FEATURE ARTICLE: MINING INVESTMENT IN ABS PUBLICATIONS


INTRODUCTION

Australia is currently experiencing unprecedented levels of investment activity. This is primarily due to the number and size of mining projects currently underway. Investment activity is expected to continue to rise in the coming years as additional mining projects commence. The Australian Bureau of Statistics (ABS) publishes a range of information to assist the Australian community in monitoring this activity over time.

Mining projects tend to be complex in structure and comprise a number of different investment activities including exploration, engineering construction, plant and equipment and buildings. This feature article therefore provides a summary of the conceptual basis of the relevant ABS publications that measure investment in Australia. A hypothetical mining project is then used to illustrate how mining investment activity is reflected in ABS data.

In addition, a central theme of this article is the increasing role of offshore construction to meet the investment demands of Australia's mining businesses. This topic is examined in respect of each ABS publication.


UTILISING ABS PUBLICATIONS TO MONITOR INVESTMENT IN AUSTRALIA

The Australian mining industry is currently investing in a number of high-value projects to develop new sites and expand the productive capacity of existing ones. These include several large scale liquefied natural gas (LNG) and iron ore projects in Western Australia, Queensland and the Northern Territory.

Several ABS publications measure aspects of Australian investment including expenditure on capital goods produced in Australia or imported from overseas. However, there can be significant variations in the timing and manner by which each publication captures expenditure due to differences in their underlying framework.

This section provides a brief summary of the conceptual basis of the relevant ABS publications that measure investment and explains how each publication records different aspects of mining capital expenditure, including where applicable the acquisition of imported capital goods.


Mineral and Petroleum Exploration (ABS Cat. No. 8412.0)

Mineral and petroleum exploration expenditure is published quarterly in Mineral and Petroleum Exploration, Australia (ABS Cat. No. 8412.0). Data are collected from private enterprises known to be engaged in exploration activities inside Australia, as well as in Australian waters including the Joint Petroleum Development Area (JPDA). All expenditures (capitalised and non-capitalised) incurred during the exploratory or evaluation stages of a mining project, up until development for the purposes of production takes place, are included in this publication and may include items such as engineering and economic feasibility studies, land access and legal fees, license fees, seismic studies, environmental evaluations and exploratory drilling.


Private New Capital Expenditure and Expected Expenditure (ABS Cat. No. 5625.0)

Capital expenditure (Capex) as reported by businesses on new 'plant and equipment' and 'building and structures' is published quarterly in Private New Capital Expenditure and Expected Expenditure (ABS Cat. No. 5625.0). Businesses are asked to report the value of their capital expenditure on a change of ownership basis.(footnote 1) This concept is relatively simple to implement when purchasing new plant and equipment. However, some assets are constructed over a number of accounting periods. In these situations, such as in the case of buildings and structures, including imports, constructed under a contract of sale, the change of ownership occurs progressively as construction is taking place. The Capex on the asset under construction is approximated by the progress payments made during the quarter. As a result, the Capex series of building and structures is relatively smooth (as seen in the graph below), with significant short-term variations and level shifts driven only by projects commencing, projects ending or significant ramping up of existing projects.

Australian mining businesses have a number of avenues to meet their investment demands. One of these avenues is to utilise international supply and procurement networks, including those for the construction of what Private New Capital Expenditure and Expected Expenditure classifies as 'buildings and structures'.

The buildings and structures category covers non-residential building, other structures and land improvements, and includes fixtures, facilities and equipment integral to the structure/building, as well as any associated site preparation costs.(footnote 2) Some examples of mining buildings and structures included in this asset category are LNG and iron ore processing equipment, floating production storage and offloading vessels (FPSOs), offshore platforms and drilling rigs, railway lines, port construction, pipelines and mining accommodation. These items classified as 'buildings and structures' represent an increasing proportion of capital expenditure by Australian mining businesses.

Traditionally, equipment such as trucks, bulldozers and other mobile equipment have represented the great bulk of capital imports by mining companies. In recent years this has been augmented by large modular structures built overseas. This shift is thought to have been driven by a number of factors, including innovations in mining infrastructure design and construction, a high Australian dollar, and access to overseas construction yards that specialise in the fabrication of mining structures.(footnote 3)


Engineering Construction Activity (ABS Cat. No. 8762.0)

The value of Australian engineering construction activity (ECA) is published quarterly in Engineering Construction Activity (ABS Cat. No. 8762.0). Data collected include: the 'value of work done in the quarter'; 'the total value of new projects commenced in the quarter'; and the 'value of work yet to be completed'. Data are classified according to the type of construction taking place. Mining-related engineering construction is captured in several categories, including railways, harbours (dredging work), pipelines, heavy industry and oil, gas, coal and other minerals. The value of engineering construction work undertaken in a quarter includes the value of the actual work done by the reporting unit and the value of purchases of machinery and equipment that are integral to the structure.

