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Deep Dive: Building Materials

After several turbulent years, the building materials industry finally appears to be on steady ground. Supply chain snags have unsnarled, the economy is relatively stable, and the U.S. government has passed legislation supporting more domestic construction.

Yet, a number of obstacles remain, including complying with environmental, social and governance (ESG) regulations and labor challenges.

In this deep dive, we’ll review some of the top issues and trends facing the building materials sector.

The ‘nearshoring’ movement will be a boon to domestic construction

For over half a century, U.S. companies spread their supply chains across the globe to reduce costs. Once the vulnerability of this structure was exposed by COVID and the ensuing supply chain crisis, leaders started to question their strategy.

Slowly but surely, companies are moving their supply chains closer to home. According to a recent Deloitte study, “more than 400 North American businesses have the intention of carrying out a relocation process from Asia to Mexico,” and 68% of American manufacturing leaders plan to shift operations back to the U.S.

Building materials companies that operate in regions where the nearshoring movement is concentrated, such as Mexico, will likely see increased demand for their products to support construction activity. However, some companies could end up worse off. Those that rely on regions that are no longer attractive could face significant disruptions as they adapt to market changes.

Government incentives support domestic manufacturing

The U.S. government recently passed several new laws that incentivize domestic manufacturing.

  • The Inflation Reduction Act (IRA) was passed in 2022, and contains various incentives to bring manufacturing back to the U.S., especially as it relates to battery factories. Since the law was enacted, automakers “have detailed about $11 billion in U.S. EV battery manufacturing investments.” Building materials suppliers stand to benefit from the dozens of factories that will be built throughout the country in the next decade.
  • The Build America Buy America Act of 2021 supports domestic building materials companies by requiring that “all iron, steel, manufactured products, and construction materials used in covered infrastructure projects are produced in the United States.”
  • The CHIPS and Science Act of 2022 contains $39 billion in manufacturing incentives for domestic semiconductor production. Several large American companies have already announced massive investments as a result of the law—Micron committed $40 billion to memory chip manufacturing, while Qualcomm and GlobalFoundries entered into a $4 billion partnership to expand the latter’s New York factory.

The Biden administration has made it clear that it’s looking to incentivize domestic manufacturing in critical areas, such as clean energy and semiconductors. Building materials companies that supply components for these products, as well as materials required for building factories, are likely to benefit.

Decline in lumber prices will make it cheaper to build homes

Between 2020 and 2023, lumber prices swung wildly. In early 2023, the price has settled closer to its long run average, and builders can once again commit to projects with healthy margins.

Cheaper lumber will have a significant effect on the housing market. While higher mortgage rates have contributed to slowing new housing starts since mid-2020, a lack of inventory combined with lower materials costs could kickstart new residential construction.

Predicting the path of the housing market is a fool’s errand, but falling lumber prices make for more attractive margins for building materials companies. This could mean a surge in residential construction in 2023.

Semiconductor manufacturing is set to boom

Around three quarters of global semiconductor manufacturing is based on Asia. American companies have realized the strategic risk in relying on foreign production of these crucial chips, and are planning on making a lot more of them at home.

Along with the battery plants we mentioned earlier, large investments are being made in domestic chip factories. According to Bloomberg, “Semiconductors account for 56% of the $330 billion of North American megaprojects announced since 2020…which counts $86 billion of US electric-vehicle and battery-plant announcements in the same period.”

Despite this historic investment, a number of challenges remain. The Associated Builders and Contractors group estimates the industry needs over 500,000 additional workers to meet demand. Attracting that many workers likely means higher labor costs, which would pressure margins.

Taken altogether, U.S. building materials providers are likely to see a surge in demand related to chip factories. “Hundreds of thousands of cubic meters of concrete and tens of thousands of tons of steel are needed…[and] construction-equipment and building-materials suppliers should see a big, multi year increase in demand, without shouldering as much risk as those doing all the spending.”

Demand for green building construction and retrofitting will remain elevated

Construction and building materials leaders are looking for ways to reduce emissions associated with cement production, since it’s responsible for nearly 8% of global greenhouse gas (GHG) emissions. However, demand for concrete stands to increase in the coming years as the global population becomes more urbanized.

To meet demand while reducing GHGs, producers are looking to incorporate alternative raw materials in the production process. Using recycled materials as fuel, such as paper mill rejects, is one way to cut emissions. Since limestone production is a key source of GHGs within cement, replacements such as volcanic rock are gaining traction as low-emission alternatives.

While cement is a significant GHG culprit, buildings in general accounted for over 37% of global emissions in 2020. The most common ways to retrofit buildings to become greener include upgrading lighting to LEDs, replacing inefficient HVAC systems, and installing solar panels. Building materials companies that capitalize on these trends will be the winners of the next decade.

A dynamic environment requires agility

Some of these factors, such as volatile lumber prices and demand for green buildings, are familiar to building materials leaders. Others, such as the boom in semiconductor and battery manufacturing, are new trends to get their arms around.

Regardless, in the face of climbing interest rates and a focus on climate transition risk, managing liquidity will be a top priority for building materials companies this year. As a result, according to S&P Global, Capex spending in this category is expected to be flat in 2023 after two years of significant growth.

Which means, managing Capex budgets efficiently, while having the agility to adapt to a shifting landscape, will be critical to navigating the turbulence.