Market Insights: Seizing the moment

Construction materials firms saw steady growth and strong earnings in 2021 following the uncertainty in 2020 related to the pandemic.

The U.S. Geological Survey estimates that aggregates output grew 4 percent year over year for both crushed stone and sand and gravel in the third quarter of 2021, which outpaces historic norms. This growth continues to be driven by infrastructure spending and the expanding residential and e-commerce sectors.

Demand for construction materials is set to soar even higher with funding from the $1.2 trillion Infrastructure Investment & Jobs Act (IIJA). While the language is complex and introduces a new definition of “infrastructure,” the result for traditional infrastructure is a once-in-a-generation investment. For instance, the National Asphalt Pavement Association (NAPA) projects federal funding to increase for highways and streets by as much as 55 percent over the FAST Act baseline established in 2015.

Given these large funding resources, we see strong, sustained demand for construction materials as projects to repair, maintain and modernize infrastructure are set to kick off in 2022 and continue beyond 2026, addressing a massive backlog of repair needs.

A booming residential market will continue to drive demand for construction materials, as well, raising the question: How will supply keep up?

The “war on talent” is not a new topic for the sector. Until now, construction materials firms have been creative in addressing labor shortages, but a scarcity of crews, drivers, plant operators and Department of Transportation (DOT) personnel will likely constrain production.

While production demand will benefit from improvements in automation and extended production hours, labor shortages, inflation, interest rate hikes and supply chain issues present potential headwinds. Zooming out to the bigger picture, those who overcome the talent shortage will capitalize on the coming boom.

Outperforming in 2021

A year that began with cautious optimism finished with a rush of momentum.

Viewed as a whole, the sector’s financial performance was exceptional. FMI’s Construction Materials Index (CMI), a proprietary index of 17 publicly traded construction materials firms, showed sustained growth throughout 2021. The CMI increased by 37 percent, outperforming the Dow Jones Industrial Average and S&P 500 last year.

Increasing road funding

The $1.2 trillion IIJA will provide a significant boost in funding above the FAST Act baseline for highways and streets beginning in 2022, continuing over the next five years. The increased range of 30 to 55 percent depends on when certain funds are allocated.

The bottom line, however, is clear.

“This bill represents a once-in-a-generation investment in the country’s transportation networks,” says Audrey Copeland, president and CEO of NAPA.

Guaranteeing funding for the next five or more years is excellent news for the near-insolvent Highway Trust Fund, which is funded by gas tax revenue. The American Society of Civil Engineers notes that investment in transportation will help fulfill the estimated $800 billion backlog of road and bridge capital needs.

Across new and existing programs, DOT will manage a large portion of the funds, which will funnel through to aggregate, asphalt and ready-mixed concrete producers. Federal agencies have expressed a desire to channel more funding toward repair and maintenance work.

In addition to traditional infrastructure segments such as roads and bridges, construction materials producers will benefit from IIJA funding for power, water, environmental remediation and broadband projects, although to a lesser degree. The “small print” of the IIJA is also favorable for producers, as it provides some needed exemptions from Buy America rules and leaves out pavement mandates and Green New Deal language.

The housing market

Residential construction is sensitive to changes in economic conditions, leading people to question whether we are experiencing a residential “bubble.”

FMI believes the current landscape indicates continued growth rather than the need for a correction. Low interest rates, an imbalance of supply and demand, and the wave of millennials are all arguments against current activity being deemed a bubble.

Millennials, who have long delayed home ownership, now reportedly account for half of all purchases across the country, and they’re driving home prices to record levels. We see evidence that pent-up demand and tight housing inventory will continue to support a strong market.

The current pace of housing starts still pales in comparison to historic levels. The U.S. Census Bureau indicates that housing starts increased 16.8 percent to a seasonally adjusted annual rate of about 1.68 million last November – still well below the 2.14 million starts in 2005 and 2006.

Robert Dietz, senior vice president for economics and housing policy and chief economist at the National Association of Home Builders (NAHB), shared with us how he expects residential construction to expand in 2022 despite significant headwinds – including a lack of building materials and a growing labor shortage. NAHB forecasted single-family starts to end 2022 around 25 percent higher than pre-pandemic levels at the end of 2019.

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