Imported structures, such as LNG and iron ore processing equipment that have been fabricated overseas, are only included in the work done figures once the item is fixed into place. The value of these imports are included in the 'value of work commenced' data in the quarter that work begins on the project's domestic site. The 'value of work yet to be done' category also records the total value of the structures to be imported up until the time when the items are transported and installed. In the quarter of installation, this amount will be transferred to 'work done' for the quarter. As a result, the ECA work done series can be quite volatile.

The ECA is not directly comparable to the Capex series due to differences in data classifications (industry versus type of construction) and the fact that the Capex series is collected on a change of ownership basis (which includes progress payments for overseas construction of imported structures), whereas the ECA measures the value of activity that has occurred in the period.


Building Activity (ABS Cat. No. 8752.0)

The value of construction of new buildings and the alteration of and/or additions to exisiting buildings is published quarterly in Building Activity (ABS Cat. No. 8752.0). Mining-related building activity may include the construction of accommodation and facilities for workers, offices, and other buildings. In line with the ABS Engineering Construction Activity publication, this activity is captured on a 'work done' basis. In the case of imported building structures, the ABS Building Activity publication will record the full value of the building once it has been imported and installed.

Both the Engineering Construction Activity publication and the Building Activity (BA) publication capture data via the businesses directly involved in the production of the assets (contractors for construction projects). Thus buildings and structures as reported by Capex are represented in both the ECA and BA publications.


International Merchandise Imports (ABS Cat. No. 5439.0)

International Merchandise Imports (ABS Cat. No. 5439.0) recognises the full value of an imported capital good on a recorded trade basis and is published monthly. That is, when the record for the item has been cleared by Australian Customs & Border Protection. Engineering construction activity and merchandise trade data are therefore conceptually comparable in tracking imported capital structures. There may, however, be slight differences in timing due to a lag between the time of import and installation if this occurs between quarters. The graphs below show spikes in 2011 due to the import and installation of large capital items.

International Trade in Goods and Services (ABS Cat No. 5368.0) and Balance of Payments and International Investment Position (ABS Cat. No. 5302.0)

Imports of capital goods are also reported in the monthly ABS publication International Trade in Goods and Services (ABS Cat. No. 5368.0) and the quarterly ABS publication Balance of Payments and International Investment Position (ABS Cat. No. 5302.0). The monthly International Trade publication presents estimates of trade in goods and services on both a recorded trade basis (merchandise import and export statistics) and also a balance of payments basis (accounting for progressive ownership changes). In line with national accounting conventions, merchandise trade data from Customs (as presented in the ABS catalogue 5439.0) are adjusted to a Balance of Payments basis using Capex data. This adjustment accounts for progress payments made on structures to be imported, to capture the real economic transfer of ownership.

The quarterly Balance of Payments publication captures economic transactions between Australian residents and the rest of the world, and its Goods and Services component is simply an aggregation of the monthly International Trade data (on a balance of payments basis).


Australian National Accounts: National Income, Expenditure and Product (ABS Cat. No. 5206.0)

Finally, the quarterly ABS publication Australian National Accounts: National Income, Expenditure and Product (ABS Cat. No. 5206.0) captures mining investment activity in Australia as part of private gross fixed capital formation (GFCF). Mineral and petroleum exploration expenditure is treated as an acquisition of an intellectual property product and is therefore included in GFCF. The data from the Engineering Construction and Building Activity publications is the direct source for the non-dwelling construction component of GFCF, to account for the value of work done on construction projects as it is put into place. Balance of Payments data is then used to adjust for the progressive change in ownership of structures to be imported. GFCF includes all the costs of acquiring fixed assets, including all the costs of transporting imported capital goods. Imports of goods and services data appearing in ABS publications 5302.0 and 5206.0 are entirely consistent.


EXAMPLE - LNG PROJECT

A hypothetical mining project is now used to illustrate how mining investment activity is reflected in ABS data.

Consider an LNG project which will be developed off the coast of Australia. The project will be operated by a resident entity of an international LNG company. Downstream components of the project include; an LNG liquefaction and purification plant consisting of 2 LNG trains; condensate handling facilities; loading facilities for exportation; and a pipeline to transport the gas onshore. A modularisation technique will be used, whereby the bulk of structural components will be preassembled overseas and transported for installation onto the site. Progress payments will be made throughout construction, with the company recognising ownership of the assets during construction. Prefabricated accommodation units to house workers will also be constructed overseas as part of the project.


Components of capital expenditure

Initial exploration and evaluation works

All of the expenses incurred by the company in identifying, exploring and evaluating the LNG deposit are captured in the Mineral and Petroleum Exploration publication, in the quarter that they are incurred. Such expenditures include economic and engineering feasibility studies, seismic studies, map preparation fees, payments to employees and contractors, land access and license fees, legal fees, and costs incurred to drill exploratory gas wells. This exploration spending will be reflected in the GFCF component of the National Accounts in the same quarter that it is undertaken by the company.

