US building materials industry enjoys modest growth on housing starts

21 December 2017

The US construction industry materials segment has witnessed a resurgence in demand thanks, in large part, to an upswing in residential starts. While revenues continue to climb, and total shareholder returns surpass the S&P 500, challenges continue to mount, largely due to labour shortages thanks to former workers let go during the financial crisis not returning to the industry.

The materials segment of the US construction industry was one of the hardest hit parts of the US economy following the financial crisis, when, at its low-point in 2011, value fell to $788 billion. The industry has seen an uplift in more recent years, as the US economy improved and infrastructure investment was on the cards again. In the intervening years, total value increased by more than 50% to hit $1,164 billion.

Amid this new resurgence, a report from Roland Berger has examined the US construction materials industry in terms of recent performances as well as projected growth, uncovering bumps in the road for the industry in the future.Financial metricsBuilding materials revenues stood at $144.2 billion in 2016, up 3.1% from the previous year. EBITDA margins saw modest increases, up 10%, while working capital as a % of sales was up slightly to 19%, while debt/EBITDA ratio fell to 2.4x from 3.1x the previous year, indicating reduced risk, largely due to debt reductions among ‘roofing, siding, and other materials’ and ‘construction metals’ companies.

Returns to shareholders for much of the industry has rated above that of the wider S&P 500. Total shareholder returns averaging 12.1% among building material firms between mid-2014 and mid-2017, while the S&P 500 averaged 7.3% over the same period.

Value of returns

HVAC plumbing and electrical equipment ran out ahead, with the value of every $100 invested increasing to $192, while roofing, siding, lumber and other materials saw an increase to $155. Not all industries surpassed the S&P 500 average of $124; while lighting and wiring saw the lowest relative return, at $111. Higher returns in recent years were driven in part by commodity price reductions, although some sectors suffered from increased uncertainty in relation to potential tariffs over imports from Mexico et al.

Major growth

In terms of major growth areas for the annual addition of construction put in place over the past years, 2017 is projected to see a boost across all segments: infrastructure; residential buildings; and commercial buildings. The firm is projecting that the industry as a whole will grow at an average of 3.5% between 2016 and 2019, topping out at construction additions of almost $1.3 trillion. Infrastructure will see the most significant increase, at 4.2% annually; the country’s infrastructure was awarded an overall D+, suggesting that considerable investment may be required. The residential buildings segment is projected to see somewhat more modest growth at 2.9%. Annual value of construction added.Growth in the industry is partly the result of relatively robust economic growth, even with sectorial drag, such as a difficulty finding skilled labour, pushing up costs.

The residential sector has seen particularly strong growth in recent years, with multi-family housing growing by more than 20% in terms of annual value of construction put in place, up from $35 billion to $62 billion. Improvements investment was up 8.3%, from $122 to $155 billion, while single family home construction saw a firm 12.9% increase, up from $172 billion to $247 billion.

Annual value of construction

One of the divers for growth has been the cumulative population increase since 2012 in metropolitan areas. Particularly large and middle size metropolitan areas saw increases, at 1% and 0.8% per annum respectively. In total, around 9.1 million people joined a US metro area between 2013 and 2016.

Labour shortages

While the industry has improved its revenues significantly since the crisis low-point, the industry does continue to face bottlenecks. One major area of concern is that many of the skilled labourers let go during the financial crisis years have not returned, resulting in an increased mismatch between growing demand for new housing starts and labour. Shortages hit almost 60% in 2016, with former workers not enticed back by higher wages so far. Many of these have moved to work in less cyclical industries or migrated out of the US.Housing starts and labour

The authors of the report concluded that, “The primary driver of this performance is the residential sector with double-digit growth in the multi-family segment and population growth in the Southern US. However, there have been some headwinds hampering the sector. The workforce shortage has knock-on effects in the forms of delayed projects, increased wages and higher home prices. Some builders have also had to slow down the pace of accepting new orders to make sure they can meet deadlines.”


