US Construction Spending Hits a 7-Year High Due, In Part, To Low Prices

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US construction spending rose in July to the highest level in over 7 years as private construction outlays surged, providing another sign of solid economic momentum at the start of the third quarter.

Construction spending increased 0.7% to $1.08 trillion, the highest level since May 2008, the Commerce Department said on Tuesday. June’s outlays were revised up to show a 0.7% increase instead of the previously reported 0.1% gain.

Meanwhile, the monthly Construction MMI® – tracking the key industrial metals used in the construction sector – registered a value of 69 in September, a decrease of 4.2% from 72 in August, another all-time low.

Construction_Chart_September-2015_FNL

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Construction spending has increased for 8 straight months. Economists polled by Reuters had forecast construction outlays rising 0.6% in July. Construction spending was up 13.7% compared to July of last year.

Chinese Oversupply

Still, no matter how much the US construction sector booms – both residential and non-residential construction are hitting multiyear highs – prices are staying low mostly due to oversupply and a sharp decline in Chinese demand.

China Construction Bank Corp., the nation’s second-largest lender, reported zero profit growth and rising bad loans as the government struggles to prop up the economy.

Net income for the three months ending June 30 was 64.9 billion yuan ($10 billion), unchanged from a year earlier, based on an exchange filing on Sunday. That was below Bloomberg analysts’ expectations.

After the stock market crash there last week, China’s economy is still in freefall and it’s unlikely that the world’s second-largest economy can be counted on to restore its falling construction activity in the short term. Beijing is, rather, doubling down on export stimulus policies, such as devaluing their own currency, and tacitly encouraging overproduction of base metals at home. This actually increases oversupply and hinders supply-demand equilibrium.

Export destinations such as the US and now Mexico are responding, as one would think, with anti-dumping investigations and tariffs but price relief in most of those cases is still far off.

Here in the US, construction spending in July was buoyed by a 1.3% jump in private construction spending to the highest level since April 2008. Spending on private non-residential construction projects surged 1.5% to the highest level since October 2008.

What This Means for Metal Buyers in Construction

Until oversupply, particularly from China, of construction products such as rebar and H-beam steel is dealt with, it is unlikely that prices will reverse course and rise soon.

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