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June 2012
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Will Congress Leave Us Hanging Again?
 
Without a new federal highway bill, the outlook for metals demand from the infrastructure sector remains cloudy.
  
While other parts of the construction market are starting to see some early signs of life, the same cannot be said of the infrastructure or public works sector, which has continued to decline this year. Any significant improvement is viewed as unlikely until  Congress passes a major long-term surface transportation reauthorization bill, which would be quite a feat given the current political climate in Washington.

A new highway bill could give a big boost to the suppliers of steel, aluminum and other materials used in infrastructure construction. Steel, in particular, has a lot to gain from new public works projects that would increase demand for concrete reinforcing bar, plate, structurals, pipe and tube, and wire rod. Infrastructure improvements account for about half of all rebar sales, with the rest going into commercial and multifamily construction.

“We must make rebuilding our crumbling transportation infrastructure system a top national priority,” says John Surma, chairman and chief executive officer of United States Steel Corp., Pittsburgh. “It’s essential to be able to do business efficiently within our own borders in order to maintain our dominant role in the global economy.”

Not only are the nation’s roads and bridges in need of repair, but also its locks and dams, pipelines and energy grid, parts of which are critically near failure, says Thomas Danjczek, president of the Steel Manufacturers Association, Washington, D.C.

Alison Premo Black, chief economist for the Washington, D.C.-based American Road & Transportation Builders Association, reports that about 25 percent of the nation’s bridges have been deemed structurally deficient or functionally obsolete. By some estimates, more than 200,000 bridges need to be renovated or replaced.

Based on the U.S. Department of Transportation’s needs and conditions report, the government would need to spend an additional $10 billion per year to keep from losing further ground in the maintenance of the country’s roads and bridges, and another $79 billion per year to do the work that is truly needed.

Michael Rehwinkel, president and chief executive officer of Chicago-based Evraz North America, notes that construction of non-building structures, including highway, bridge and water supply construction, was expected to grow about 6 percent this year. “However, that was predicated on a well-funded surface transportation bill being in place prior to the 2012 highway construction season.”

Instead, what has happened since the latest transportation bill expired in 2009 is that Congress has passed a series of 90-day extensions—a total of nine extensions to date—to keep federal funds flowing to existing infrastructure projects at current levels. This stopgap approach has left the infrastructure construction sector depressed.

“A long-term, well-funded federal bill would provide the certainty that states and local municipalities need to go ahead with infrastructure construction projects,” says Philip K. Bell, a spokesman for Gerdau Long Steel North America, Tampa, Fla. Without such a bill, public works construction has remained relatively soft by historical standards and even weaker than it was a year ago.

Late last year, metal suppliers to the infrastructure sector saw a slight bump as the last of the American Recovery and Reinvestment Act (ARRA) economic stimulus money went through the system for some bridge projects, says Robert J. Willis, vice president of construction market development for the Steel Market Development Institute, Washington, D.C. Despite that increase, total spending for put in place public works construction declined by 7.2 percent in 2011, according to Metal Strategies Inc., West Chester, Pa.

Ken Simonson, chief economist for the Associated General Contractors of America, Arlington, Va., says that public construction is down about 3 percent so far this year. He attributes that dip to the lack of further economic stimulus money, the depletion of allotted funds for water and sewer projects, and the completion of post-Katrina reconstruction in New Orleans.

“It’s difficult to measure the impact of the ARRA as a whole. So many of the projects were supposed to be shovel-ready but weren’t, so a lot of those funds didn’t go to steel-intensive projects,” says Christopher Plummer, managing director of Metal Strategies. 

While it was originally billed as an infrastructure measure, the economic stimulus legislation proved not to be so. “Of the over $800 billion package, most estimates conclude that only 8 to 10 percent was used to fund infrastructure spending,” Bell says.

“There is no such thing as shovel-ready when it comes to construction. Now the federal government admits that,” says Charles Bradford, metals analyst and principal of Bradford Research in New York.

The economic stimulus funds were mostly used for reconstruction, rework and rehabilitation projects, but not a lot of new construction, says Premo Black. In fact, only about $3 billion of the package went for bridge work.

