Despite the struggling housing market, other more steel-intensive construction sectors are doing well, particularly energy-related industrial building, which by some estimates is seeing an astounding 60 percent growth rate.
While observers fear that some types of commercial building will eventually be dragged down by the weakness in homebuilding, most agree that construction of industrial structures, especially energy-related ones “without roofs” such as oil rigs and wind towers, will continue to skyrocket. This is good news for steelmakers, says Peter Wright, director of marketing for Chaparral Steel Co., Midlothian, Texas, who notes that while steel accounts for about half of all materials used in traditional nonresidential construction, industrial structures are virtually all steel.
Overall, nonresidential construction spending, including industrial construction, was up 14 percent in the first quarter of this year vs. first-quarter 2006, says Ken Simonson, chief economist for the Associated General Con tractors of America, Alexandria, Va., who expects that trend to continue. Supporting this view is recent information from Reed Construction Data, Norcross, Ga., which shows that the value of nonresidential construction starts for the first four months of this year were up 23 percent in spite of weak growth in highway construction and paving.
The breakout between the industrial sector and traditional nonresidential construction is hard to distinguish as the two overlap, and statistics from the two leading construction consulting firms—Reed and McGraw Hill Construction—vary wildly. McGraw Hill’s construction data unit, formerly known as F.W. Dodge, places nonresidential construction growth at a much lower rate.
Wright believes that the growth rate for traditional nonresidential construction markets, on a square footage basis, will decline throughout 2007, possibly ending up at near zero growth for the year, while industrial construction will continue to surge at a 60 percent pace.
“Industrial demand caught a lot of people by surprise,” says Jim Wroble, sales and marketing manager for the structural steel and rail division at Steel Dynamics Inc., Fort Wayne, Ind. “We were shipping way beyond what nonresidential demand would suggest. We now realize that it was actually powerful industrial demand.”
“Powerful” is an apt description of steel demand generated largely by energy-market projects such as structures for oil and gas exploration, transmission and refining, alternative fuel (including ethanol and biofuel) production, wind mill farms, chemical refining and coal-fired power plants. Adding to the demand, experts say, is construction of facilities for the pulp, paper and wood, food and beverage, pharmaceutical, biotechnology and industrial manufacturing industries.
Wright attributes the current tightness of the structural steel market, where producers are operating at 97 percent of capacity or more, to this strong industrial demand, which is also fueling sales of reinforcing bar, plate, structural tubing and stainless steel.
The 100 ethanol plants currently under construction, as well as a similar building of biodiesel facilities, illustrate the enormity of demand, says Simonson. And that doesn’t even take into account all the oil and gas related expansions and the rebirth of investment by the electric power industry after virtually no activity for about five years, he adds.
Reed also reports that manufacturing construction starts were up 61 percent through April compared with the first four months of last year. Jim Haughey, its chief economist, observes that manufacturing investment shrank by two-thirds from the 1990s to the early part of this decade when it started to bounce back. “Since then it has doubled, but it is still not back to where it was,” he says.
High capacity utilization rates and factory floors filled with machinery and equipment have led to a need for the manufacturing sector to build new factories, concurs John Anton, director of the steel service of Global Insight, Washington, D.C.
The list of new manufacturing facilities and expansions keeps on growing, including a number in the steel industry. SeverCorr is putting the finishing touches on its new mill in Columbus, Miss. One of the most recent announcements is ThyssenKrupp AG’s plan to build a new 4.5-million-ton carbon and stainless steel mill in Mt. Vernon, Ala. Also new on the already long list of manufacturing construction projects is a $400 million truck engine plant to be built by Paccar Inc. in Columbus, Miss., and another Toyota auto assembly plant in Blue Springs, Miss. There has also been some construction in the pharmaceutical industry, says John Cross, vice president of the Chicago-based American Institute of Steel Construction.
