At this year’s VMA Market Outlook Workshop, Aug. 8-9, 2019 in San Diego, economists and industry experts presented their take on the position of the U.S. and global economies, as well as specific markets of interest to valve manufacturers. Here are summaries of the outlook for mining and commercial construction. See the outlook for other markets in the Fall 2019 issue of VALVE Magazine.
HOLDING ITS OWN
Given that most things that are manufactured start with raw materials taken from the earth, “mining is vital to the future we envision,” said Douglas Anderson, partner at PwC. “How could we build [products] without mining?”
Anderson offered an industry review and outlook based on 40 mining companies that are the largest by market capitalization.
Gold, copper, iron ore and coal represent 72% of revenues among those companies, he explained. The proportion of revenue each of those commodities brings in has remained relatively steady for the last decade and a half (Figure 1).
Other minerals of interest include platinum, palladium, molybdenum and the rare earth elements. Today, rare earths are required for many high-tech products, including the batteries and high-strength magnets used in hybrid and electric vehicles. Rare earth elements come mainly from China, but the Mountain Pass mine in California, which is currently under development, is also a source.
Mining revenue increased from 2017 to 2018 by 8%, rising by $51 billion to $683 billion for that year. It should increase again in 2019, Anderson said. The bottom line in mining is improving because operational improvements and reduced costs are offsetting increased expenses such as freight. Overall, capital expenditures across the market were up in 2018 over 2017, though they are currently running below the 5-year average, Anderson said—48% of capital expenditure covers ongoing projects, while the rest is for new projects.
“Miners are generally careful with their capital,” Anderson said. He anticipated a modest increase for 2019, but said there is room for further growth, he said. The exception seems to be among coal-mining companies.
Activity in mergers and acquisitions for the mining industry has picked up, which Anderson said was: “a good sign of a healthy industry.” He cited some recent multi-billion-dollar deals including a Chinese company’s acquisition of 24% of a Chilean lithium mine and two global mining giants’ sale of a stake in one of the largest copper mines to Indonesia’s state mining company.
As for gold, Anderson noted that during uncertain times, people like to hold this precious metal as an investment. Recently, gold prices have been high and trending up. After $7 billion in gold transactions in 2018, the gold business had already showed $14 billion in transactions year to date (2019) at the time of the Market Outlook Workshop. Capital expenditure in gold mining held steady from 2017 to 2018.
REBRANDING A NEGATIVE IMAGE
Though financial performance for mining companies is strong, stock prices and market capitalization do not reflect this strength. “There’s a gap between financial returns and market value,” Anderson said. He suggested one reason is that the public and investors see mining as an unsafe industry due to disasters such as the 2019 collapse of an iron ore tailing dam in Brazil. “We need the market and the public to regain trust,” he said. One possible solution is technology, which could reduce the number of workers at risk in the mines.
Another factor that reflects poorly on mining is global climate change because of coal’s bad reputation among those seeking to reduce carbon dioxide emissions. He suggested mining companies adopt greenhouse gas reduction initiatives similar to what oil companies have done.
Anderson proposed that this is a good time for mining companies “to engage with those who benefit from their work,” which would be not just investors, but the general public.
- The commodity revenue mix appears stable among the top 40 mining companies for selected major commodities (coal, iron ore, gold, copper).
- Mining profits appear likely to increase by about 15% for 2019.
- Capital expenditures should be up modestly for 2019.
THE MARKET IS CHANGING
Jay Bowman, managing director at FMI Corporation, had a mostly positive outlook for commercial construction in this country. He pointed out that, for the next couple of years, indicators are for the GDP to continue to grow. Also, consumer confidence remains high right now and corporate earnings have surpassed expectations. Unemployment remains below the Federal Reserve’s target. There is no expected increase in the federal funds rate, which means financing for projects should continue to be affordable. All of this is good news for the commercial construction industry, though the industry suffers from one major pressure: lack of skilled labor.
Bowman said he sees quite a few changes in the markets served by commercial construction. For example, fewer segments are spending more money. Three segments make up half the forecast spending for 2019–2023: education at $523 billion, retail and restaurants at $454 billion, and office building at $384 billion (Figure 2). The next three sectors are manufacturing ($346 billion), transportation ($314 billion) and health care ($224 billion). Those six sectors are forecast to account for 82% of the market during the five years 2019-2023.
A few specific trends include:
Education: Many of the expected projects are in higher education, with colleges and universities building facilities to attract a shrinking number of students, a trend Bowman said he found troubling because of falling enrollments and rising tuitions.
Office buildings: Bowman saw a change in the kinds of office space being built. For example, a greater portion are being built as or reconfigured into co-working spaces.
Commercial: The need for distribution centers is growing, as is the need for data centers.
Manufacturing: In the pharmaceutical industry, biologics are replacing small-molecule drugs. The process for making biologicals is much more complex, so makers of these drugs need to upscale by expanding their footprint or building new facilities.
Transportation: Spending in 2018 was over $50 billion. Projects were not as much for highways as airports, mass transportation and marine ports.
MEGAPROJECTS AND DEADLINES
Bowman said megaprojects (those with budgets of $1 billion or more) are growing in size and frequency. The annual value of megaproject starts in the U.S. increased from 3% of total U.S. project starts in 2013 to approximately 33% in 2018, he said. In the U.S., 320 megaprojects have been awarded since 2012, representing $718 billion in investment and another 674 are in the planning stages. Megaproject spending is projected to increase about 600% over the next decade, Bowman said.
Data centers for companies such Amazon and Microsoft account for much of the growth in megaprojects. They can run to a million square feet or more, with budgets of more than $1 billion each. Bowman said the economics on the client side look like this: A client spends $1 on construction, $8 on equipment and achieves a 300% return on investment. Data center construction looks like it will grow at about 11% CAGR over the next 5 years.
Shorter construction schedules have become a trend for nonresidential projects. Between 2007 and 2019 the average construction schedule for nonresidential projects has fallen considerably. During that time, the average schedule for projects valued at $25 million or more went from 34.5 months to 21.4 months, a reduction of 38%. Meanwhile, projects valued over $250 million reduced their average schedule from 72.6 months to 40.7 months, down 44% (Figure 3).
COMMERCIAL CONSTRUCTION FORECAST
- Commercial construction continues but in an uneven manner. It should grow, but at a slower rate, for the next two years.
- Activity will continue to concentrate in fewer markets. Changes in composition are as important as changes in volume.
- Data center construction looks like it will grow about 11% CAGR over the next 5 years.
- Projects will continue to trend bigger and faster. Megaprojects will become more prevalent.