There are a number of bright spots when it comes to infrastructure construction, however. One such area is electrical transmission and the upgrading of the nation’s power grid, says James Lewis, a spokesman for the Arlington, Va.-based Aluminum Association. Domestic producer shipments of aluminum electrical wire and cable were up about 30 percent year on year in the first quarter, with aluminum conductor steel-reinforced cable and bare cable up 34 percent and insulated wire and cable up 23 percent.

Premo Black points to some other positives. Investment in Class 1 railroads should remain stable this year. Ports and waterways are seeing increased spending—largely from the port authorities and their tenants rather than federal funding—in preparation for the expansion of the Panama Canal at the end of 2014, which will open the East and Gulf Coast ports to more Asian trade.

Investment in oil and natural gas pipelines, a big consumer of steel plate, should also remain strong. As Bradford points out, the average pipeline is about 40 years old, which is much longer than it was designed to last, and so must be replaced. Increased drilling in the nation’s shale plays also is creating a need for additional transmission pipelines.

Private transportation infrastructure spending is also up approximately 8 percent this year, Simonson says. Public transportation spending, on the other hand, is down 11 percent, while drinking water infrastructure investment is down 10 percent.

Meanwhile, all eyes are on public transportation infrastructure spending and whether or not Congress can pass a multi-year surface transportation bill. Sen. Barbara Boxer (D-Calif.), chairwoman of the Senate Environment and Public Works Committee, has said she is optimistic a bipartisan bill will get passed before the latest short-term extension expires at the end of June. Others are not so sure, especially with this being a presidential election year.

Everyone recognizes the need for a good transportation system, says Kevin M. Dempsey, the American Iron and Steel Institute’s senior vice president of public policy and general counsel. Short-term extensions aren’t good for anyone, making it harder for state and local departments of transportation to plan for future projects, he adds.
Nevertheless, Simonson predicts the outcome will be two more short-term extensions before a full blown reauthorization bill is approved.

Currently, congressional leaders are trying to find some common ground between the $109 billion two-year bill passed by the Senate in March and the tenth 90-day extension approved by the House after it failed to pass a five-year $260 billion plan.

Further complicating the process is that the House’s extension includes language promoting construction of the entire Keystone XL pipeline, which remains controversial. “That opens a whole new can of worms and could make it even more contentious,” says Adam Parr, vice president of policy and communications for the Steel Manufacturers Association. Lynn Lupori Gray, senior consultant for Hatch Beddows, agrees, calling the Keystone pipeline a political volleyball. “Anything it is attached to will be hard to pass.”

“I am hoping this will lead to at least a two-year extension this time before Congress can come up with an even longer-term plan,” says Dempsey at AISI. 

Bill Jones, vice chairman of O’Neal Industries Inc., Birmingham, Ala., says even a two-year bill will not be enough. “It will still make planning very difficult and the implementation of long-term projects (the ones that are most steel intensive) nearly impossible.”

Future uncertainty also puts a dampener on the ability to bring certain innovations to the marketplace, including SMDI’s E-Span 140 project to promote short span steel bridges and the aluminum industry’s promotion of aluminum bridge decking.

Traditionally, surface transportation projects are paid for by the federal Highway Trust Fund, which is largely funded with a gasoline tax. The federal gasoline tax has been fixed at 18.4 cents per gallon since 1993 and is not indexed to inflation. With the average American driving fewer miles in cars that consume less gas, “that means the money coming into the federal coffers has declined significantly,” Plummer notes.

The federal gasoline tax currently pays for only about half of needed transportation maintenance, says Danjczek at SMA. That means other sources of funding for infrastructure projects must be identified.

“Congress needs to take an ‘all of the above’ approach, putting all potential funding mechanisms on the table,” says Bell at Gerdau. This includes such options as raising the gasoline tax, indexing it to inflation, increasing tolls or adding new toll roads and expanding the use of public-private partnerships.

“There is every reason to believe, given the current gridlock and funding problems in Washington, that we will get another extension and not a full transportation bill,” Danjczek says.

That is not good news for steel suppliers. Though overall steel operating rates are 78 to 80 percent, capacity utilization for such construction metals as rebar, wire rod and structurals is closer to 60 or 65 percent. “While that is up about 10 percent year on year, it is still down from the 75 percent traditional operating rate,” he says.

Like other executives, Danjczek is hopeful Congress will come to grips with infrastructure funding sooner rather than later, as the nation’s roads and bridges continue to crumble. “We can’t just keep kicking the can down the road.”
 

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