Recovery Lacks Horsepower
Demand for construction-related steel products is improving, say the experts, but at an uneven pace.
By Myra Pinkham, Contributing Editor
While still lagging other sectors of the economy, the construction market is improving. The gains, especially for nonresidential construction, are expected to be modest this year, but could be measurably better in 2014, say the experts, increasing demand for such construction-related steel products as structural sections and rebar.
“You could say the construction market is comprised of three horses pulling in three different directions with residential construction running at full gallop, private nonresidential at a slow walk and public construction moving backwards,” says Ken Simonson, chief economist at the Associated General Contractors of America, Arlington, Va.
Positive factors supporting growth in U.S. construction are fragile and could easily be overwhelmed by unexpected weakness in the U.S. economy, said Michael Rehwinkel, chief executive officer of Evraz North America and chairman of the American Iron and Steel Institute, during AISI’s general meeting in mid-May.
Bernard Markstein, U.S. chief economist for Reed Construction Data, Norcross, Ga., fears the U.S. government went too far with its recent austerity measures, creating a drag on the economy. “The U.S. economy has been growing, but just not fast enough,” he says, calling for increased government investment in infrastructure to stimulate growth.
Spending in the residential construction sector, including both single-family and multi-family housing, is up about 30 percent so far this year, and is forecast to finish the year 15 percent ahead of 2012. Spending on single-family homes will rise about 10 percent for the year, while construction of multi-family dwellings will jump 20 percent, according to various industry estimates.
Housing starts are expected to increase by an impressive 25 percent this year, albeit from a low base, but that number is still somewhat disappointing. “While builders today are considerably more optimistic than at earlier stages of the housing recovery, numerous challenges are slowing their ability to get new projects under way,” says Rick Judson, chairman of the Washington-based National Association of Home Builders. Slowing the pace are access to construction credit, tough qualification standards for mortgages, and rising costs for building materials, developable lots and labor.
Analyst John Anton, director of the steel service at IHS Global Insight, notes that annual housing starts plummeted to 500,000 in 2009, down dramatically from over two million prior to the crash. Homebuilding did not really improve until 2011 when it reached 740,000 units. After reaching 960,000 last year, IHS forecasts growth to 1.1 million housing units this year and 1.45 million in 2014—still well below prior peaks.
Multi-family residential construction, which is more steel intensive than single-family homes, has actually been the strongest of all the construction sectors for the past three years, notes Kermit Baker, chief economist with the American Institute of Architects. Its growth rate is starting to slow, however, as more individuals can now afford to buy a home rather than rent an apartment or condo.
“The turnaround of the residential construction sector is key. It had been a drag on the economy, but now is spurring more economic growth,” says Markstein at Reed.
The pickup in residential construction bodes well for nonresidential construction activity, too, notes Kim Leppold, senior metals analyst for London-based Metal Bulletin Research. After a lag of about 12 months, spending on roads, bridges, shopping centers and office buildings tends to follow new-home construction and the people it attracts. The trend is uneven, however.
Nonresidential construction declined by 62 percent, on a square foot basis, from 2007 to 2010. While it has improved, it is still 55 percent below its peak, says John Cross, vice president of the Chicago-based American Institute of Steel Construction. “While the rate of growth of private nonresidential construction will escalate, it will remain slow,” he says, especially with U.S. GDP growth remaining under 2 percent and unemployment over 7 percent.
AIA’s Architecture Billings Index, a leading economic indicator of construction activity, reversed course in April after eight months of gains, declining to 48.6 from the March reading of 51.9. This score, below 50, reflects a decrease in demand for design services and is the lowest mark since July 2012.
AIA predicts an “unspectacular” rise in nonresidential building of 5 percent this year and 7.2 percent in 2014. Construction of commercial facilities will lead the way with spending gains of nearly 9 percent this year and 11 percent next year. Hotel construction will see double-digit gains, followed by manufacturing and warehousing buildings, and retail space, the association forecasts.
