the high Australian dollar and the potential competitive threat of LNG exports from the United States. As such, how quickly investment within the energy sector declines from 2014 onwards will be dependent on whether additional projects (Arrow, Browse and 4th train at Gorgon) are approved. While we expect that the 4th train at Gorgon will be approved there is a significant degree of uncertainty over both the Browse and Arrow projects.

One project has been removed from the database:

Woodside’s Pluto 2 Project, WA (AUD14.9bn)

We have upwardly revised cost estimates for three projects:

Chevron’s Gorgon Project, WA (AUD52bn from AUD40bn)

Origin/ConocoPhillips/Sinopec Australia Pacific LNG, QLD (AUD24.7bn from AUD23bn)

Santos/Petronas Gladstone LNG Project, QLD (AUD18.bn from AUD16.2bn)

Additional projects added to our database include:

The 4th Train at Chevron’s Gorgon Project , WA (AUD10bn)

We have altered the estimated start dates of the following projects:

Woodside/Shell/PetroChina Browse LNG project (AUD35bn) is now scheduled to start in 2016. If this project is approved we anticipate that the joint venture partners are likely to develop this project using FLNG technology.


17


Exxon Mobil/BHP Scarborough LNG project (AUD15bn) is now expected to start in 2017 rather than.

Woodside/Conoco Phillips/Shell/Osaka Gas’s Greater Sunrise (AUD15bn) is now expected to start in 2018 rather than 2015.

FIGURE 28. ENERGY SECTOR INVESTMENT

0

10

20

30

40

50

60

70

2012 2013 2014 2015 2016

July 2012 (est) March 2013 (est)

AU

Dbn

FIGURE 29. ENERGY SECTOR INVESTMENT BY STAGE

0

10

20

30

40

50

60

70

2011 2012 2013 2014 2015 2016Under Construction Under Consideration Possible Completed Cancelled

AU

Dbn

Investment pipeline excluding projects that have been either cancelled or indefinitely delayed since July 2012

Ivestment pipeline for projects that are either under construction or

committed


MINING

We have significantly revised downward our estimate of the potential pipeline of projects in the mining sector to around AUD100bn from around AUD130bn in July 2012. The sharp decline in bulk commodity prices in the second half of 2012 resulted in mining companies scaling back their investment intentions, with a number of projects either indefinitely delayed or cancelled. We estimate that these deferrals and cancellations have stripped an estimated AUD55bn from the investment pipeline, although this figure is somewhat higher if reductions in related infrastructure projects such as rail and ports are included.

While the total pipeline of work remains impressive, only 35% of projects are either “committed” to or already “under construction” from the beginning of 2014 onwards, implying there is still a considerable degree of uncertainty for projects that remain uncommitted.


18


The following projects have either been indefinitely delayed or cancelled:

BHP’s Olympic Dam Expansion, SA (AUD30bn)

Waratah Coal’s China First Thermal Coal Project, QLD (AUD8.3bn)

Xstrata’s Wandoan Coal Mine, QLD (AUD7bn)

Crossland Resources’s Jack Hills Iron Ore Project, WA (AUD4.3bn)

China Metallurgical Group’s Cape Lambert Iron Ore Project, WA (AUD3.7bn)

Atlas’s Ridley Project, WA (AUD2.97bn)

Grange Resources’s Southdown Project, WA (AUD2.88bn)

Aquila/Vale Belvedere Coking Coal Project, QLD (AUD2.8bn)

BHP’s Peak Downs Coking Coal Project, QLD (AUD2.2bn)

Jupiter Mine’s Mount Ida Magnetite Project, WA (AUD1.6bn)

Heron’s Kalgoorlie Nickel Project, WA (AUD1.4bn)

Sinosteel Midwest Corporation’s Weld Range Hematite Project, WA (AUD1bn)

Rio Tinto’s Mt Pleasant Thermal Coal Project, NSW (AUD629m)

Macarthur Coal’s Monto Open Cut Thermal Coal Project (AUD300mn)

These delays and cancellations, however, have been partially offset by cost upgrades, project restarts and additional projects added to the database.

The following project has been re-started:

Fortescue’s King’s Project, WA (AUD1.6bn). This project is expected to be completed by the end of 2013.

