In the frenetic deluge of the final five days of reporting season last week, many investors no doubt missed a one-page media release from Australia and New Zealand Banking Group (ASX: ANZ).
The release titled 'ANZ forecasts sharp decline in Australian major resources and infrastructure projects spending' was alerting investors to the publication by the bank of its report 'Australia Major Projects Update 2015'.
While on the one hand, it may come as no surprise to investors that Australia is experiencing a marked slowdown in capital expenditure, it may come as a surprise just how much further – according to the findings of ANZ Bank – that there still is to go.
The Findings
- ANZ Bank is forecasting that capital expenditure on major Australian mining, energy and infrastructure projects is set to fall by over 60% in the next three years.
- In dollar terms, this implies a decline in major project spending from around $188 billion in 2014 to $32 billion by 2017.
- There are two major drivers of this downtrend. First, some large scale projects such as the respective Queensland-based LNG Projects of Santos Ltd (ASX: STO) and Origin Energy Ltd (ASX: ORG) are reaching completion and entering the production stage. Second, with ANZ Bank estimating that Australian export earnings from iron ore, coal and LNG will sink by $110 billion compared with previous forecasts, there is now sharply reduced capital spending plans for new projects.
- Critically, whereas in the past some commentators have suggested that public-backed infrastructure spending could fill the hole left by the resource sector, the ANZ is forecasting that this will only provide "a very modest offset."
What does it all mean?
For investors, the conclusions drawn from this report should make them wary of suggestions that a cyclical low has been reached for service providers to the resource and infrastructure sector. Despite massive falls in the share price of some leading companies such as Worleyparsons Limited (ASX: WOR) and Downer EDI Limited (ASX: DOW) over the past few years, investors need to be careful that they still aren't catching falling knives.
