Infrastructure Outlook 2019
A Bridge Too Far?
By Myra Pinkham
on Jul 24, 2019
U.S. infrastructure construction spending has gotten off to a stronger than expected start this year, which is good news for metal suppliers to that sector. However, some industry observers doubt the momentum can be sustained without the passage of a long-term federal infrastructure bill. And while there seems to be increasing bipartisan support for such legislation, there continues to be a lack of consensus on how it would be funded.
According to the latest U.S. Census Bureau data, infrastructure construction spending was 13 percent higher than it had been during the first three months of 2018.
The rate of growth, however, has been more moderate for infrastructure construction starts, Robert Murray, chief economist with Dodge Data & Analytics points out. While starts continue to climb, the rate of that growth has been easing after peaking at 19 percent in 2017. That was followed by a 6 percent increase in 2018. He says he is expecting to see another 5 percent gain in 2019, with only a 1 percent increase projected in 2020.
The increase in infrastructure spending has been a factor in the recent uptick in demand for reinforcing bar and other steels used in public works construction. Christopher Plummer, managing director of Metal Strategies Inc., observes that rebar consumption was up 24.4 percent year on year in January, following a 19.8 percent climb in 2018. In fact, in January U.S. domestic rebar shipments totaled 727,147 tons, its highest monthly level since July 2008. That came after an 11 percent increase in rebar shipments to 7.8 million tons in 2018 – the highest it had been since 2007.
In addition to rebar, infrastructure construction activity has a big impact upon such other steel products as structural steel, plate, pipe and tube, wire and wire mesh and, albeit to a lesser degree, sheet products. A spokeswoman for the American Iron and Steel Institute says a broad rule of thumb estimate is that every $1 billion of infrastructure spending requires about 50,000 net tons of steel.
Tyler Kenyon, vice president and senior metals mining analyst at Cowen & Co., says the increase in infrastructure construction spending occurred at a time when overall construction activity was somewhat dampened by the more extreme than usual weather, including extremely wet conditions in the South and the West and severe wintry conditions in the Midwest and parts of the Northeast.
Several factors are behind the strength. Though interest rates are somewhat higher, they remain accommodative. Also, most state and local municipality fiscal budgets are relatively healthy, he notes.
The federal gasoline tax, which hasn’t been increased since 1993, has been the major funding source for the federal Highway Trust Fund. However, over the past six years, more than 30 states and some municipalities have stepped in to fill the void, says Brian Pallasch, managing director of government relations and infrastructure initiatives for the American Society of Civil Engineers. Already this year, Alabama, Arkansas and Ohio have raised their state gasoline taxes to deal with their infrastructure issues.
Infrastructure construction spending also received a boost – about $20 million per year – from the fiscal 2018 and 2019 federal budgets and appropriations from those budgets. While some went toward surface transportation such as roads, bridges and transit, those appropriations were also spread across a variety of other infrastructure categories, including water infrastructure, Army Corps of Engineers’ civil works projects and dam safety. Additionally, resources for the Parks Service to address their backlog in needed maintenance and repair of roadway systems and facilities was included.
There have also been a growing number of public-private partnerships, particularly toll facilities with either traditional state agencies or with privately funded roads that will eventually be turned over to the states, says Ken Simonson, chief economist for the Associated General Contractors of America.
Despite this, Simonson isn’t sure whether the current growth of infrastructure spending will be sustained, especially given the current rate of growth is extraordinarily high for a sector that is generally known for more modest changes in spending. Philip K. Bell, president of the Steel Manufacturers Association says infrastructure spending really hasn’t increased “meaningfully” since 2014, even with Congressional passage in December 2015 of the five-year, $305 billion Fixing America’s Surface Transportation Act. The FAST Act was the first long-term national surface transportation bill passed in more than a decade, but that bill that will be expiring at the end of next year.
Scott Hazelton, managing director of the IHS Markit construction service, believes infrastructure spending is likely to see slow growth going forward, as there really isn’t anything currently driving it. “For there to be sustained, strong infrastructure construction, you need to have a strong overall construction market – a strong housing or commercial construction market demanding such infrastructure as new sewer, water or underground utility lines or new roads,” he explains. “But both housing and nonresidential construction starts have been effectively flat, with housing starts only up about 4 percent last year and about 1 percent this year and nonresidential up about 5 percent last year and about 4 percent this year.
Nevertheless, Brian Manning, CEO for mc2 civil inc., a Houston-based civil construction contractor, says both civil engineers and contractors are quite busy right now with various types of infrastructure projects. Activity has been particularly strong in heavy construction, such as roads and bridges, water, sewage and energy infrastructure. The biggest constraint upon getting new projects online is contractors’ ability to find qualified workers in today’s tight labor market.
While there has genuinely been an increase in the number of projects over the past year, the higher spending numbers are also a reflection of increased bid prices due to higher construction material costs, Simonson says. In 2018, the Federal Highway Administration’s national highway construction cost index was up 12.7 percent; its largest annual change since 2008 and a dramatic change from its 0.5 percent increase in 2017.
A combination of the Buy America push for public infrastructure projects and the Section 232 tariffs have had an upward influence upon steel prices. Still, Manning says it hasn’t affected contractors that much, given that they are able to pass through those costs. “However, it is possible that it could result in fewer infrastructure projects going forward,” he admits.
Also, Cowen’s Kenyon expects the prices for the steel products used in infrastructure construction will ease. He notes the spreads between many of those products and scrap prices are well in excess of where they had been – in some cases $70-$85 per ton. “I believe there will be a normalization of the spread as more domestic long product comes online and with the likelihood of the easing of some protectionist measures.”
