Construction materials

Assess the building materials market right now

Demand for construction aggregates remains high according to the US Geological Survey. Photo: P&Q Staff

The results came in on July 28: the US economy contracted for the second consecutive quarter.

Although not official as of this date, the general consensus is that the United States is in a recession. The economic slowdown was caused by historic levels of inflation, subsequent interest rate hikes and supply chain constraints.

The construction materials sector is not immune to these scourges. But there are two caveats for the sector that should lessen the pain of a recession. These are federal funds committed under the Infrastructure Investment & Jobs Act (IIJA) and individual and single markets where certain producers operate.

For M&A activity in building materials, buyers looking beyond the current economic environment may find themselves in a more strengthened position. Large publicly traded buyers are still looking to grow while weathering this period of economic uncertainty. As such, buyers will deploy capital to strategic targets in favorable markets where they have existing operations.

As Warren Buffet so aptly said, “Be afraid when others are greedy and greedy when others are afraid. But those who are “greedy” right now could see themselves in a much stronger position when the economy recovers.

Inflation

American economist Thomas Sowell once called inflation “the most universal tax of all”.

Inflation has raged through the global economy to historic proportions. In June, the consumer price index, a measure of average costs (and one of the main barometers of inflation) rose to 9.1% year-over-year. It is a peak in 40 years.

In addition, the producer price index (PPI), a measure of the average change in selling prices, reached 11.3% in June. The segment dedicated to the construction of the PPI recorded an impressive 19.2%.

All of these measures indicate that the cost of goods has risen dramatically, hurting consumer purchasing power and eroding margins for businesses. Some specific components of inflation had a greater impact on construction materials.

PPI facets, including energy and steel, have grown significantly over the past year. These cost increases have hurt the profits of building materials producers. Thus, producers who pass on increased costs to customers will fare much better than those who cannot.

Interest rate

Faced with the dilemma of inflation lies the monetary answer.

The Federal Reserve has embarked on an aggressive campaign to control inflation by raising interest rates four times this year alone. According The Wall Street Journalit’s the most aggressive beat since the 1980s.

Rising interest rates increase borrowing costs and reduce demand for goods. This ends in lower prices, thereby lowering inflation.

At the July meeting, the Fed raised the fed funds rate by 75 basis points to a range between 2.25% and 2.5%. Additionally, the Fed has signaled that there will be further rate hikes throughout the year. While monetary policy is important, the focus should be on how it relates specifically to building materials.

First, it has a direct impact on the residential sector, as housing borrowing costs have risen significantly over the year. Second, with the rising cost of debt, financing equipment through debt will continue to become more expensive.

Although uncomfortable, the increase in interest rates is necessary to bring prices down to sustainable levels.

Supply Chain

The interconnectedness of all these issues has compounded the lingering supply chain problem.

Initial problems caused by the pandemic and tariffs were only exacerbated by war and global economic turmoil, causing major bottlenecks for supply chains. The strained supply chain has a direct impact on the building materials sector when it comes to equipment purchases.

Long equipment delivery times have pushed planned investments to 2023 and beyond. In addition, equipment costs are increasing significantly to compensate for the high demand.


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