A number of projects have also received upward revisions to cost estimates:

Hancock Prospecting’s Roy Hill Iron Ore Project (AUD9.5bn from AUD7.2bn)

CITIC Pacific Mining’s Iron Ore Project, WA (AUD7.4bn from AUD6.1bn)

Australasian Resources’s Balmoral South Magnetite Project (AUD3.3bn from AUD2bn)

Rio Tinto’s Nammuldi Iron Ore Expansion, WA (AUD3bn from 2.1bn)

Rio Tinto’s Kestrel Coal Mine Expansion, QLD (AUD1.9bn from AUD1.2bn)

Xstrata’s Ravensworth Underground Coal Project, QLD (AUD1.4bn from AUD750m)

Flinders Mines Pilbara Project (AUD1.1bn from AUD488m)

Xstrata’s Lady Loretta Zinc Project, QLD (AUD362 from AUD246m)


Iron Road’s Central Eyre Iron Ore Project, WA (AUD2.6bn beginning 2015)

Rio Tinto’s Yandicoogina Iron Ore Expansion, WA (AUD1.7bn started 2012)

QCoal’s Byerwen Coal Project, QLD (AUD1.6bn beginning 2015)

Rio Tinto’s Marandoo Iron Ore Expansion, WA (AUD1.1bn started 2012)

Rex Mineral’s Hillside Copper Project, SA (AUD900m beginning 2014)

Vista Gold’s Mount Todd Gold Mine Expansion, NT (AUD750m, final investment decision due mid-2013)

Xstrata’s Rolleston Thermal Coal Project, QLD (AUD391m)

Kingsgate’s Bowden Silver Mine Project, NSW (AUD350m beginning 2015)

Apollo Minerals’ Commonwealth Hill Iron Ore Project, (AUD320m beginning 2015)

Yancoal’s Expansion of Ahston Mine, NSW (AUD290m beginning 2014)


19


Venturex Resources’s Pilbara VMS Province Project, WA (AUD279m beginning 2014)

East China Mineral Exploration and Development Bureau’s Mineral Sands Project, NT (AUD250m beginning 2016)

Western Desert Resources’s Roper Bar Iron Ore Project, NT (AUD160m started 2012)

FIGURE 30. MINING SECTOR INVESTMENT

0

5

10

15

20

25

30

35

40

2012 2013 2014 2015 2016


AU

Dbn

FIGURE 31. MINING SECTOR INVESTMENT BY STAGE

0

5

10

15

20

25

30

35

40

45

50

2011 2012 2013 2014 2015 2016Under Construction

AU

Dbn

Investment pipeline excluding projects that have been either cancelled or indefinitely delayed since

July 2012

Investment pipeline for projects that are

either under construction or

committed


RAIL

While our overall investment pipeline for rail projects remains broadly unchanged at AUD37bn compared with the previous estimate of AUD40bn, the headline number disguises significant churn at an individual project level. A number of high profile mining-related rail projects, such as BHP’s Goonyella Rail Project, have been cancelled. Meanwhile, the Queensland government has, thus far, only approved GVK’s single multi-use railway in the Galilee Basin further delaying the potential construction of Waratah Coal’s rival rail project. These cancellations and delays, however, have been largely offset by cost upgrades and the addition of projects to the investment pipeline. We have also shifted forward the timing of the North West (Epping to Rouse Hill) Metro Rail Link in New South Wales to 2014 from 2016, which has boosted investment numbers in 2014 and 2015.


20


The following projects have been cancelled or indefinitely delayed:

Waratah Coal’s Galilee Basin Rail Project, QLD (AUD2bn)

BHP’s Goonyella Rail Network, QLD (AUD2bn)

Xstrata’s Surat Basin (Southern Missing Rail Link) Rail Line, QLD (AUD1bn)

A number of projects have also received upward revisions to cost estimates:

New South Wales State Rail Authority’s North West (Epping to Rouse Hill) Metro Rail Link, NSW (AUD9.2bn from AUD8.5bn. Start date of the project has been shifted forward to 2014 from previously estimated 2016).


Victorian Government’s Melbourne Metro Rail Project, VIC (AUD5.5bn beginning 2016)

Australian Rail Track Corporation’s Hunter Valley Capacity Increase, NSW (AUD3.2bn beginning 2014)

Australian Rail Track Corporation’s Melbourne to Brisbane Inland Rail Alignment Project (AUD2.3bn beginning 2015)

Transport New South Wales’s Circular Quay to Central Light Rail Project, NSW (AUD1.6bn beginning 2014)

Western Australia Government’s Perth Light Rail Project, WA (AUD1.6bn beginning in 2016)

Transport South Australia’s Goodwood and Torrens Rail Junctions Upgrade, SA (AUD440m started 2013)

Queensland Rail’s Lawnton and Petrie Rail Project, QLD (AUD170m beginning 2013)

Metro Transport Sydney’s Dulwich Hill to Lilyfield Light Rail Project, NSW (AUD170m beginning 2013)

Australian Rail Track Corporation’s Port Botany Rail Line, NSW (AUD170m started 2012)

FIGURE 32. RAIL SECTOR INVESTMENT

0

2

4

6

8

10

12

14

16

2012 2013 2014 2015 2016


AU

Dbn


ROADS

Our estimate of potential investment for roads between 2013-16 has risen to AUD34 from a previously estimated AUD28bn. Much of this has been driven by potential government backed projects in New South Wales and Victoria.


