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Infrastructure Report

Gearing Up For Growth

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The matching pair of federal projects, the IIJA and IRA, will pave the way for growth in infrastructure spending for the next few years.

The combination of the need for investment and the promise of federal, state and local funds has resulted in a good deal of infrastructure optimism about the next several years. Signs are positive for public investment and the steel and other metals used for the various projects that are either under way or are on the drawing board. But at this point the actual push from such landmark legislation as the Infrastructure Investment and Jobs Act and the Inflation Reduction Act is still in early stages. 

The dynamics of the infrastructure construction sector tend to be somewhat different than those for construction in general, observes Paolo Frediani, a senior steel analyst for Fastmarkets. He notes that while overall U.S. construction activity, which is still currently fairly healthy, is likely to slow down going forward, that isn’t necessarily the case for infrastructure builds, which don’t tend to correlate as strongly with macroeconomic factors. 

As such, helped by the additional monies from the IIJA and IRA and other sources, Frediani believes that U.S. infrastructure construction activity will be up somewhat this year and will see even stronger growth over the next five years or so. 

Ken Simonson, chief economist for the Associated General Contractors, says that over the past year public works construction spending has been quite strong, increasing 11 percent year on year in January. That, he observes, included a 16.4 percent increase for highway and street, a 3.1 percent increase for transportation, a 16 percent increase for sewage and waste disposal, a 17 percent increase for water supply and a 21.5 percent increase for conservation and development. Moreover, that spending was largely unrelated to recent federal legislation, including the IIJA, but rather because many states and local governments have record, or near-record surpluses and “rainy day” funds. Therefore, they can invest more money into their infrastructure.

This, he says, is not only the case for roads and bridges, but other transportation infrastructure, including airport, port and harbor and rail. This is taking place despite all of the macroeconomic and recessionary fears in the marketplace, worries somewhat mitigated by the lift they have gotten from COVID pandemic relief funds and recent job recovery, says Philip Gibbs, a metals equity analyst for KeyBanc Capital Markets.

“Highway and bridge construction has been steady over the past 10 years,” Alison Premo Black, senior vice president and chief economist for the American Road & Transportation Builders Association, points out. Supported by the previous federal highway bill – the Fixing America’s Surface Transportation Act – as well as other federal, state and local government funding mechanisms, investment in already under way for highway and bridge construction projects. With little help from the IIJA, that spending reached a record level by the end of 2022 with a full-year increase of about nine percent. Black says the states and local governments were motivated to increase their own revenue sources through gasoline and other sales taxes, public-private partnerships and/or bond issues because of such factors as growing population, higher economic activity and deteriorating infrastructure conditions. 

“The additional funding (particularly federal) for the U.S. infrastructure market is long overdue,” says Veronika Akhmadieva, an American economist for CRU, noting that while state and local government spending was up 2.3 percent in 2022, total federal public works spending was down 21.3 percent year on year. This is at a time when the condition of the nation’s infrastructure, while improving, is still not in a state where it needs to be to promote a healthy and robust economy, says Philip Bell, president of the Steel Manufacturers Association. He notes that it is the nation’s infrastructure that allows trains, trucks and barges to get goods to businesses and their customers. 

The latest American Society of Civil Engineers’ report card, released in 2021, gave the state of U.S. infrastructure a cumulative GPA of a “C,” marking the first time since the inception of the report card that the average score rose above the “D” range. The group’s grades ranged from a “B” for rail infrastructure to a “D-” for transit infrastructure with the grades for 11 of the 17 categories unchanged from the 2017 report card. Only one category – bridges – inched downward, with a grade of “C” as opposed to a “C+” in 2017. That, an ASCE spokesman says, was because more U.S. bridges were in mediocre condition over that four-year period. 

While it can’t be guaranteed, the spokesman says it is likely grades will be up across the board when the next ASCE report card is issued in 2025, helped by the pickup in infrastructure investment funding. However, such factors as inflation and labor availability could have an impact. 

There has already been some year-on-year improvement in many infrastructure-related construction sectors and it is expected that there will be even more tangible gains later this year. However, Fastmarkets’ Frediani believes at this point it has been more due to an easing of certain supply chain issues than the impact of governmental policies given it will take some time for the funds from such new legislation as the IIJA and the IRA to have the desired effect. Though the IRA is not a conventional infrastructure bill, it will eventually provide some support for energy infrastructure as well as the development of renewable energy generation. On the other hand, the IIJA focuses upon more traditional, steel-intensive infrastructure projects, Bell notes.
While it is the states that are still driving a lot of infrastructure investment, as is historically the case, Gibbs says the IIJA means more funds will begin coming from the federal coffers. “It, however, remains unclear how all of this is going to go down,” Gibbs says, “including who will get the money and what the priorities will be.” He notes it still hasn’t been disclosed which projects should be pushed and how they will be funded and how the contractors will get the workers they need to complete those projects in the current tight labor market. Also, he points out the $1.2 trillion coming from the IIJA will likely be, at least to some degree, watered down by inflation. 

