2015 Construction Materials Outlook
FMI defines construction materials as aggregates (either crushed stone or sand and gravel), cement, asphalt and ready-mixed concrete. These materials are used principally in two key construction segments, roads and houses, both of which are tied to the conditions noted previously in the Heavy Civil Contractors article, and renewed new housing construction and the impact of rising interest rates. A third issue unique to this sector is the 2014 announcement of a merger between the two largest cement producers in the world, Holcim and Lafarge.
As discussed in the article on Heavy Civil Contractors, the inability of Congress to create viable long-term funding methods for the Highway Trust Fund, combined with continued infrastructure funding malaise in the United States, depresses road construction and hence has a significant impact on many aspects of the construction industry, including heavy civil, and aggregate and asphalt producers.
Housing on the other hand, continues to improve, and in 2014, for the first time in many years, housing starts exceeded the 1 million annualized new construction rate. This has improved the fortunes of many ready-mixed concrete producers. The only dark cloud on the horizon is that of rising interest rates. Ready-mixed concrete producers in the areas where housing starts have rebounded are finally seeing strong market improvements after what has been a bleak five years. FMI expects new housing construction to begin to level off as inventory levels stabilize in hot markets and as interest rates rise. Even with this leveling, the ready-mixed concrete industry should continue to enjoy improving margins and production volumes as commercial construction, which inevitably follows new housing construction, takes place.
The other bright spot for the ready-mixed concrete industry is the continued increase in the use of concrete as a building material both in commercial and transportation construction. For many years, asphalt was generally the lower-cost paving material for road construction. That has changed over the past few years, and now it is generally accepted that an equal-cost pavement can be made with either asphalt or concrete.
The last significant trend to watch for in construction materials in 2015 will be an acceleration of industry consolidation. In 2014 the largest merger in the history of the cement industry was announced between Holcim and Lafarge. As the No. 1 and No. 2 largest global cement producers, respectively, this merger has strong consequences, including the following: Smaller producers will face increased pressure to merge or acquire in order to maintain competitive economies of scale and geographic footprints. Downstream vertical integration will continue and potentially accelerate as the opportunities to grow profitability via the largescale mergers decrease. Increased antitrust scrutiny in markets with only one or two major producers will be likely.
In the aggregates-focused markets, the key merger announcement of 2014 was between Martin Marietta and Texas Industries Inc. (TXI). On a domestic scale, this acquisition represents the further consolidation of aggregates production in the United States. FMI sees no immediate end in sight to this continued consolidation, and it is noteworthy that many key markets are now effectively consolidated with few or no independent producers remaining.
In summary, the keys to a successful 2015 for the construction materials industry will depend upon a few factors, namely: Infrastructure spending levels being increased. Continued positive growth in housing. Increased private development construction activity. If these factors align, 2015 could be the best year the construction materials segment has seen in almost a decade.
William G. Hill is a senior managing director with FMI Capital Advisors, Inc., FMI Corporation’s registered Investment Banking subsidiary. He can be reached via email at [email protected].