21


The following project has been removed from the database:

Queensland Department of Transport and Main Roads Toowoomba Bypass Project (AUD1.75bn)

Costs for one project have been revised upward:

Gateway WA - Perth Airport and Freight Access, WA (AUD1bn from AUD387m started 2012)

The following projects have been added to the database:

New South Wales Roads and Maritime Services West Connex Project (AUD10bn beginning 2015)

Victorian Government’s East-West Link Tunnel (AUD10bn beginning 2016)

Western Australia’s Department of Transport’s Northern Suburbs Road Project (AUD500m beginning 2013)

New South Wales Roads and Maritime Services Warell Creek Project (AUD440m beginning 2013)

New South Wales Roads and Maritime Services M5 Widening (King Georges Road to Camden Valley Way), NSW (AUD400m started 2012)

Queensland Department of Transport and Main Roads Port of Brisbane Motorway Upgrade, QLD (AUD385m started 2012)

Queensland Department of Transport and Main Roads Upgrade of Mains Road and Kessels Road Intersection Project, QLD (AUD300m started 2012)

Queensland Department of Transport and Main Roads Mt Gravatt-Capalaba Road Project (AUD240m started 2012)

Queensland Department of Transport and Main Roads Bruce Highway Upgrade (Cairns) Project (AUD150m started 2012)

Queensland Department of Transport and Main Roads Bruce Highway Upgrade (Calliope) Project (AUD150m started 2012)

Queensland Department of Transport and Main Roads Smith Street Motorway and Olsen Avenue Upgrade Project (AUD130m beginning 2013)

Queensland Department of Transport and Main Roads Bruce Highway Upgrade (Gin Gin) Project (AUD120m started 2012)

FIGURE 33. ROAD SECTOR INVESTMENT

0

2

4

6

8

10

12

2012 2013 2014 2015 2016


AU

Dbn



22


PORTS

Our estimate for spending on port infrastructure has been downgraded significantly to AUD13bn from a previous estimate of AUD27bn. This downgrade in capital expenditure intentions largely reflects the indefinite delay of mining-related port infrastructure with both the Anketell Port Project and Oakajee Port Projects in Western Australia having been removed from our pipeline, along with the Port of Hastings Development in Victoria. There have been some positive developments, however, with Rio Tinto commencing early works and dredging activity for its Cape Lambert Port facility.

A number of projects have been removed from the database including key mining-related port infrastructure:

Victorian Government’s Port of Hastings Project, VIC (AUD9.4bn)

Western Australia Government’s Anketell Port Project, WA (AUD7bn)

Mitsubishi’s Oakajee Port Project, WA (AUD5.9bn)

Centrex Metals Port Lincoln Refurbishment Project, SA (AUD150m)

These cancellations and indefinite delays have been partially offset by a cost upgrade to one project:

Rio Tinto’s Cape Lambert Port Expansion, WA (AUD3.7bn from AUD1.2bn)

The following projects have been added to the database:

Port Waratah Coal Services Kooragang Island Expansion (AUD5.1bn started 2012)

Hutchison Ports Holdings Port of Brisbane Upgrade, QLD (AUD205m started 2012)

FIGURE 34. PORT SECTOR INVESTMENT

0

1

2

3

4

5

6

7

8

9

2012 2013 2014 2015 2016

March 2013 (est) July 2012 (est)

AU

Dbn


ELECTRICITY

There is potential for a significant increase in investment within the electricity sector following confirmation by the Climate Change Authority that the 2020 renewable energy targets will be maintained. These targets mandate that at least 20% of Australia’s electricity is derived from renewable resources by 2020. As such, we anticipate that there is scope for an upswing in investment and construction in the renewable sector, particularly wind farms. The total estimated electricity investment pipeline has been upgraded to AUD28bn from AUD25bn.


