While the Reserve Bank directors were finishing their main course in the Martin Place boardroom yesterday, content after leaving interest rates steady this month, on the other side of the continent Woodside was making an iconic announcement that will make the next couple of RBA meetings much less comfortable.
The cost of building the Train 5 LNG expansion have blown out by 21% to $2.425 billion, with the labour shortage the main culprit. In round figures, it’s an extra $400 million on top of what the North-West Shelf partners originally agreed to spend.
It’s a big figure to focus on, but it’s also pretty much par for the construction industry course during this resources and infrastructure boom. The constant undercurrent of the present reporting season is that costs are sharply rising with no end in sight – and the RBA is watching closely.
The Woodside announcement had been telegraphed to the market so there was little immediate reaction. The problem for the entire resources sector though is that, as each project costs more, the gamble on commodity prices remaining high to pay for development gets riskier.
The Oz reporting of the Woodside announcement nicely recalled Chip Goodyear’s telling quote last month: “For every project you approve in WA add 10% to every other project in the state because you are cannibalising a workforce that’s not growing to be able to handle that incremental project.”
The WA labor shortage is extreme, but Queensland is not far behind and it’s not just construction workers and miners in demand. The ABC reports a far north Queensland meatworks is shutting down early this season partly because of a shortage of labour.
That boom states’ demand is steadily being transmitted throughout the economy. The problem for New South Wales and Victoria is that the room has to be made for that growth – and that means the RBA applying the brakes.
Eventually, caught in the pincer movement of rising interest rates and higher labour costs, the less profitable and least efficient businesses will fail.