And new projects are threatened by cost overruns and delays as economy struggles to cope with size of new projects.
According to the the Australian Bureau of Agricultural and Resource Economics and Sciences (ABARES), this is a whopping 31% or AUD 41 billion increase from just six months ago.
In a report from Moodys’ on the same day, the Australian Bureau of Statistics (ABS) announced that the country’s expected private capital expenditure for the 2011-12 fiscal year will be AUD139.5 billion, also a 31% increase from last year’s estimate for 2010-11. Most of the growth is due also to the booming resources sector, which mainly includes petroleum and mining, and continues to capitalize on the ever-increasing demand for commodities from China.
The growth in capital expenditure is credit negative for the resources sector, which is growing at a pace that considerably raises execution risk. We do not believe the current pipeline of projects is sustainable: the resources sector faces significant tightening in the contractor market, and many of the projects are increasingly complex. We have already seen cost overruns and delays at a number of large projects such as Woodside Petroleum’s AUD12 billion Pluto liquefied-natural-gas (LNG) project and the AUD4.4 billion Kipper-Turrum gas project, owned 50/50 by BHP Billiton and Exxon Mobil.
For the resources companies that are developing these major projects, the ultimate credit impact will depend heavily on their financial flexibility and the funding structures for such projects. For example, if Fortescue Metals Group faces disappointments in completing its USD8.4 billion iron ore mining project in Western Australia, it will likely lead to rating pressure because of its small size and low credit quality. On the other hand, we do not see project failure causing BHP Billiton significant negative credit implications and which would lead to a rating downgrade because it has a very strong balance sheet and considerable financial flexibility.
The tremendous growth in the value of resources projects, which have more than doubled in only three years, is stretching the capacity of the labour market and adding inflationary pressures across the economy. We recently published a report highlighting the impact of Australia’s rising costs on the corporate sector.
Not only is the aggregate value of the projects rising, but the average value of each project and their complexity are also growing. In our analysis of each company’s credit profiles, we assume cost over- runs of as much as 10%-20% of total project costs, and delays in completion of 12-18 months, as a downside scenario.
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