How construction materials producers are situated for 2023
FMI Capital Advisors says highway and street spending – a significant driver for aggregate and hot-mix asphalt production – began to accelerate in the fourth quarter last year. Photo: Bilanol/iStock / Getty Images Plus/Getty Images
Additionally, Vulcan reported that continued pricing momentum more than offset a 42 percent increase in liquid asphalt. Vulcan recorded growth of 111 percent in cash gross profit.
Likewise, on Summit Materials’ third-quarter 2022 earnings call, CEO Anne Noonan cited the strongest year-on-year organic pricing growth in the company’s history for aggregates, cement and ready-mix.
Also, several companies have already signaled price increases in early 2023, expecting further pricing gains to expand margins throughout the year.
Consider, too, that the passage of the $280 billion Creating Helpful Incentives to Produce Semiconductors & Science (CHIPS) Act in August brought hope to bolster the U.S. manufacturing sector.
At the close of 2022, construction materials firms indicated that demand remained strong despite increased costs from inflation. And IIJA funding began hitting backlogs, which will boost many aggregate and asphalt producers.
The dynamics of state DOTs will dictate the flow of funds for 2023, as some have indicated that infrastructure investments will be key pieces to their annual agenda.
Looking ahead, it is clear economic performance cannot be forecasted through a single lens.
Recessions do not affect all industries equally. Daily headlines announce mass layoffs in the information and technology sectors, while construction and services industries proclaim a labor shortage. Oil and gas companies, which recently suffered massive losses, are now reporting their best performances in years.
To this end, it is important for construction materials producers to focus on their specific business drivers and end markets to achieve success in the coming months. To us, there are five key elements to watch that will dictate 2023 performance.
1. Recession and consumer confidence. Concerns of a recession are top of mind for many consumers. Pandemic savings are starting to dwindle, and consumer debt is on the rise.
In June 2022, consumer sentiment hit an all-time low – and it remains well below historical averages. Residential, one of construction materials’ most consumer-facing end markets, has already shown signs of slowing.
If weakening consumer spending goes from bad to worse, it could foreshadow hard times to come for other sectors, as well. Producers largely tied to nonbuilding construction and government funding may be better positioned to weather any economic downturn.
2. Inflation and interest rates. Inflation remains the all-consuming question for consumers, firms and Jerome Powell as 2023 unfolds.
Though the pace of inflation declined for seven consecutive months starting in June 2022 – reaching 6.4 percent in January 2023 – many are divided on the magnitude and frequency of rate hikes required to bring inflation back to the Federal Reserve’s long-term target.
In early February, the Fed increased rates by 0.25 percent – smaller than prior increases. This measured approach shows the Fed is committed to using its toolbox to fight inflation while showing receptiveness to positive incoming economic data. Daily news has been inconsistent, making capital spending and pricing plans especially difficult for construction materials operators. The next few months of inflation data will be especially important as they set the economic table for the Fed’s interest rate strategy.
3. IIJA rollout. Construction materials producers had a strong year in 2022, even without significant distributions from the highly anticipated IIJA. Much like the construction materials industry, state DOTs are not immune to the labor shortage. Constrained manpower along with regulatory impediments slowed lettings.
Still, funding intended for 2022 did not vanish into thin air. Backlogs of new projects in development suggest an increased rollout of IIJA-funded projects in 2023. How and when these projects materialize will drive performance for producers.
4. Demand and backlogs. Strong demand became the theme for construction materials as 2022 progressed. That said, production of crushed stone, sand and gravel in the fourth quarter showed signs of softening – likely due to the slowdown in single-family construction.
While a near-term residential slowdown is expected, long-term housing fundamentals and demand in other end markets remain strong. FMI projects double-digit increases for manufacturing and commercial spending, as well as substantial highway and street spending. Balancing the good with the bad will be key for 2023.
5. Global events. Since early 2022, the U.S. has been caught in the ripple effect of two international developments – the Russia-Ukraine war and China’s zero-COVID lockdowns – which are constraining global supply chains.
The Russia-Ukraine conflict has had significant impacts on the world’s energy supply. Though more prevalent in the EU, the U.S. battled soaring gas prices, which added more fuel to the inflation bonfire. Supply chains are adapting, and widespread calls for onshoring are gaining traction.
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