Why the construction industry is so important for steel companies
Construction accounts for 40% of steel consumption in the United States. The construction sector includes commercial housing, infrastructure, and non-residential construction. Being the largest consumer of steel, construction activity remains a key driver for steel companies. It affects the overall steel market as well as prices for steel products.
Why Nucor investors should closely monitor construction activity
Nucor gets almost half of its revenue from the construction industry. Within this sector it’s also heavily dependent on the fortunes of non-residential construction. The previous chart shows the growth in private non-residential construction. As you can see, the number has shown improvement after hitting a bottom on 2011. However, the rate of recovery has slowed down over the past year which impacted Nucor’s revenues.
Why the construction industry still hasn’t reached pre-crisis levels?
While the other sectors in economy have either recovered or are slowly recovering from the recession, the construction industry is nowhere near the pre-crisis levels. Major segments of the construction industry supply reasons for this.
- Housing – The housing sector was hit the worst by the recession. If you look at indicators for growth in this sector like new home starts, the numbers are on an uptrend, but still way below the 2007 numbers. There are multiple reasons for this like unemployment and strict credit norms by banks, but the primary reason has been the lack of confidence in consumers. Housing being a high value purchase, consumers tend to buy only when they’re confident of their future earnings
- Nonresidential private construction – This includes segments like retail, offices, and hospitals. The business sector also has been shying away from making capital investments. This has led to a slower recovery in this segment
- Public investment – Through investment in public infrastructure like dams and bridges, government also is a key consumer of steel. After the global recession, there has been a renewed focus on fiscal discipline which has impacted the government spending
An upswing in construction activity remains a key driver for steel companies like Nucor (NUE), ArcelorMittal (MT), U.S. Steel Corporation (X), and Reliance Steel & Aluminum (RS). It’s also vital for exchange-traded funds (or ETFs) like the SPDR S&P Metals and Mining ETF (XME).