The Prospects for Building Materials

In the aftermath of the 2009 Great Recession, the building materials sector and the construction industry as a whole have shown signs of recovery. According to Roland Berger's Building Materials Company Index analysis, there has been a notable 41-percentage-point increase in total shareholder return over the three-year period from July 2014 to June 2017. The year-over-year revenue growth in 2016 stands at 3.1%, with industry EBIT margins reaching 10.0%. Additionally, a significant 62% of building material companies are surpassing the historical industry average cost of capital, set at 8%.

The key driver behind this robust performance is the resurgence of the underlying construction market. In 2016, the construction value put in place escalated to USD 1.16 trillion, marking an increase from USD 1.00 trillion in 2014, translating to an annual growth rate of 8.1%. Notably, the residential sector played a pivotal role, experiencing substantial growth from USD 375 billion in 2014 to USD 464 billion in 2016, equating to an impressive annual growth rate of 11.3%. Within the residential construction market, the multi-family segment demonstrated double-digit growth, boasting a compound annual growth rate of 15.6% from 2014 to 2016. Furthermore, the Southern US witnessed population growth contributing to this positive trend.

However, challenges persist within the sector. A persistent workforce shortage has afflicted the industry, with 56% of homebuilders reporting a scarcity of labor for their projects. This shortage has led to repercussions such as project delays, elevated wages, and increased home prices. Some builders have even had to moderate the pace of accepting new orders to ensure timely project completion. Looking ahead, there are both short-term and long-term prospects to mitigate these challenges. The federal government is actively reviewing regulatory and compliance policies to reduce red tape and associated costs. Moreover, industry stakeholders may seize opportunities to advocate for additional relief from the Trump administration. The potential passage of the promised USD 1 trillion infrastructure plan by the Trump administration could serve as a substantial boon for the industry, potentially revitalizing interest in the sector from the labor force.

The macro-economic insights

Economic Contraction on a National Scale, Indications point to a decelerating national economy, with the Conference Board's leading economic index dropping to 103.9 in October. This extends a trend of monthly declines throughout the year. While certain markets may experience varying degrees of slowdown, overall growth levels witnessed from 2020 to 2022 are now in the rear-view mirror. Consumer Spending Remains Steady Amidst Weakening Real Disposable Incomes, despite a decline in real disposable incomes by 0.1 percent monthly, consumer spending remains robust, driven by reduced savings rates and increased credit card usage. Although holiday spending is currently resilient, a tightening of consumer wallets seems inevitable, posing a potential slowdown in GDP as 2024 approaches. The Dilemma of Interest Rate Trends in 2024, Persistently high inflation levels combined with low unemployment rates may defer any interest rate reductions by the Federal Reserve until mid-2024. The impact of elevated interest rates, reaching the mid-20% range for credit cards, is expected to influence consumer credit spending significantly. Housing Market Outlook for 2024: Single Family Housing Starts and Resale Projections, with mortgage rates nearing 8%, the housing market has felt the repercussions. The National Association of Builders reports a 10% decline in single family housing starts for 2023 compared to 2022, forecasting a rate between 900K to 920K units. However, optimism arises for 2024, with analysts predicting an increase in single family starts by 5-12% while multi-family starts may decrease by 12-18%. Existing home sales are anticipated to dip by 4%. The Impact of 2023 Housing Market Dynamics on First Time Homebuyers, first time homebuyers are facing challenges in affording payments, prompting assistance from builders and savvy resellers. Despite the housing market's strain, these buyers, managing around $2,400/mo payments, continue to drive the new single-family housing market forward. A simplified overview of payment options reveals the necessity of an annual household income ranging from $86,000 to $115,000 to enter the current housing market reasonably. Efforts to sustain demand involve public builders offering rate buy-downs, enabling entry with a 3% down payment on 6% interest terms, counteracting the high-interest rate and house price environment. In 2024, market shifts that favorably impact homeowners' entry into the market (such as job creation, lower inflation/interest rates, lower home prices, and increased housing inventory) are expected to drive increased demand. Conversely, any developments that intensify strain (such as job losses, higher inflation/interest rates, higher home prices, and reduced housing inventory) are likely to lead to decreased demand. Responding to sales pressures, builders are adjusting strategies by cutting prices and providing sales incentives to maintain market momentum. According to the NAHB/Wells Fargo HMI, 36% of builders reported cutting home prices in November 2023, the highest share during this cycle. Additionally, 60% of builders offered sales incentives in November.

The market overviews

In 2022, the Global Building Materials Market achieved a value of USD 1.3 trillion and is poised to grow, reaching USD 1.7 trillion by 2030, with a Compound Annual Growth Rate (CAGR) of 3.9% during the forecast period from 2023 to 2030. This upward trajectory is primarily attributed to the increasing demand for building materials, fueled by government investments in infrastructure development, encompassing public buildings, utilities, and transportation systems. The ongoing expansion of various industries, such as highways, railways, tunnels, non-residential buildings, and mining, underscores the critical need for new infrastructure construction. This sustained development is a driving force behind the heightened demand for building materials.

