Aggregate Producers Positioned for a Recovery in 2010

Aggregate Producers Positioned for a Recovery in 2010
Published: 17 September 2009

After a forecasted 40% peak-to-trough decline in domestic demand for construction materials by the end of 2009, analysts expect volumes to begin to gradually trend up starting in 2010. A report by Patricia Oey in the Morningstar.com says that by that time, it expects stimulus spending on roads and infrastructure and a recovery in residential construction to drive growth in demand for construction materials, which will be somewhat offset by declines in nonresidential construction spending. Starting in 2011, an improving economy is expected to support construction spending growth across end markets, including the nonresidential segment. Domestic aggregate producers Vulcan Materials and Martin Marietta are well positioned to benefit from this recovery. However, while demand for cement will also enjoy similar growth drivers, the Morning Star reports that there is a risk that potential emission regulations could weigh on the industry’s profitability.

Indicators Suggest Demand for Construction Materials Will Turn Positive in 2010

According to the U.S. Census construction spending figures, growth in public spending on highways and streets has been tepid in 2009, which reflects the slow startup of stimulus spending, and lower state and local spending due to weakening budgets. “However, we are optimistic that stimulus-driven road construction activity will pick up in the spring of 2010--highway construction awards reached a record high of $6.8 billion in June, which was followed by $6.2 billion in awards in July. We estimate about 60% to 70% of the $28 billion in stimulus allocated for road work will be spent in 2010, and this boost in federal spending will offset a slowdown in state and local spending. Public spending on roads and highways accounts for a significant portion of demand for construction materials--about 30% to 40%. If we include spending on infrastructure projects such as sewers and bridges, this figure rises to 45% to 55% of total demand,” the report said.

Another major end market for construction materials is residential construction. In a normal demand environment, residential construction accounts for about 20% to 30% of demand for construction materials, but it is currently trending lower, as residential construction spending has fallen around 60% over the last few years. After about four years of declines, we started to see some light at the end of the tunnel in 2009, when single-family housing starts and housing permits rose for five straight months starting in March. Reed Construction Data estimates residential construction spending to grow 18% in 2010.

Anticipated increases in spending on roads and residential construction in 2010 will be offset by declines in nonresidential construction. Nonresidential construction starts were down over 20% in the first half of 2009, weighed by the weaker economic environment and a tight credit environment. If the economy begins to strengthen in 2010, the report expects nonresidential construction activity will begin to grow again in 2011. This segment accounts for about 20% of demand for construction materials.