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Higher Nonresidential Construction Spending Is Good for Aluminum

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Nonresidential construction spending

In the last part of this series, we looked at the trend in US vehicle sales. In this part, we’ll see how nonresidential construction spending is shaping up in the United States (IVV). The nonresidential construction industry is a major aluminum consumer. Alcoa is the market leader in commercial architectural systems in the North American market. It gets more than $1 billion in annual revenues from the nonresidential construction industry.

Investors should therefore closely track nonresidential construction activity. Alcoa and Kaiser Aluminum (KALU) each forms 3.5% of the SPDR S&P Metals and Mining ETF (XME). Reliance Steel & Aluminum (RS) forms ~4% of XME’s portfolio.

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Spending increases

The above chart shows the trend in nonresidential construction spending. It increased 4.7% in March on a year-over-year basis. Nonresidential construction spending accounts for almost two-thirds of total construction spending. While residential construction spending has declined in the last few months, nonresidential construction spending has inched up. Higher nonresidential construction spending is positive for Alcoa.

Architectural Billings Index

The Architectural Billings Index, a leading indicator of nonresidential construction activity, increased to 51.7 in March The 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.

Simply put, an increase in architectural billing means more buildings are expected to go up in the future. Higher construction activity leads to a higher demand for aluminum products. Companies like Noranda Aluminum (NOR) benefit from an increase in aluminum demand.

In the next part, we’ll look at the dynamics of aluminum supply.

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