Manufacturing-related construction increased 18.5 percent in 2012, will moderate to around 5.5 percent this year due to the slow first quarter, then jump again to 14 percent next year, estimates Reed Construction Data. “A lot of that is due to the boom in the energy market, which has made it desirable to manufacture products in the United States again,” says Markstein, pointing to the re-shoring trend.
Meanwhile, public construction spending continues to disappoint. AGC predicts a further 2-5 percent decline this year due to cuts in federal discretionary spending and additional weakness at the state and local government levels. “While state budgets have been rising, budgets have not increased for the funding of construction projects,” Simonson says.
Yet the need is critical. The American Society for Civil Engineers gives the nation’s roads and bridges a barely-passing grade of “D” and estimates it will take an investment of $3.6 trillion to bring them up to a “B.”
“The infrastructure of the United States is in terrible condition, which poses a danger not only to our citizens but our ability to compete in the manufacturing sector with the rest of the global community,” says John Ferriola, president and chief executive officer of Nucor Corp., Charlotte, N.C. “You have to have a strong, safe, efficient infrastructure in order to be able to enjoy the logistical competitive advantages that keep us on par with other countries.”
Thomas Gibson, AISI president and chief executive officer, says the nation needs a long-term solution on the funding of highway and bridge construction, more than the current “stopgap measure” in effect through September 2014. Amid a rancorous austerity debate, Congress passed a short-term, $109 billion surface transportation bill last March.
Leppold describes the bill as largely a placeholder, allowing for the “triaging” of projects that are absolutely vital versus those that can wait. Not only is the funding too low, but the time frame is too short to adequately plan new projects, she adds.
“It’s half a loaf,” Markstein agrees, but still better than the continuing resolutions passed since the prior highway bill expired in 2009.
The biggest issue in passing a new five- or six-year highway bill is how to fund it. Surface transportation bills are traditionally funded with revenues from the federal gasoline tax. An unintended consequence of today’s more fuel efficient vehicles is less money for road improvements, notes Charles Bradford, metals analyst at New-York based Bradford Research.
Possible solutions include raising gas or sales taxes, adding tolls to some roads and promoting more public-private partnerships. But tax increases of any kind are a tough sell these days at both the federal and state levels.
In late May, President Obama signed an executive order to modernize permitting practices and regulations, which should help speed up approval for major infrastructure projects, experts say.
Structural steel outlook
Industry executives see only modest improvement in demand for steel long products, based on current construction conditions. IHS reports that domestic shipments of structural sections increased 11.7 percent last year, with apparent consumption, including imports, up 15.7 percent. So far this year, shipments are up an additional 10.4 percent and consumption is up 18.3 percent. But the structurals market still has a long way to go to fully recover from its 40 percent decline in 2009, Anton says.
Supply is outpacing demand, keeping lead times short, says Jim Kerkvliet, vice president of sales and marketing for Gerdau Long Steel North America, Tampa, Fla. While lead times from rollings are about 40 to 60 days, 70 to 80 percent of structural products are sold from mill inventories, equating to a lead time of only one to two weeks.
The situation is similar for rebar and wire rod, Leppold says. Even with domestic supply readily available, foreign producers are aggressively seeking a home for their steel in the U.S. because of the weak economies abroad.
Service centers remain cautious about taking any sizable inventory positions in construction-related steels because future pricing is so uncertain. Distributor inventories of long products, while up slightly in the past few months, remain fairly lean, Leppold says, at roughly 2.2 months on hand versus 2.5 months a year ago. With inventories so short, an unexpected supply constraint or pickup in demand could catch service centers off guard, she adds, though that’s unlikely.
Kerkvliet believes the worst is over for the U.S. construction sector. “We will continue to see an improving construction economy, benefitting all levels of the supply chain with better days ahead. Our only concern is that our markets aren’t undermined by unfair imports,” he says.