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Nucor Could Benefit From Higher Nonresidential Construction Spend

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Nonresidential construction spending

In the previous parts, we saw that housing indicators have reached their pre-crisis levels in recent months. In this part of the series, we’ll analyze how the nonresidential construction spending could play out in the coming months. This sector accounts for almost two-thirds of total construction spending.

Nonresidential construction spending has been on an uptrend, increasing 4.5% year-over-year in the first five months of 2015. This has supported the demand for steel products.

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Architectural billing index

From an investor’s perspective, it’s also important to look at leading indicators of nonresidential construction activity. The architectural billing index is a leading indicator of nonresidential construction spending. Higher architectural billing generally translates into increased future construction spending. This index leads actual construction spending by about nine to 12 months.

Architectural billing increased in May

The above chart shows the recent trend in the architectural billing index, which has stood at 50 or higher for ten out of the last 12 months. Readings higher than 50 are associated with an increase in architectural billing.

Higher architectural billing bodes well for future steel demand. Nonresidential construction sector consumes steel products like rebar (or reinforcing bar). Nucor (NUE) and Commercial Metals Company (CMC) are leading rebar suppliers in North America. Nucor gets almost half of its revenues from the nonresidential construction sector.

Nucor and Reliance Steel & Aluminum (RS) each form ~4.15% of the SPDR S&P Metals and Mining ETF (XME).

If construction spending has boosted the steel sector, automobile sales have also played their part in augmenting US steel demand. How is the US (SPY) automobile industry expected to play out in the coming months? We’ll find out in our next part.

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