Suspense Builds for Beams
Nonresidential construction typically lags growth in homebuilding by about two years. The calendar says it’s time for a bump in commercial construction. Is the market listening?
By Myra Pinkham, Contributing Editor
Producers and distributors of beams and other structural steel products are stuck in a wait-and-see mode. They are waiting to see if the weak first-quarter economy was an anomaly caused by the extreme winter weather. They are waiting to see if this is the year the surge in homebuilding finally translates into more commercial construction. They are waiting to see if Congress can find the political resolve, and the funding, for a long-term highway bill. And they are waiting to see if domestic mills will raise prices in the face of growing structural steel imports.
Despite these various uncertainties, the prospects for nonresidential construction, and thus structural steel sales, appear favorable, say the experts. In addition to construction, structural steel is also used in truck trailers, machinery, cranes, rail cars, and the like. "We are seeing the early onset of a recovery. This is very important for steel. When nonresidential construction is healthy, it can have an even greater impact on the steel industry in general than automotive," says analyst Christopher Plummer, managing director of Metal Strategies Inc., West Chester, Pa. Structurals shipments, while up in the last two years, remain a million tons below prerecession peaks near 8 million tons. 2014 shipments will total about 6.5 million tons, Metal Strategies estimates.
Indexes from the Washington-based American Institute of Architects delivered mixed signals in April. AIA's Architecture Billings Index registered 49.6, slightly below the 50 level that indicates growth in design activity. AIA has added a new indicator measuring the trends in new design contracts at architecture firms, which provides a strong signal of the direction of future architecture billings. The score for design contracts in April was 54.6. "Despite an easing in demand for architecture services over the last couple of months, there is a pervading sense of optimism that business conditions are poised to improve as the year moves on," said AIA Chief Economist Kermit Baker. "With a healthy figure for design contracts, this should translate into improved billings in the near future."
Ken Simonson, chief economist with Associated General Contractors of America, Arlington, Va., says overall construction spending increased by 8 percent in the first quarter, versus the same period in 2013, and is likely to finish the year up about 5 percent. The strongest sectors for private nonresidential construction are manufacturing, power and energy projects, and communications. "We are just at the beginning of a major expansion for manufacturing construction and other projects related to energy, including oil and gas exploration, petrochemical plants, energy export facilities and the construction of pipelines."
Residential construction is recovering at a robust 20 percent annual rate, though it remains 40 percent below its normal level. Census Bureau data shows single-family housing starts are up nearly 10 percent for the year, while multifamily starts are up 70 percent year-on-year. Nonresidential construction, which historically lags residential construction by about 24 months, accounts for roughly 80 percent of structural steel demand. Market researchers at IHS Inc., based in Englewood, Colo., estimate nonresidential construction will grow about 4 percent this year, with the public sector weighing down private-sector gains. Next year, they predict growth of 10 percent, followed by another 5 percent in 2016.
"Commercial construction was clearly impacted by the wintry weather. There is now hope that a lot of projects that were delayed in the first quarter will come back in the second quarter," says John Cross, vice president of the American Institute of Steel Construction in Chicago. Much of the current growth is in multifamily residential construction, especially in the South, Texas and California, he says. He also pointed to a pickup in warehouse construction and upgrades to U.S. ports due to the widening of the Panama Canal. "We are optimistic that the structural steel market will improve as nonresidential construction improves. Clearly there is enough domestic supply to handle any increase in demand."
Bradley MacAulay, metals analyst with Metal Bulletin Research, says the structural steel market is more supply-driven today than demand-driven. Demand was hampered by the harsh winter weather and has seen only moderate recovery so far. Mills are reporting higher orders and shipments, but that is mainly due to normal seasonal service center restocking. "Demand growth has been slow. In fact, structural steel shipments to end-users is one of the lowest performers of all long products. Year-on-year growth rates during the first quarter were only slightly better than the first quarter of 2013, which was a very slow growth quarter," he says.
Yet suppliers appear relatively optimistic. "Our earlier belief that the market softness was related to severe weather and to a temporary spike in imports, rather than an underlying structural change in demand, seems to be confirmed as market indicators have improved, consumer sentiment is rising and, most importantly, our order book has strengthened on all fronts," says Marlene Owen, director of investor relations for Steel Dynamics Inc., Fort Wayne, Ind. "The steady increase in fabrication and wide-flange beam orders gives us confidence that nonresidential construction is definitely in recovery."
In Nucor's most recent investor conference call, President John Ferriola said his company's structurals business also is doing well. Nucor-Yamato is on schedule for the startup of its new $115 million structural mill in Blytheville, Ark., later this summer, which will greatly expand its sheet piling production capabilities. Its rebar business was hurt by the tough winter conditions in the first quarter, but has seen modest improvement this spring. "On the structurals side, the wide-flange beam side, we also see demand improving marginally. It does not face the same import pressure as rebar, therefore pricing has been a little more stable," he said.
