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The construction industry, which has been buffeting headwinds from historically high interest rates and slow take off for projects, remains an attractive end consumer for domestic steel producers.
The Federal Reserve said on Wednesday May 1 it is keeping its key interest rate unchanged at between 5.25-5.50%, the highest level in more than two decades, and a rate it has been maintaining since July 2023 to battle high inflation.
The Fed’s battle against inflation has taken a bite out of the construction industry, especially the residential construction sub-sector.
For example, borrowers are expected to pay an average of 7.75% on a 30-year mortgage, and these high rates have cooled the housing market.
The Architectural Billing Index (ABI) – a major indicator of construction activity – fell for the 14th consecutive month in March 2024, declining to a score of 43.6, down from 49.5 in February, and lower than 46.2 in January and 45.4 in December 2023.
Despite these lukewarm indicators, steel producers who service the construction end markets were positive in their quarterly earnings.
US steelmaker Nucor said during the company’s first-quarter earnings conference call on April 23 that it will keep pushing on with construction projects in its rebar, plate and sheet mill divisions.
Nucor was upbeat about the resiliency in non-residential construction despite the company’s lower output in steel products in the first quarter, the company’s executive vice president of fabricated construction products Brad Ford said during the call.
Likewise, top executives at Steel Dynamics Inc (SDI) reiterated confidence in the impact of onshoring and federal programs including the Inflation Reduction Act (IRA) and the Infrastructure Investment and Jobs Act (IIJA).
“North America will benefit from continued onshoring and manufacturing businesses, and the US will benefit from the allocation of monies from the infrastructure program, the Inflation Reduction Act and other public programs,” SDI chief executive officer Mark Millett said during an earnings call on April 24.
Wire rod producer Insteel also underlined positive macro-indicators of construction end markets during an earnings call on April 25.
“The latest February data [from the US Department of Commerce] revealed that total construction spending on a seemingly adjusted annual basis increased by approximately 11% compared to last year,” Scot Jafroodi, Insteel vice president, chief financial officer and treasurer said during the company’s fiscal second-quarter earnings call.
“Nonresidential construction spending increased by 14% and public highway and street construction, which is one of the largest in-use applications for our products, showed an increase of nearly 19%,” Jafroodi said, but admitted that “indicators for nonresidential construction, Architectural Billings and Dodge Momentum Indexes, remain weak.”
Insteel H.O. Woltz III said that both non-residential and residential steel markets were “strengthening in a parallel pace.”
“Most of the products that we put into residential markets are more commodity like, and they’ve been more competitive,” Woltz said. “I think what we’re seeing now is really decent demand from both residential and non-residential markets, and certainly a recovery in both.”
Fastmarkets analyst Kim Leppold made similar observations about construction demand recovery, noting that the gains will be realized in the long term.
“While we always expect immediate boosts in steel demand from infrastructure bills, the results are much more gradual given that the funds need to be appropriated and projects approved and finalized,” Leppold said. “There are more longer-term gains to be expected once we see actual spending. Eventual interest rate drops will also hasten spending.”
Other analysts noted there are signs of gradual easing of the interest rate-driven pains. In a JP Morgan equity research note from November 2023, analysts forecast that underlying construction-related steel demand has decelerated to +3.5% in 2024 from +6% in 2023.
“We remain suspicious of when and how much infrastructure stimulus will materialize, but expect to see impacts starting [in the second half of 2024] at the earliest,” analysts said in the JP Morgan research note. “This should be gradual and sustained over time rather than a step change.”
The JP Morgan analysts also highlighted the long-term impact of reshoring and nearshoring of supply chains; a trend bolstered by pandemic-led disruptions and “Buy America” requirements.
“Onshoring trends driven by manufacturing will likely be the key bright spot and can more than neutralize weakness in commercial and office [sectors],” the JP Morgan analysts said.
Despite the upbeat stance of certain domestic producers, other market participants were less enthused about the prospects for construction demand.
“Higher interest rates could mean higher borrowing costs for construction projects, potentially dampening demand,” a steel producer said.
Three steel distributors reported similar sentiment as the producer.
“High interest rates are weakening demand from the construction sector,” the first distributor said, while the second distributor said that “high interest rates are killing business in the construction industry.”
“New home construction is down,” a third distributor said.
A second producer source, however, noted that “construction of electronic chips factories and data centers are huge projects, and once they get going, interest rate changes won’t matter.”
“The medium-term outlook for the construction sector is stronger than you would expect,” the second producer said. “If you look at the raw data, it tells a different story.”
A fourth distributor said that a lot of the current work being done in the construction sector was financed at lower interest rates.
“New projects are slower to take off, especially in the prefabricated concrete projects, but the heavy infrastructure projects are moving along – for example roads, bridges,” the fourth distributor said. “There is robustness in the heavy construction/equipment side.”
The fourth distributor said residential construction demand was “stable and relatively consistent,” while the slowdown in nonresidential construction happened two years ago.
“Non-residential construction projects have switched from big box stores and strip malls to the big distribution centers (Amazon, Walmart),” the fourth distributor said.
The World Steel Association (WSA) said a residential construction downturn driven by high interest rates and high construction costs “have dragged down steel demand across most major steel using regions.”
“In 2023 we saw sharp drops in housing activity in the US, China, Japan and the EU, and weakness in housing activity is expected to stretch well into 2024 in most major markets on the lagged impact of monetary tightening,” WSA said in its short-range outlook for April 2024. “A meaningful recovery in residential construction is expected to begin only from 2025 onwards.”
It is also consequential that 2024 is a presidential election year, and some market participants say that construction demand will pick up once the election uncertainty is settled.
It is noteworthy that many of the steel products serving the construction sector are experiencing softer spot demand and stable to weak prices.
For example, Fastmarkets’ weekly price assessment for steel reinforcing bar (rebar), fob mill US was flat at $40.50 per cwt ($830 per short ton) on Wednesday May 1, down by 2.41% from $41.50 per cwt on April 17, where it had remained since March 13.
Domestic wire rod prices were stable in April due to low import volumes and flat scrap prices, with Fastmarkets’ monthly price assessment for steel wire rod (low carbon) industrial quality, fob mill US calculated at $43-48 per cwt ($860-960 per short ton) on April 16, unchanged from March 19 and down by 6.19% from $47-50 per cwt on February 20, where it had been flat since December 19.
The US price of Galvalume, a steel coated product that is used exclusively in the construction sector, increased marginally in April, the first rise after declining for the previous two months, partly due to increased imports competition as well as a generally softer market environment.
Fastmarkets’ monthly price assessment for steel coil Galvalume, fob mill US was $52 per cwt ($1,040 per short ton) on April 16, up by 1.96% from $51 per cwt on March 19 but still down by 17.46% from $63 per cwt in April 2023.
Fastmarkets launched two import price assessments to track imported steel products that compete with domestic Galvalume material.
Fastmarkets assessed the price for steel coil 55% Al-Zn coated steel import, South Korean-made, ddp Gulf Ports at $64 per cwt on April 16.
On the same day, Fastmarkets assessed the price for steel coil 55% Al-Zn coated steel import, non-South Korean-made, ddp Gulf Ports at $56 per cwt.
The US was licensed to import 103,951 tonnes of carbon and alloy steel with other metallic coatings – the category that includes Galvalume – in March, compared with 92,344 tonnes in February and 61,527 tonnes in March 2023, according to data from the US International Trade Administration’s steel import monitoring system.
Galvalume® is a registered trademark of BIEC International.
Fastmarkets has recently launched an import component to its domestic Galvalume price. Talk to us today to find out more.