23


The following projects have been either indefinitely delayed or cancelled:

AGL’s Dalton Power Project, NSW (AUD1.5bn)

AREVA/CS Energy’s Solar Dawn Project, QLD (AUD1.5bn)

The Townsville to Mount Isa Transmission Link Project, QLD (AUD1.5bn)

Queensland Gas Company’s Hunter Valley Power Station (AUD750m)

Cost estimates for the following projects have been revised upward:

AGL’s Macarthur Wind Farm, VIC (AUD1bn from AUD800m started 2013)

TrustPower’s Snowtown Wind Farm, SA (AUD429 from AUD200m)

A number of projects have been added to the investment pipeline:

Hydro Tasmania’s King Island Wind Farm, TAS (AUD2bn beginning 2016)

Suzlon Group’s Yorke Peninsula Wind Farm, SA (AUD1.3bn beginning 2014)

BHP/ESSO’s Longford Gas Plant Upgrade, VIC (AUD1bn beginning 2014)

AGL’s Coopers Gap Wind Farm, QLD (AUD800m beginning 2016)

Ergon Energy’s Supply Upgrage, QLD (AUD635 started 2012)

Verve Energy’s Warradarge Wind Farm, WA (AUD600m beginning 2015)

Waaree Group’s Solar Power Plant Project, SA (AUD200m beginning 2015)

ElectraNet’s Network Upgrade, SA (AUD180m beginning 2015)

Powerlink Queensland’s Gladstone Substation Project, QLD (AUD160m started 2012)

Powerlink Queensland’s Columboola to Western Downs Network Project, QLD (AUD150m started 2013)

CS Energy’s Kogan Creek Project, QLD (AUD108m started 2012)

Powerlink Queensland’s Columboola and Wandoan Project, QLD (AUD100m started 2012)

FIGURE 35. ELECTRICITY SECTOR INVESTMENT

0

1

2

3

4

5

6

7

8

9

2012 2013 2014 2015 2016


AU

Dbn



24


HOSPITALS

Our forecast pipeline of hospital and health projects has been revised upward by around AUD2bn to AUD11bn. Nonetheless, investment in this sector is still expected to peak towards the end of this year.

The following project has had its capital expenditure budget revised downward:

South Australia Department of Health’s Royal Adelaide Hospital, SA (AUD1.8bn from AUD2.1bn)

This cost downgrade, however, has been more than offset by the following projects which have been added to the investment pipeline:

Australia Capital Territory Department of Health’s University of Canberra Hospital Project, ACT (AUD280m beginning 2014)

New South Wales Department of Health’s Blacktown Hospital Project, NSW (AUD270m started 2012)

Victoria Department of Health’s Monash Children's Hospital Project, VIC (AUD250m beginning 2014)

New South Wales Department of Health’s Tamworth Hospital Redevelopment, NSW (AUD 220m started 2012)

New South Wales Department of Health’s South East Regional Hospital, NSW (AUD170m started 2012)

Victoria Department of Health’s Redevelopment of the Royal Victorian Eye and Ear Hospital, VIC (AUD165m beginning 2014)

University of Queensland’s Oral Health Centre, QLD (AUD132m started 2012)

New South Wales Department of Health’s Hornsby Hospital Redevelopment, NSW (AUD120m started 2012)

FIGURE 36. HOSPITAL SECTOR INVESTMENT

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

2012 2013 2014 2015 2016


AU

Dbn



25


WATER & SEWERAGE

Our estimate of investment in major water and sewerage infrastructure projects has been revised upward between 2013 and 2016. The jump in investment for 2014 reflects our expectations that the Ord River Development Project and the Nathan Dam and Pipeline Project, will begin in this year.

The following projects have been either indefinitely delayed or cancelled:

SunWater’s Connors River Dam & Pipelines, QLD (AUD1.3bn)

BHP’s Olympic Dam Water Pipeline, SA (AUD400m)

The following projects have been added to the investment pipeline:

Queensland Government’s Nathan Dam and Pipeline Project, QLD (AUD1.4bn beginning 2014)

Shanghai Zhongfu’s Ord River Development, WA (AUD700m beginning 2014)

Water Corporation’s East Rockingham Water Treatment Plant, QLD (AUD600m beginning 2014)

Tasmanian Government’s Drought Proofing Pipeline Project, TAS (AUD300m started 2011)

Federal Government’s Water Regulators at Pike, SA (AUD100m beginning 2016)

Tasmania Department of Primary Industries and Water’s Midlands Water Scheme, TAS (AUD104m beginning 2013)

FIGURE 37. WATER AND SEWERAGE SECTOR INVESTMENT

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

2012 2013 2014 2015 2016


AU

Dbn



26


APPENDIX

FIGURE 38. MAJOR MINING AND ENERGY PROJECTS

Source: BREE


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major project update -march 2013

Documents

powerlink queenslands columboola

joint venture partners

west link tunnel

iron ore prices

metro rail link

united arab emirates

bulk commodity prices

escalating labour costs