Traditional nonresidential commercial construction is not growing quite as strongly, but it is still positive, says Joe Stratman, vice president and general manager for Nucor-Yamato Steel Co., Blytheville, Ark. He places the current growth rate at 2 to 3 percent, while 2006 growth was closer to 7 percent. Some industry observers say this is partly a byproduct of the downturn in residential construction.
“There is a lead-lag relationship between residential and nonresidential construction,” says Jim Fritch, executive vice president of the Dallas-based CMC Steel Group of Commercial Metals Corp. “If people don’t buy homes, they don’t need retail stores, schools or treatment plants. If there is no growth in residential, it could definitely affect other areas of construction,” he maintains.
Wright and Stratman are skeptical that the housing slump has had much impact on commercial construction. While certain nonresidential sectors, such as retail and education, may be loosely tied to homebuilding, construction of warehouses, office buildings and public works projects are more directly affected by the economy and new job creation. Though employment is up, it hasn’t grown as much as expected, not enough even to compensate for college graduates entering the job market, Wright says.
Even school construction is not that closely linked to housing, maintains one service center executive, who says that growth in the education sector is more related to availability of state and federal funding. “There has also been a strong need to build schools in the last several years due to the federal No Child Left Behind legislation and its call for smaller class sizes,” he says.
Experts predict that the housing slump—particularly the dip in single-family home construction—will continue through this year and possibly into 2008, a full two years from the start of the decline. Bernard Markstein, senior economist and director of forecasting for the Washington, D.C.-based National Association for Home Builders, says that total housing starts in the second quarter (including single-family and multi-family starts) will fall to an annualized, seasonally adjusted 1.42 million units, down from 1.46 million units in the first quarter and well off the peak of 2.1 million units in first-quarter 2006. The NAHB forecasts that annualized housing starts will dip further to 1.39 million units in the third quarter before rebounding to 1.43 million units by year’s end. NAHB officials are hoping to see a 4.4 percent rise to 1.485 million starts in 2008.
Haughey notes that multi-family residential, while down slightly, has been fairly steady, which is positive for steel suppliers as this type of construction consumes more steel than single-family homes—though there has been a push for more steel framing in both (see related story on page 23).
Markstein says the two-year housing decline was caused by an inventory overhang, largely of single-family homes, that followed a period of overbuilding in 2004 and 2005. “With interest rates low and home prices rising, people became excited about the housing market. This resulted in speculation, which caused phantom demand and eventually led to oversupply,” explains Markstein.
Global Insight’s Anton estimates that about 20 percent of potential buyers were knocked out of the housing market due to the subprime mortgage crisis and another 10 percent or so are taking a wait-and-see stance until the market picks up again, severely reducing the pool of prospective buyers.
Market demographics, however, continue to be positive. The nation’s population is growing, Markstein says. “Demand is continuing to grow, but it will take time for it to catch up with supply. The inventories have already been worked down a bit, but they remain very high. In March, there were 545,000 new homes for sale, about 7.8 months worth, in addition to 3,745,000, or 7.5 months, of existing homes for sale.” By 2008, he says, there should be a better balance between supply and demand, renewing construction activity.
AISC’s Cross says that retail construction, including strip malls that support residential growth, typically runs two to three years behind single-family home construction, so it is still in a boom mode, up about 10 percent from a year ago. But that growth rate is already starting to stall and is expected to eventually shrink. Big department stores—those that attract shoppers from distances of 20 miles or more—are not as closely tied to the residential market, he adds. “They tend to be built in good economic times, and the times are good now.”
Construction of hotels and resorts is one of the big growth areas in the nonresidential market today, up 158 percent for the first three months of this year vs. the same period a year earlier, according to Wright.
“There has been a rebound of all types of travel—business, leisure, international. Travel had hit the brakes hard starting in 2000 and even more after September 11, but now it is picking up again thanks to more than five years of economic expansion and good income growth,” Simonson adds.
