How construction materials producers are situated for 2023

Trade relief is also supported by the recent wind down of the zero-COVID policy in China. As a result, the New York Fed’s Global Supply Chain Pressure Index hit its

lowest mark since February 2020. Global economics look promising, but there is much to be seen – especially with news of a Russian offensive this spring.

FMI forecasts total construction put-in-place spending to fall 2 percent in 2023, driven significantly by decreased residential spending. For aggregate and concrete producers with large exposure to single-family construction, the Fed’s current rate hiking schedule spells continued struggle. Diversification of end markets may play a key role in surviving any potential downturn.

Producers looking to mitigate the expected single-family downturn can find solace in sustained demand for nonresidential construction. Manufacturing and commercial are expected to boom in 2023 with the support of federal stimulus and continued demand for e-commerce infrastructure.

FMI expects strength in nonbuilding spending, estimating an 8 percent increase in 2023 thanks to support from IIJA. Highway and street spending – a significant driver for aggregate and hot-mix asphalt production, began to accelerate in the fourth quarter of 2022. With guaranteed federal funding, FMI projects steady spending increases for the sector through 2026 as federal stimulus is released.

Broad macroeconomic trends are a good bellwether for performance, but one must remember that construction is local. This is especially true for construction materials operations, which service a somewhat narrow jurisdiction.

County and state investment, as well as private development, will not always follow the contours of the economic downturn.

Rather, there will be opportunities in markets where the population is growing – even in a worst-case scenario.

While access to cheap borrowing costs was dialed back in 2022, M&A activity still kept pace with historic norms.

The need for public companies to grow, coupled with factors like talent shortages, means there is still a strong incentive to pursue strategic investments. Bigger deals gave way to more bolt-on activity as buyers looked at ways to deepen their reach in existing markets and geographies.

Despite a slowdown by end of year, 2022 brought several large strategic acquisitions. In July, CalPortland purchased a California cement plant and other assets from Martin Marietta. In November, SRM Concrete completed the acquisition of a subsidiary of U.S. Concrete, which is owned by Vulcan. The acquisition entails 28 ready-mix locations in New York, New Jersey and Pennsylvania.

We also saw market expansions for CRH Americas Materials, which acquired Kentucky-based Hinkle Contracting Co.; Vulcan’s purchase of Syar, a large northern California construction materials producer; and a spinoff for MDU Resources Group of its construction materials arm: Knife River Corporation.

Going into 2023, we see more selective growth through M&A as buyers drill down on existing markets or geographies where operations are proven. Overall, buyers are not over-leveraged and need to continue to grow. A boom in public activity could boost interest in construction materials players, especially those with strong performances over the past year.

A move to strengthen market positions supports bolt-on acquisitions, and activity here may be colored by environmental, social and governance objectives where it makes strategic sense. Recycled materials producers offer an appealing value proposition for states with environmentally friendly sourcing mandates, as well as those markets with a low supply of virgin aggregates.

Though interest from private equity has historically been limited, the broad strokes of the industry make for an attractive investment: high fragmentation and still largely family-owned, often with a need to transition ownership, and to bolster staffing during a time of full backlogs. Near-term dynamics do not change this, and supply of sellers will hold.

Conclusion

National and global economic news has been a mixed bag, and a feeling of disconnect between headlines and regional construction performance may start to emerge.

Construction is a local business with unique drivers for materials producers in each market. Describing the outlook for 2023 as “good” or “bad” is too simplistic. The effect of interest rates on residential construction is apparent, but funding for nonresidential and nonbuilding is accelerating and backlogs are up. Justifications for alarm are easy to find. For now, however, construction materials demand is strong and the path forward remains promising.

In terms of M&A, steady industry performance buoyed activity in 2022 despite broad economic uncertainty. The annual volume of construction materials transactions kept pace, but they mildly slowed in the second half of the year.

Longer-term industry dynamics and limits to organic growth support strategic M&A for the construction materials industry. Solid operational performances from construction materials firms in 2023, combined with strong backlogs from IIJA projects, will set up construction materials targets for productive conversations with buyers in the coming year.

George Reddin, Rob Mineo and Evan Coughlin are with FMI Capital Advisors.

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