AISI analysis indicates the overall constant dollar infrastructure investment is likely to see modest declines the next two years absent the enactment of new federal infrastructure authorization legislation, the trade group’s spokeswoman noted. Both the AISI and SMA were encouraged with the April 30 meeting between President Trump, House of Representatives Speaker Nancy Pelosi and Senate Minority Leader Chuck Schumer. Reports of the meeting were largely positive, with the three at least agreeing in principle for a 10-year, $2 trillion infrastructure investment plan. “But we need the political cooperation to fund it,” Bell says.
Consensus on how such legislation would be paid for is yet to be reached, which could be very challenging in today’s hyper-partisan political environment. Furthermore, based on Trump’s 2020 budget proposal, the Highway Trust Fund could move into the red starting in fiscal 2022, according to a recent analysis by the Congressional Budget Office. Plummer says this comes as the federal deficit, which is already $1 trillion, is expected to increase further.
Eric Stuart, SMA’s vice president of environment, energy and infrastructure policy, maintains one of the previous misses was not raising the federal gasoline tax when fuel prices were much lower than they are today. Maintaining that currently level, 18.4 cents per gallon, is insufficient to even robustly fund the FAST Act highway bill. Bell says to fund the comprehensive infrastructure investment plan now being discussed, a combination of new appropriations, federal enhancements and public-private partnerships should be pursued.
“There is no question that U.S. infrastructure is in serious need of investment,” Plummer says, pointing to the “grades” of the most recent ASCE infrastructure report card, which was released in 2017. The next report card isn’t scheduled to come out until 2021.
Pallasch notes that while the overall grade remained unchanged at D+, the need number, or infrastructure deficit, actually grew slightly in 2017 compared with ASCE’s previous infrastructure report card in 2013. This occurred as the grades for seven categories moved up – hazardous waste to D+, inland waterways to D, levees to D, ports to C+, rail to B, schools to D+ and wastewater to D+ – and those for three other categories declined – parks and recreation to D+, solid waste to C+ and transit to D-. Meanwhile, the grades for roads and bridges categories, which, he says, together account for $1.1 trillion of the $2 trillion infrastructure deficit, were unchanged with a C+ for bridges and a D for roads.
In April, the American Road & Transportation Builders Association in April released its latest annual analysis of the U.S. Department of Transportation’s National Bridge Inventory database, which showed that in 2018 there were 47,052 bridges that were classified as structurally deficient and in poor condition. If placed end to end, those deficient bridges would span nearly 1,100 miles.
Alison Premo Black, ARTBA’s senior vice president and chief economist, observes that while the percentage of all U.S. bridges now structurally deficient has declined gradually to 7.6 percent from 8.7 percent in 2014 and the percentage that need some sort of repair has moved down to 38 percent from 40 percent, the pace of improvement has really slowed down over the past few years. She adds it would take about 80 years to work through the current backlog of structurally deficient bridges, and it would require about $171 billion in funding from federal, state and local sources to do so.
“And that is just for bridges,” she points out. “That is without even touching upon energy, water, ports and communications, which are all parts of the broad-based infrastructure needs.”
SMA’s Bell says the most positive growth has been for energy infrastructure, helped by dramatic improvements in oil and natural gas exploration technology, which has also promoted the need for pipelines to transport energy. The opening of the export market for crude oil and liquefied natural gas has also been a factor, resulting in a groundswell of construction of export terminals. Building has been particularly active at Gulf of Mexico ports, says Aaron Ellis, a spokesman for the American Association of Port Authorities.
Ellis says AAPAs latest port infrastructure survey, which came out in 2016, indicates the ports and their private partners were planning to invest about $32 billion in port infrastructure between 2016 and 2020, including about $128 worth of projects at Gulf of Mexico ports alone.
While its next survey, which will cover 2020-2024 investments, will not come out until later this year, Ellis says some AAPA assessments of immediate needs indicate the ports must invest $66 billion over the next 10 years just to be able to handle current freight volumes. However, the report notes the federal, state and local governments must shoulder some of the load. They ports have already received a $293.7 million coastal port infrastructure grant from the U.S. DOT’s Maritime Administration and $9 million in Build grants, but paying for infrastructure investment – both at the ports and elsewhere – will continue to be a challenge.
Industry observers say the most likely funding mechanism, especially for surface transportation infrastructure, will at least in part involve increasing the federal gasoline tax, while acknowledging the growing number of electric vehicles do not pay such a tax. In addition to increased use of public-private partnerships and toll roads and bridges, another option being discussed is a user fee based on vehicle miles traveled. Unfortunately, it is generally believed such a fee would be hard to implement quickly. IHS Markit’s Hazelton says while some states are already testing such a fee, it isn’t likely to be able to be implemented federally before 2023. That isn’t soon enough to address current needs, including the shortfall in the Highway Trust Fund.
“Overall, I think that infrastructure spending will remain fairly strong,” Plummer says, especially if either the FAST Act is renewed or extended or if Congress is able to pass a more comprehensive infrastructure investment plan. That would be excellent news for producers of rebar and other steel products used for infrastructure construction.
But AGC’s Simonson says a lot depends upon whether President Trump, Rep. Pelosi and Sen. Schumer can reach an agreement on a broad-based infrastructure investment plan. “The timing and the nature of that agreement is still unclear, and it won’t be easy, but after nothing going through over the past two years, at least now there is at least a glimmer of hope of getting something done.”
Plummer believes something could get done given the rare appearance of bipartisan support, even in the face of the growing federal deficit. However, he suspects the end result that gets passed is most likely “mediocre” in size, possibly a quarter or a third of the $2 trillion currently being talked about.