“It is hard to measure what the IIJA’s impact upon infrastructure construction has been at this point,” Simonson says, given the differential between many infrastructure projects have already been awarded and value put in place data reported by the U.S. Census Bureau. 

ARTBA’s Black says that, while it is still early in the process, the IIJA was a key reason that U.S. road and bridge contracts were up 25 percent, although funding from state and local governments and other federal sources were also contributing factors. For example, CRU’s Akhmadieva notes that in January the Federal Highway Administration announced a $2.1 billion investment in bridge infrastructure. That, SMA’s Bell says, is a sign that federal infrastructure moneys are starting to flow. 

The Biden administration announced that as of November 2022 – a year after the IIJA was passed – 29,000 infrastructure projects valued at $185 billion were awarded, which is about a third of the total expected. “While that isn’t that much, it is a good start,” Akhmadieva says. 

However, Simonson says that a November/December AGC survey and his subsequent conversations indicate that very little IIJA money has been put up to bid yet. “But that is likely to change over the next few months,” with federal agencies moving ahead, writing rules and advertising projects to be bid. He added that there is always a lag time between when contracts are awarded and when construction gets under way and when contractors order raw materials for those projects. 

Simonson says that while construction contractors are happy about the U.S. government’s plans to increase infrastructure construction investment, they have some concerns, including questions about whether some of the bills’ provisions, including its Build America, Buy America requirements, will make it very difficult, if not impossible, for them to source some of the materials needed. 

Kevin Dempsey, president and CEO of the American Iron and Steel Institute, says American steel, given it is the cleanest among material manufactured by the world’s leading producers, will be at the core of U.S. infrastructure construction projects. Those plans include roads and bridges, locks and dams, drinking water systems, the electrical grid and clean energy projects. He says one recent focus has been fixing off-system bridges, particularly short-span bridges. 

Akhmadieva estimates the IIJA alone should result in a 2.6 percent increase in steel demand over the next five years, starting in the second half of this year. Bell agrees, noting that generally for every $100 billion in infrastructure investment there is about a five-million short-ton increase in demand for steel, particularly rebar, structural steel, wire rod and plate. During its recent quarterly earning conference call, Nucor estimated that over that timeframe demand for rebar will increase 1.5 million tons to 2 million tons per year. 

Dempsey says steel will also benefit from investment in energy infrastructure, including renewable energy projects, helped by the many tax incentives in the IRA, noting, “Steel is a critical component in the continued development of all clean energy technologies to reduce America’s carbon footprint, given that both wind and solar renewable energy systems and electric vehicles depend upon steel.” 

Nevertheless, it is generally expected there will be enough domestic steel available with several mills, including Nucor and Commercial Metals, bringing more steelmaking capacity aimed at meeting this demand. For example, Nucor has not only started up a greenfield plate mill in Brandenburg, Ky., but is also constructing a new 430,000-ton-a-year rebar micro-mill in Lexington, N.C. and adding a new melt shop at its Kingman, Ariz., bar mill. Likewise, according to Ty Garrison, senior vice president of operations, CMC has announced plans to build a new rebar mill in Berkeley County, W.Va., as well as a new rebar and merchant bar mill adjacent to its existing mill in Mesa, Ariz. Also, Fastmarkets’ Frediani says, the expected weakening of private construction activity could free up some steel to meet the growing infrastructure construction requirements. 

There, however, could be some periods of time over the next five to seven years that steel supply could tighten, such as seasonal construction rebound periods, Josh Spoores, CRU’s principal steel analyst, admits.  “But overall, over the timeframe of these bills there will be enough steel supply,” he says. 

Other metals are also expected to benefit from the expected increases in infrastructure construction activity, Akhmadieva says. For example, she expects the IIJA will result in a 0.8 percent a year increase in aluminum demand over the next five years, largely for such transportation infrastructure applications as bus stations, transit systems and electric vehicle-related infrastructure. She says aluminum will also be needed in the electric grid for long distance transmission lines. 

Meanwhile, while it is used less for infrastructure than other construction applications, copper will get a 2.6 percent annual boost over the next five years from the IIJA. This will come from such applications as the power grid, underground power distribution in urban areas, substituting lead pipes for water infrastructure, EV charging infrastructure and buildings’ wiring, Akhmadieva says. She believes there is adequate supply of both aluminium and copper for their increased infrastructure-related demand. 

After double-digit growth for most categories for U.S. infrastructure construction spending last year, AGC’s Simonson says even with the impediments to getting the IIJA funds out, there will be a lot more federal and state money coming this year and for years to come. “While the timing is still somewhat of a mystery, the arrow is pointing up,” he says. Gibbs agrees, noting that while there won’t be a sudden, dramatic surge in activity this year, there should be some visible improvement.

However, with the potential for an economic recession later this year, coupled with the continued difficulty finding construction workers, Akhmadieva expects the real pickup in U.S. infrastructure construction to begin next year and to peak in 2025 or 2026.

While construction activity is up, the effects of the various spending bills have yet to truly materialize. (Photo courtesy John Deere)

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