PERTH (miningweekly.com) – Advisory firm Deloitte on Friday warned that the continued economic uncertainty, and consequent volatility in equity and commodity markets, were increasing pressures on major capital projects, prompting a focus on cost reduction and timely delivery by engineering, construction and project management companies.

Deloitte’s lead audit partner in Western Australia, Tim Richards, noted that the volatile commodity prices, a strong Australian dollar, falling productivity and rising labour costs were just some of the issues at the core of capital project decisions.

Around A$130-billion in capital investment decisions for new projects was due before 2015, and Richards noted that the ability of the Australian economy to sustain this Millennium boom was now being tested.

“Energy and resource companies, as well as the construction and engineering services companies who guide them through the development and production process, will need to ensure that they understand volatility risks and execute more efficiency in their project deployments to succeed,” Richards said.

He pointed out that the market capitalisation of Western Australia-listed companies, which comprise the Deloitte WA Index, closed April at A$142.5-billion, a decrease of 1.9% over the past six months.

Fears of a Chinese manufacturing slowdown and its impact on demand for Western Australian exports had a significant impact on the Deloitte WA Index at the back end of the March quarter, as falling iron-ore and base metal prices continued to impact the major resource companies and their capital project prospects, Richards said.

International markets surveyed fared comparatively better, as global equity market sentiment improved for the most part during the six month period to April, on the back of strengthening macroeconomic conditions. However, they have still experienced a slight softening recently, as a result of concerns surrounding the Cypriot bailout plan and easing iron-ore prices.
 
“Growth over the last six months has been more sporadic, impacted by global economic concerns and volatility in commodity prices, resulting in the postponement of various projects and increasing pressure on margins,” Richards said.

Commodity prices also continued to react wildly to global events as a “sell-first, ask questions later” mentality remained prevalent in the markets, with the majority of commodity prices surveyed decreasing in the six months to April, impacting not only bottom-line figures, but also weighing heavily on capital project decisions.

Richards noted that the period of rising gold prices had finally come to an end, with a 14.3% fall in gold prices experienced in the six months to April.

This decrease came as confidence slowly returned to businesses and financial markets, impacting the demand for the safe-haven metal.

Meanwhile, weakening consumption in the global manufacturing sector and the European automotive and household appliance sectors have reduced the demand for industrial metals, with copper and nickel prices falling 9.1% and 4.2% in the six months to April.

Iron-ore prices, however, have bucked the trend, rising 13.2% over the six months, although decreasing in April.

Deloitte reported that the approval of approximately $150-billion in highway, seaport and airport projects in China has assisted in improving sentiment surrounding the commodity, which rose as high as $152/t at the end of February.

Forecasts for the bulk commodity, however, are not favourable, with new capacity expected from the completion of various new and expansion projects suggesting that the iron-ore price will fall, with Goldman Sachs predicting a price of $85/t in December 2014.

Richards said that organisations would have no choice but to incorporate the volatility that they had thought impossible through the post global financial crisis boom years in Australia and, that they, in effect, needed to create a business case that catered for, and insured against, the worst of the worst-case scenarios.