Pre-final investment decision

Pre-final investment decision (FID) spending includes front-end engineering design (FEED) costs incurred in the development phase of the project. These costs may be paid to domestic or foreign contractors. The Capex publication captures these costs in the quarter that they are capitalised by the company (with the assumption that this reflects the period in which these costs were incurred). This is the case regardless of whether FEED is conducted by a domestic or foreign company. If conducted by a foreign company, these FEED costs are also recognised by Balance of Payments and International Trade in Goods and Services as an import of engineering services in the quarter that the spending occurred. This pre-FID spending is also reflected in the GFCF component of the National Accounts.

Engineering Construction Activity recognises the total value of FEED expenditure in the first quarter that works begin on the actual project site (for example, site preparation activities, commencement of physical construction). This is despite the fact that FEED spending may have occurred over a number of quarters.

During construction

Expenditure reported to the Capex survey includes domestic activity on-site plus progress payments made for construction of the engineering and accommodation modules during the quarter. In this way, the entire value of the modular construction component is progressively accounted for over the entire construction period.

Balance of Payments and International Trade in Goods and Services also use progress payments to reflect change of ownership for offshore construction of physical assets and engineering services over the construction period. Balance of Payments and International Trade in Goods and Services obtain the value of progress payments from the Capex survey. As a result, and due to differences in the timing of the ABS surveys, incorporating progress payments data into Balance of Payments and International Trade in Goods and Services data may occur in the following quarter if this information is not available in time for publishing.

Engineering Construction Activity and Building Activity only record the domestic work undertaken in the quarter on a 'work done' basis. The full value of the items yet to be imported is reflected in the 'work to be done' figure.

The full value of domestic work done plus the progress payments made in the quarter are included in GFCF, a component of the expenditure measure of GDP and published in the Quarterly National Accounts.

Import and installation

Capex records the value of the final progress payment made for the completion of work overseas, plus any additional transportation costs, and any installation costs incurred in fixing the structure into place. Balance of Payments will likewise record the value of the final progress payment.

Merchandise trade data, as presented in ABS catalogue number 5439.0, will record the full value of the module when it is registered as an import into Australian waters by Customs (on a 'recorded trade' (cif) basis).

At the time of installation of a complete LNG module, Engineering Construction Activity records the total value of the imported structure plus the installation costs, causing a spike in the Engineering Construction Activity series. Therefore, in this particular quarter, the Engineering Construction Activity and Capex figures show an obvious timing discrepancy. Engineering Construction Activity also shows a corresponding fall in the 'work yet to be done' value from the previous quarter. The same applies for Building Activity in the recording of the imported accommodation modules.

The full value of domestic work, any final progress payments made in the quarter, and the transport and installation costs to fix the structures into place are included in GFCF, a component of the expenditure measure of GDP and published in the Quarterly National Accounts. The recording of the import of the capital products is exactly the same in the Balance of Payments and the National Accounts, and every effort is made to ensure that the recording of the GFCF of the imported capital goods and the corresponding import data are consistent.


SUMMARY

Australia is experiencing a period of unprecedented investment activity, primarily due to Australian mining projects. These mining projects are complex in nature and therefore the ABS plays a crucial role to assist policy makers, analysts and the community generally to understand the size and impact of these projects on the Australian economy. The ABS fulfils this role by producing a range of relevant, high quality data series over time.

This feature article provides a summary of ABS data series that can be used by the Australian community to monitor investment. Included in this group are those series that monitor the increasing role of offshore construction activity to meet the investment demands of Australia's mining businesses. Understanding the role and size of offshore construction activity in this context, and how it is reflected in ABS data, will assist data users to have a complete picture of current investment activity in Australia as well as the likelihood of planned investment activity being realised in the future.

A summary of the ABS publications which capture mining investment is available in the Appendix.


REFERENCES

Reserve Bank of Australia, Statement of Monetary Policy, February 2012. Box C: Imports and Investment

Reserve Bank of Australia, Statement of Monetary Policy, November 2011. Box B: The Mining Sector and the External Accounts

United Nations, International Monetary Fund, Organisation for Economic Co-operation and Development, World Bank and Commission of the European Communities, System of National Accounts 2008, Brussels/Luxembourg, New York, Paris, Washington D.C., 2008

1 See System of National Accounts 2008, 10.53-10.55. <back
2 Per System of National Accounts 2008, 10.73-Other buildings and structures. <back
3 As documented by the Reserve Bank of Australia in Statement of Monetary Policy, November 2011 - Box B:The Mining Sector and the External Accounts. <back