The push for products featuring rapid manufacturing schedules and reduced production costs is a key factor propelling the demand for innovative building materials. Utilizing ready-mix concrete and precast components emerges as a strategic approach, significantly cutting down construction time. An illustrative example is Gauge Brothers Concrete Products, which employed precast concrete components to complete the construction of a 440,000-square-foot N95 manufacturing facility in just 52 days in January 2021. This underscores the efficiency gains associated with the adoption of innovative building materials in construction projects.

Some significant advancements and distress

In October 2022, Holcim, a leader in sustainable building solutions, acquired Wiltshire Heavy Construction Materials, a top provider of construction solutions in the UK, enhancing Holcim's market share. August 2022 saw Saint-Gobain, a French international firm, acquire Kaycan, a manufacturer and distributor of external building materials in Canada and the U.S., expanding Saint-Gobain's leadership position in sustainable construction.  Sherwin-Williams Company's acquisition of AquaSurTech in February 2022 aimed to boost its market share in coatings solutions for construction materials.

Russia-Ukraine War Impact

The building materials supply chain faces compounded challenges from the Russia-Ukraine conflict, which adds to existing pressures from Brexit, COVID-19, and shipping route constraints. The confluence of these negative factors has created a perfect storm, resulting in supply shortages, longer lead times, and elevated prices. While the crisis may have a greater impact on raw materials, the Construction Leadership Council (CLC) notes that products from Ukraine, Russia, and Belarus accounted for only 1.25% of construction imports into the UK in 2021. The squeeze in supply and prices is expected to be more pronounced in raw commodities like oil, bitumen, copper, and aluminum ore, essential for producing various building materials.

COVID-19 Impact on the Building Materials Market

The global building materials market is grappling with the repercussions of the COVID-19 pandemic, witnessing disruptions in the construction sector worldwide. The surge in COVID-19 cases has led to challenges such as disruptions in the material supply chain, labor shortages, and the widespread closure of construction sites. U.S. contractors, for instance, faced difficulties in their material supply chain due to operational halts by foreign suppliers and logistics firms, many of which are based in China.

The adverse effects of the pandemic were particularly pronounced in India, where KPMG reported in April 2020 that more than 59 lakh crore worth of construction projects were significantly impacted. Looking ahead, the UN projects that by 2030, 3 billion people will require new housing and essential urban infrastructure, necessitating sustained efforts in the construction industry.

AI Impact

Artificial Intelligence (AI) is emerging as a game-changer in the building materials sector, offering significant contributions to sustainability. AI plays a crucial role in selecting materials with minimal environmental impact and determining optimal manufacturing techniques by analyzing vast databases. The integration of robotics, AI, and the Internet of Things can potentially reduce construction costs by up to 20%. Engineers are now able to deploy small robots on construction sites, enhancing efficiency and safety through technologies like virtual reality. A notable example is the collaboration between IBM Corporation, Red Hat Software, and Cobuilder in April 2021, resulting in the creation of the OpenBuilt platform. This platform aims to streamline the fragmented supply chain in the construction industry, providing a digital solution for safer, more sustainable, and efficient construction technologies.

Conclusion

Taking a macroeconomic perspective into account, the global building materials market operates within the broader context of economic trends and conditions. The COVID-19 pandemic has undoubtedly cast a shadow on the sector, leading to disruptions in supply chains, labor shortages, and site closures. These challenges have reverberated across the construction industry, impacting the development of projects worldwide. However, amidst these challenges, macroeconomic factors such as government investments in infrastructure have played a pivotal role in sustaining demand for building materials.

Looking ahead, the market's growth prospects, as indicated by the forecasted CAGR of 3.9% from 2023 to 2030, underscore the resilience of the industry. The macroeconomic landscape, characterized by efforts to recover from the pandemic-induced economic downturn, will likely influence the trajectory of the building materials market. Economic recovery measures, fiscal policies, and global economic conditions will be key determinants of the industry's performance.

Additionally, the integration of artificial intelligence (AI) into the sector aligns with broader macroeconomic trends emphasizing innovation and sustainability. The use of AI not only addresses immediate challenges but also positions the industry for long-term growth by enhancing efficiency and environmental consciousness. The macroeconomic outlook, including factors like interest rates, inflation, and overall economic stability, will influence the industry's ability to adopt and leverage such advanced technologies.

The Russia-Ukraine conflict introduces geopolitical complexities that can further impact the macroeconomic environment for building materials. The interplay of geopolitical tensions, coupled with existing challenges from Brexit, COVID-19, and shipping constraints, creates a dynamic and uncertain economic landscape. The macroeconomic response to these geopolitical events will likely shape trade dynamics, commodity prices, and overall market stability.

In conclusion, the global building materials market operates at the intersection of various forces, including the macroeconomic environment, technological advancements, and geopolitical events. While challenges persist, strategic developments, sustained government investments, and the embrace of innovative technologies position the industry for growth. Navigating the macroeconomic landscape will be crucial for stakeholders, as they adapt to emerging trends, geopolitical shifts, and economic recovery efforts.