Medical construction remains reasonably strong, Simonson continues, with construction of new hospitals in areas where there has been population growth and increased need for nursing homes as the population ages.
Office construction is up a surprising 26 percent, Simonson says. Office vacancy rates have been declining in such cities as New York, Washington, D.C., Las Vegas and some in California, prompting additional construction. Companies are reportedly downsizing in other parts of the country, however, raising doubts about the continued strength of the office sector.
In the public works sector, new bridge construction is doing well, but highway work is not nearly as strong as had been expected. “It is mostly due to federal funding problems,” Haughey says. “Highway funding is confusing and state program managers are slow to react.”
Rising material costs have also been a drag on nonresidential construction growth, executives report, especially for public projects, which tend to be less flexible than private ones.
All told, experts expect traditional nonresidential construction to be fairly flat this year, “but I don’t see that as a negative, as it is flat at a good level,” says Anton.
And with energy-related construction continuing at its hot pace, steel suppliers should be fairly well insulated from any jolt caused by the housing slump.
Time to Build a Case
for Steel Framing
One would think that the weakness in the housing market would be bad news for anything related to residential construction. Not so, says Larry Williams, president of the Steel Framing Alliance, who sees this downtime as an opportunity to sell home builders on the virtues of steel framed homes.
He does admit that steel framing is a hard sell right now given that framing wood prices are at historical lows, but he is not letting that deter him. “Wood prices won’t stay this low,” he says, noting that many regions of the country are ripe to receive the steel framing message, including the West Coast and the Gulf region where termites, mold and high winds are major problems.
“From 2004 to 2005, home builders sold virtually anything they could put up. In that environment, it was harder to talk to them about switching to a new material. Now, with the slower market, builders have more time to learn about steel framing,” says Williams. Training in steel construction techniques could offer a side benefit by keeping idle crews busy so they don’t leave to find other work, he adds.
Steel’s price volatility is an obstacle to conversion, however, says Bernard Markstein, senior economist and director of forecasting for the National Association of Home Builders. “It was originally thought that steel was a more stable, predictable commodity than wood, but in recent years steel prices have been as unpredictable as lumber. Given that builders are more confident using lumber than steel—except for those in high termite areas such as Hawaii—most are very resistant to converting to steel.”
Current material prices don’t help the Steel Framing Alliance in its mission, either. Due in large part to the weak housing market, wood product prices were down 26 percent in April vs. a year earlier, including an 11.1 percent decline in lumber prices and a 14.6 percent falloff in prices of softwood used in framing. That compares with a 17.1 percent increase in steel prices, Markstein reports.
Currently, only about 1.8 percent of U.S. homes are framed with light-gauge galvanized steel studs. While that is up from 0.79 percent in 1997, it is still well below initial forecasts.
Steel supporters claim significant gains however. “Where it has really shined is in multi-family residential,” Williams says. As of 2005 (the last year that data was available), steel framing had reached almost 6 percent of the multi-family market, up from less than 1 percent in 1998.
Steel has also made inroads in certain regions of the country for single-family homes, notably in Hawaii, where over 70 percent of its homes are steel framed. In storm-prone Florida, 7 percent of homes are framed with steel, up from just 1.5 percent in 1997. The growth has been particularly pronounced south of Orlando, where 60 percent of homes are steel framed. Similarly, hurricane reconstruction in the Gulf promises to boost demand for steel studs there.
The Steel Framing Alliance is targeting such potential growth areas by putting more people “in the field,” as well as concentrating its efforts more on large production builders, those that develop large subdivisions, as opposed to small contractors who build semi-custom homes that are less advantageous for standardized steel framing.
Overall, shipments of steel framing—including material for nonresidential applications, which accounts for 95 percent of the market—were up 45 percent in 2006, to 2.3 million tons from 1.5 million tons in 1998. That’s a healthy annual growth rate of 5 to 8 percent, according to the Steel Stud Manufacturers Association, despite the doubling of the price of steel during that period.