Nevertheless, other sources report an increase in imports of beams, notably heavy beams. According to Metal Strategies' data, the spot price for structural beams has increased more than 8 percent in the past year to around $820 per ton. Gerdau Long Steel North America, Tampa, Fla., announced a further $20 per ton increase in its beam price in early May, but rescinded it later in the month, partly because of concern about increased import penetration. Structurals imports increased significantly in March, April and May from Russia, China, South Korea, Mexico and Europe, says Plummer. As of March, the foreign prices were about $60 per ton below the domestic price--not a big enough differential to offset the import freight costs. "Domestic mill lead times of four to five weeks are beginning to stretch out a bit," he adds.
"Imports are fairly strong for heavy structurals," confirms Sheldon Tenenbaum, senior vice president of supplier development for Reliance Steel & Aluminum in Los Angeles. "The price differential between domestic and foreign prices is starting to get wide enough that imports are more attractive. In port cities, it's around $100 per ton or greater."
Domestic mills have been careful not to raise their prices too much and risk attracting even more imports, says Jason Kaplan, principal analyst for IHS Inc. And the current cost of scrap does not justify a rise in price. But even at the current price levels, the U.S. market is drawing attention from overseas. "With the lower- than-expected duties in some other trade cases, including OCTG and rebar, there isn't much holding imports back."
Domestic producers are certainly considering a price hike, but MacAulay at MBR is doubtful they can be successful as long as construction demand remains uncertain. Structural steel is primarily a minimill, recycled-scrap product, he notes. "The mills have definitely been trying to decouple their prices from month-by-month changes in scrap prices, but I don't think that any proposed price movement will be able to gain traction in this environment of weak demand and falling raw material costs."
Infrastructure wait continues
Despite the woeful condition of the nation's roads and bridges, infrastructure spending declined by 3 percent last year and most likely will see a similar decline this year due to government funding issues at both the state and federal levels, says Scott Hazelton, managing director of the IHS Construction Service. Much depends on how Congress extends the current highway bill when it expires in September. Failure to agree on new funding sources for the Highway Trust Fund will put at risk more than 112,000 highway projects, 5,600 transit programs and nearly 700,000 jobs, the White House warns. "Hopefully there will be a longer-term bill. With a short-term bill, like the two-year bill that was last passed, states feel they can repave roads or do minor bridge repairs but not much more. If you want to do serious bridge or highway construction, you need a longer term fix," he says.
The series of 11 short-term extensions to the federal highway bill have left the market uncertain about government infrastructure spending, says Simonson at AGCA. "We are at risk to go through the same process this time again. It is hard to say if Congress has any more rabbits to pull out of its deep dark hat."
"The success of the steel industry relies heavily on U.S. infrastructure as we both supply materials for steel-intensive projects and require efficient surface and water transportation to move raw materials and ensure just-in-time deliveries. We urge Congress to pass a well-funded, long-term transportation bill of at least five or six years, without increasing the tax burden on our industry, to create jobs, promote a robust manufacturing sector, and ensure our nation remains internationally competitive," says Thomas Gibson, president and CEO of the American Iron and Steel Institute.
The federal Highway Trust Fund is funded through an 18.4 cent per gallon gasoline tax. The problem is the fund continually generates less revenue for road improvements as vehicles get more fuel efficient. Congress also must come up with a longer-term solution to close a projected $16 billion annual shortfall in the fund. Increasing the gas tax at a time when the economy is still recovering and gas prices are already so high could impact consumer spending--and votes in the next election--making lawmakers reluctant to act. Among concepts to replace or supplement the federal gas tax are proposals to place tolls on existing interstate highways or to institute a vehicle mileage tax. Both promise to be highly unpopular. "Many people are uncomfortable about a car that reports mileage directly to the government. It is more likely that Congress will bite the bullet and raise the gasoline tax. That is the simplest way" says Bill McEleney, managing director of the National Steel Bridge Alliance, Cranston, R.I.
Bridge construction was off about 10 percent in the first quarter, compared to the same quarter last year. If states are not comfortable with the level of available funding, they will not start a major project, McEleney says. "Last year a lot of big steel bridges were bid. About 500,000 tons of structural steel was used for their fabrication and construction. This year will be more of an average year. The next few years will also be positive. Steel's share of the bridge market has held steady," he adds.
For service centers, the wait-and-see structurals market poses more potential than profits at the moment. Most are keeping a tight rein on their inventories. "Service centers are waiting to get a better sense of the underlying demand and pricing before they look to bring up their inventory levels any further," says MacAulay at MBR.
"I don't see service centers letting loose and restocking much. They are still watching their coins. They need to be confident there will be a sustained pickup in demand. Some are building up inventories slowly, but most don't want to take a chance," says Mike Emerson, owner and CEO of Huntington Steel, a Charleston, W. Va., service center and fabricator.
Service centers are maintaining the fiscal discipline that got them through the financial crisis, says Gary Stein, CEO of Triple-S Steel in Houston. Demand is improving, but very slowly. "Everyone is cautious. No one is speculating on inventories. There is no shortage of structural steel. We are buying every day, but not extraordinary volumes. There is no need to do so with mill lead times still fairly short and steady."
For structurals suppliers, the wait may soon be over, says Charles Bradford, partner with the Metals Industries Advisory Group in New York. "The structural steel market is in a recovery mode. I see the nonresidential construction turnaround at hand. This is the year for nonresidential construction to recover."