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UK manufacturing sees orders slow amid Brexit anxiety

11 April 2019

Manufacturing in the UK saw negative growth for the end of 2018, reflecting a wider slowdown in the UK economy to 0.2% for the quarter, followed by three months at the start of 2019 which saw continued softening in orders. With uncertainty still hitting the sector ahead of Brexit’s deferred deadline, the industry faces a difficult 2019.

Despite a perpetually changing economic landscape, manufacturing remains a keystone industry in the UK. Optimism in the industry has been riding high in recent years, reflecting the perceived potential of automotive technologies, but last year saw a slight dip in business performance, ahead of what seems set to be a turbulent period for British manufacturing. Ordinarily, the sector might have expected to recover its footing relatively quickly, but with the looming spectre of Brexit making the economy’s future completely uncertain, this has not been the case.

The uncertainties of Brexit have continued to create headaches for companies on both sides of the channel. As contingency planning continues, new analysis from BDO and the Make UK explores how manufacturing – a segment likely to be hard hit by Brexit – has fared in the final quarter of 2018.

Output balance stable

Manufacturing remains a key industry in the UK, generating around 10% of total economic output and supporting around 2.7 million jobs. Yet while the industry has seen a number of years of strong optimism as well as demand, Brexit is set to throw a spanner in the works, with a range of manufacturing companies leaving the UK, or considering it. Indeed, UK manufacturing’s output currently sits at a 15-month low as the industry anticipates a cliff edge Brexit.

In terms of growth for various parts of the UK economy, a slowdown was noted in the final quarter of 2018 compared to Q4 2017. Manufacturing, in particular, saw growth declines coming in at almost -1%, with a similar trend in production. Construction saw a sharp contraction, falling 2 percentage points to below 0% growth in December 2018. Only services managed to have positive % growth in the final quarter. The final quarter as a whole saw growth of 0.2% in the UK economy – the lowest level in six years.

Output across most sectors in the industry remains positive, with the percentage balance of change in output at 22%. The result is the tension quarter of positive percentage balance of change, with stagnation on the final quarter of 2018. The firm is projecting a slight softening of output going into Q2 2019. The firm notes that there is some stockpiling taking place, with orders and outputs unaligned going into 2019.

Order balance remains positive but dips further

While there is a broadly positive picture for output, the firm does note considerable differences between subsectors. Basic metals for instance, saw a net 24% fall to -18% over the past three months. Metal production is also seeing relatively poor performance as demand from the automotive industry enters a period of acute uncertainty. However, most industries are to see improved output on balance, with rubber & plastic increasing from a net 11% to net 56%.

Export trade

Having been buoyed by the lowered value of the pound, UK export orders are up slightly on the previous quarter, but remain well below the most recent peak in Q3 2018. Domestic orders were relatively strong, with a year between the most recent peaks for the segment. However, Q2 2019 looks to see domestic orders fall sharply, to half Q1’s result, while export orders too are set to see declines.

The decline reflects a decrease in basic metals, possibly a reflection of changes affecting the auto industry. Meanwhile, export orders are down due to Brexit cross-border uncertainty – the effect of the sterling devaluation unable to continue to buoy the market. Basic metals and metal products are both in negative territory for the coming three months.

Investment and employment intentions

UK employment figures reached new milestones, with total unemployment down to 3.9% while participation rates hit record highs. Employment planning continues to be in net positive territory, with a net positive balance of 22% in Q1 2019. The coming months are projected to see a slight dip, again, largely resultant from uncertainties around Brexit. Basic metals is the sector most likely to see a negative trend, reflecting the expected decline in orders.

Investment intentions meanwhile continue to be in positive territory. However, again, the now acute uncertainty about Brexit – the UK government has boxed itself into a corner – mean that confidence around investment could wane rapidly.

Commenting on the wider economy, Peter Hemington, a Partner at BDO, said, “Manufacturing firms have been ramping up their preparations for a disorderly Brexit, in large part through the stockpiling of imported goods. This has had the effect of inflating activity levels… It’s too late to do anything about this now.  But a disorderly Brexit would be far worse than the current relatively mild slowdown, possibly disastrously so… We are concerned it looks more likely than ever that we will exit the EU without a deal.”