How construction materials producers are situated for 2023

By , and |  March 21, 2023
The production of crushed stone, sand and gravel in the fourth quarter showed signs of softening, according to FMI Capital Advisors. Photo: Diatrezor/iStock / Getty Images Plus/Getty Images

The production of crushed stone, sand and gravel in the fourth quarter showed signs of softening, according to FMI Capital Advisors. Photo: Diatrezor/iStock / Getty Images Plus/Getty Images

The 2022 operating year for construction materials truly began in November 2021 with the passage of the $1.2 trillion Infrastructure Investment & Jobs Act (IIJA), prompting euphoria among firms who stood to benefit from public works through 2026.

Then economic headwinds hit.

In February 2022, inflation scaled to a 40-year-high and uncertainty began to spread. Driven by an overstimulated economy and geopolitical tensions, the Federal Reserve began a course of tightening. Throughout the year, the Fed aimed for fiscal policy that would result in a “soft landing.” This mentality continued into 2023, with efforts to avoid sending the economy into a recession – the results remain to be seen.

For all the upheaval, construction materials firms remained resilient with a “demand is strong” concept resonating through the sector. Much of the industry was able to counteract inflation through price increases, allowing earnings to remain consistent.

As we look deeper into 2023, the threat of a recession looms but there are reasons to be optimistic for construction materials.

IIJA funding and projects are coming online, providing opportunities to withstand a potential bear market. As single-family residential slowed, demand for construction materials products shifted to other end markets such as multifamily and commercial and industrial projects.

From a mergers and acquisitions (M&A) perspective, 2022 didn’t quite match the highs of 2021. Still, the year was a successful one for bolt-on acquisitions and several well-aligned, large strategic transactions.

For 2023, M&A success hinges on the strength of backlogs, firms’ ability to maintain margins amid inflationary pressures, and the dynamics of specific geographic markets. Economic uncertainty will likely impact M&A activity overall, but companies with localized steady performance are always en vogue for buyers.

2022 reflection

Before the books closed on 2021’s record-breaking earnings reports for construction materials, the federal government passed IIJA.

IIJA was a generational boon, coming off decades of underinvestment in public works and creating optimism for 2022. Aggregate, cement and hot-mix asphalt producers were set for a five-year super-cycle, and ready-mixed concrete was to be buoyed by a resurgence of residential development in an era of low interest rates, strong consumer balance sheets and generational dynamics.

In fact, 2022 would be another strong year for construction materials performance, but not without its challenges. In February, inflation reached a 40-year high, dampening much of the high spirits brought about by IIJA legislation. Later that month, Russia invaded Ukraine, inspiring skittish behavior in financial markets around the world and dashing hopes for the supply chain to easily “catch up” to demand. Equipment became harder to source, and by summer, the Federal Reserve had commenced the steepest series of rate hikes since the 1980s with designs to curb inflation.

To further complicate issues, the highly anticipated infrastructure funding from IIJA was held up by bottlenecks at state Department of Transportation (DOT) offices. Growth in input costs for nonresidential construction greatly outpaced bid prices through June 2022. This movement created a disconnect between DOT lettings and contractor bids, holding up IIJA projects.

By June, an inflection point was reached, and pricing began to catch up with costs. As bid-cost dynamics normalize, more IIJA projects will commence. Federal funding will be disbursed, providing optimism for the future. But, as Associated General Contractors of America (AGC) chief economist Ken Simonson notes: “The timing of public construction, while well-funded, remains unclear.”

Residential development saw peak spending through much of 2022. However, as borrowing rates increased, the red-hot residential market began to cool and, by year end, housing inventories were on the rise.

As single-family housing activity slowed, some concrete and cement producers offset the decline by shifting volumes to multifamily, warehouses, manufacturing projects and data centers. Optimistically, long-term fundamentals underpinning the housing market remain strong with historic underdevelopment, deurbanization and growing demand from first-time buyers.

Overall, construction firms adjusted well to the year’s challenges, successfully passing on price hikes and benefiting from the first drips of infrastructure spending. Amid the headwinds, there were several bright spots.

Construction spending as a whole saw growth of 8.5 percent year on year, unadjusted for inflation, per an analysis of Census Bureau data by AGC. Solid performance in the broader construction industry indicated success for construction materials.

Earnings reports in late 2022 were celebratory for public firms. Holcim Group, for example, recorded record net sales in the third quarter of 2022, while Vulcan Materials saw 38 percent growth in revenue and Martin Marietta detailed double-digit pricing growth.

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