We here at MetalMiner have very cautiously been pointing out the underlying strength of the US construction market and have been dutifully chalking up falling and flat Construction MMI® numbers to low oil prices and cautious banks for nearly a year now.
The monthly Construction MMI® registered a value of 75 in June, an increase of 1.4% from 74 in May – not gangbusters construction activity by any stretch of the imagination, but perhaps the beginning of a break in the down-to-flat trend the market has been mired in since last year.
There are several good reasons to believe this is a turning point in the price of construction metals such as H-beams, steel rebar and shredded scrap. Reasons that go far beyond our belief that bad weather, higher break-even points for energy projects and a lack of willingness from lenders are what has held them back thus far.
First, in April construction spending jumped 2.2% to an annual rate of $1 trillion, the highest level since November 2008, the Commerce Department said on Monday. The percentage increase was the largest since May 2012. March’s outlays were revised to show a 0.5% increase instead of the previously reported 0.6% fall. Economists polled by Reuters had forecast construction spending rising 0.7% in April.
Oil as Fuel and as Project Breaker
With spending on construction up and beating expectations, it’s reasonable to expect prices to follow, but that’s not the only indicator of a strong summer building season. My colleague, Stuart Burns, wrote this week that, at least in the US, oil prices are actually going up and inventories are falling.
“For the first time in six months,” Burns wrote, “the US oil market is flirting with backwardation, where the spot price is higher than one- or three-month dated delivery – a sign of a tightening market and, potentially, a shortage.”
According to another report, the prompt-month July contract for West Texas Intermediate (WTI) crude was 27 cents lower than second-month August this week. That was the narrowest spread since Dec. 19 and compares to a month ago when it was at a $1.50 discount.
Beyond that, the oil and gas industry has come out of this mini-slump leaner and meaner. A Goldman Sachs report noted that US oil production will grow by 155,000 barrels per day in the fourth quarter of 2015 compared with the same period in 2014, as cheap money and more efficient drilling technology allow tight oil producers to continue drilling in spite of OPEC’s best efforts to close them down.
According to the American Petroleum Institute, investments in updating US energy infrastructure alone could generate an estimated $1.14 trillion in capital investments by 2025.
Construction Metals and Materials
The cost of construction materials, overall, is poised for an increase. This includes wood and other non-metal construction inputs.
According to the 2015 Q2 Non-Residential Construction Index (NRCI) Report recently released by FMI Corporation, the construction industry is improving despite lukewarm economic conditions. FMI surveys executives at construction companies for their forecasts and, according to the responses, the index component for the cost of construction materials dropped one point to 21.4. The component drops as prices increase. The cost of labor components dropped sharply by 5.2 points to 12.5. Both labor and material cost increases reduced the overall NRCI score. Despite this, the overall score STILL gained, jumping to 64.9 for the quarter.
That score reflects 18 months of improving activity.
“It was a little bit surprising, I would expect them (construction materials) to go up faster,” said Phil Warner, research consultant at FMI. “One of my explanations (for the first half of the year) has been substitution. Copper and other materials, where they can be replaced, have been substituted. We are at a point now where prices are so low that I would expect substitution to end and construction-grade materials (metals) to rise in price faster. We certainly don’t expect them to go down as construction will continue rising. Materials are coming around. They will remain at a lower cost as construction overall improves, but we likely won’t see them falling further.”
Actual Construction Material Prices
The weekly US Gulf Coast bar fuel surcharge rose 8.1% over the past month to $0.32 per mile. At $0.32 per mile, the weekly US Midwest bar fuel surcharge increased 7.4%. The weekly US Rocky Mountain bar fuel surcharge rose 6.5% over the past month to $0.32 per mile, the second straight month of gains. After dropping the previous month, the price of European 1050 aluminum prices rose 2.3% to $2,873 per metric ton. For the second month in a row, the price of US shredded scrap increased, rising 1.6% over the past month to $254.00 per short ton. At $395.52 per metric ton, the price of Chinese H-beam steel finished the month 1.2% higher. This was the second straight month of declines.
Chinese rebar fell a slight 1.7% over the past month to $368.18 per metric ton. Chinese aluminum bar prices decreased by 1.2% this month, ending at $2,212 per metric ton.
Prices for the Chinese low price of 62% Australian iron ore fines remained constant this past month, holding at around $77.17 per dry metric ton.
The Construction MMI® collects and weights 9 metal price points used within the construction industry to provide a unique view into construction industry price trends over a 30-day period. For more information on the Construction MMI®, how it’s calculated or how your company can use the index, please drop us a note at: info (at) agmetalminer (dot) com.