While there is a degree of optimism in the mining industry that hasn’t been seen for some years, much uncertainty still exists in this sector. As for construction, the forecast is mixed, with opportunities for growth if you know which segment is growing, and when to bid on projects.
According to Richard Branch, senior economist at Dodge Analytics, construction markets are expected to grow steadily in 2018. This prediction was echoed in the 2017 Baird Industrials Survey, the results of which were released in November.
According to the Baird survey, building products manufacturers generally believe that the construction markets remain conducive for continued steady growth into 2018. Single-family growth is expected to continue, supported by favorable demographics and employment trends. However, the composition of starts could potentially shift more towards entry level, with single-family the primary driver of growth.
This contrasts with the growth in residential building that was experienced after the great recession. Then, multi-family residential led the way as single-family homes were being repossessed and new ones were not built as much. But now, according to Branch, single family construction accounts for 30 cents for each dollar spread over three broad categories of U.S. construction.
Branch noted that income property is very closely aligned with market growth and the economy generally, and in the last two years retail construction has declined. There are three factors leading to the decline: First is the lack of single family building after the recession, which led to a decline in the growth of big box stores. Next, online shopping has taken over increasingly large amounts of retail sales, so there is a decline of brick and mortar stores. Finally, the shift towards urban construction and office buildings with mixed use has also meant that fewer big retail complexes are being built. Now, small retail is on the lower level of apartment buildings or office towers. The surplus of retail space has also meant that less new construction is going on; currently 40% of all retail construction is renovation.
Even Wal-Mart is downshifting away from supercenters and is building smaller neighborhood stores.
What has been bad for the retail sector has been very good for the warehousing sector. Regional distribution centers like those built by Amazon are driving growth. However, Branch indicated that even in this market, oversupply is moderating growth and vacancy rates are going up, although they are still much lower than before the recession.
According to Branch, massive, high-end projects are driving activity along with data server farms and tech-centered locations. As telecommuting has increased, the cost of building these centers has increased to $400 to $600 per square foot compared to regular office building at $150 per square foot. There was good growth in 2014, 2015 and 2016 with lots of high-end construction like corporate headquarters, but there is not much speculative office building. The vacancy is around 13%, but office starts in Houston are down 70% thanks to fallout from oil prices.
Despite the new administration pushing to bring back jobs, there is still much uncertainty about how much manufacturing will come back to the U.S. Additionally, the strong dollar is affecting traditional manufacturing, which affects plant construction.
Also, while petrochemical plants are being built, Branch said he has not seen the much-anticipated multimillion dollar petrochemical plants come to fruition.
“The way we build things now,” said Branch, “has much more automation, which means the plants are smaller. Multi-billion-dollar announcements are scant on details. Is it machinery or renovation? Intel announced a $7 billion U.S. investment in Chandler, AZ. The plant was built in 2014 but the investment is going to outfit the plant in machinery. It’s good for economic growth but has muted effect on construction.”
Another trend to note came from the Baird survey. According to many respondents, labor constraints are increasingly cited as a potential governor to construction growth. However, most of the responding companies welcome this as it creates a more gradual and manageable backdrop. Also of note from the Baird survey, respondents expected there would be some positive tailwind to construction demand because of the hurricanes. However, that growth will likely be modest in magnitude and span several quarters, perhaps even years.
Branch noted that a key trend in all aspects of construction is that the specification rates declined because all the projects that have been sitting in the pipelines have not been specified. He advised manufacturers to be very aggressive in the coming months as these projects start making their way through. “There is a lot of market opportunity for growth in the coming 1.5 years.”
For the first time in several years, the global forecast for mining was looking up, according to a speaker at VMA’s 2018 Market Outlook event, held in August 2017.
John Craynon, senior mining engineer at the Export-Import Bank of the United States, said they are predicting an industry upturn in the next one to two years, even though commodity prices have not been strong. “A number of large projects and expansions will be coming online before 2020,” he noted. “Exploration is growing, particularly in emerging economies, and even in the U.S. for some commodities.”
At the March 2017 Prospectors and Developers Association of Canada (PDAC) meeting, many presenters gave optimistic views for the next 5 years. “Some are saying that, even with the expansion of copper production, the world’s supply is going to fall short. Same with iron ore,” reported Craynon. He also said that at the 2017 Society for Mining, Metallurgy and Exploration finance meeting, the keynote urged attendees that now is the time to build mines. And, in an article about the PDAC, David Harquail, CEO of Franco-Nevada Corp, said, “Share prices are up, the big companies are talking about dividends and the smaller companies are raising money for new projects again. It’s a different world all together.”
Some capital is also available from the commercial sector and institutional lenders, which has not been the case for the past several years.
However, there may be a limit to the availability of capital for expansion, especially domestically. “The current administration has a more favorable attitude toward mining but there are still some issues with the cost of production and other factors in the U.S.,” said Craynon. “The view of the U.S. in the global market is cloudy due to the uncertainty about trade. Because there are potential trade issues, people in the rest of the world are hesitant to invest their money here if they think they won’t be able to get it out. Many global development banks specifically omit North America from places they can lend money to.”
Also, there are concerns that, when an industry is managed by folks that are not from that industry and is looking only at return to stockholders and financial performance, mining doesn’t hold up well compared to many other industries. Thus, even though there is optimism by mining experts, it’s going to be difficult to convince publicly traded companies to invest. With mining, it takes 20 years from first expenditure to first profit in the bank.
Additionally, commodity price trends are showing steady erosion since the early part of 2017. According to Craynon, this erosion is projected to continue, and there are concerns about market manipulation. There are also demand-side issues because there is significant slowing in the economy in India, and slowing in China.
So, while there is some reason to be optimistic about mining in the next year, market fundamentals and political uncertainty are creating headwinds that could stall any potential growth in the near term.