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Alcoa investors should track nonresidential construction

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Mar. 17 2015, Published 3:21 p.m. ET

Nonresidential construction

We’ve already seen the indicators of the automobile industry. Now let’s look at the indicators of the construction sector.

The nonresidential construction industry is a major aluminum consumer. Alcoa (AA) is the market leader in commercial architectural systems in the North American market. Currently, it forms 3.30% of the Materials Select Sector ETF (XLB).

Alcoa gets more than $1 billion in annual revenues from the nonresidential construction industry. Investors should thus track nonresidential construction activity closely. Constellium N.V. (CSTM) is also a major supplier to the nonresidential construction sector.

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Architectural billing index

The Architectural Billing Index is based on a survey of architects. The participants are asked whether their billing increased, decreased, or stayed the same in the month. A value above 50 indicates an increase in billing. This index serves as a leading indicator for the nonresidential construction industry.

Simply put, an increase in architectural billing means more buildings are expected to be constructed in the future. Higher construction activity leads to higher demand for aluminum products.

Index falls below 50

The above chart shows the trend in the Architectural Billing Index. As you can see, the index fell below 50 in the latest reading in January. The index was 52.7 in December 2014. The fall in the Architectural Billing Index is negative for aluminum producers.

It’s worth noting that the index was above 50 for eight months in a row. Investors should watch the reading for a few more months to understand if the trend has reversed.

Alcoa (AA), Century Aluminum (CENX), and Kaiser Aluminum (KALU) have operations in Europe as well. In the next part, we’ll take a look at the key indicators of Europe.

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