Non-residential construction, housing starts temper steel industry

2013-03-13T12:37:00Z 2013-03-13T16:41:07Z Non-residential construction, housing starts temper steel industryAllison Friedman and Jessica Soberman Medill News Service

For the steel industry to thrive, there must be a strong construction sector, according to panel experts at a conference Tuesday.

The panelists were speaking at the Platts ninth-annual Steel Markets North America Conference at the InterContinental Chicago.

While the Standard & Poor's overall rating outlook for steel is stable. Panelist Megan Johnston, associate director of natural resources at Standard & Poor's Rating Services, highlighted economic factors that influence the steel market. They include equipment investment, which is expected to grow by 7.2 percent; non-residential construction spending, which is expected to grow by 4.5 percent; and housing starts, which are now estimated at 1.1 million.

This estimate – while below the 1.5 million that is considered normal, and still far from the nearly 2.4 million it reached at the height of the housing boom in early 2006 – is a positive thing, according to Johnston.

"Once we start to see more homes built, we'll see things like shopping centers and roads and schools built, which will eventually help steel," Johnston said.

The months' supply of new homes – the ratio of houses for sale to houses sold, which reflects how long it would take to sell the homes inventory – fell to 4.1 in February, its lowest level since 2005. The number signified faster home sales and the potential for a growing residential construction market.

"As the pace of sales continues to rise over the next few years, home-builders will have room to increase inventories," said Brian Wesbury, chief economist at First Trust Portfolios L.P., in online commentary last month. "After a large reduction in inventories over the past several years, builders look like they're getting ready for that transition. Inventories have not fallen for five straight months."

While housing starts are increasing, panelists also pointed to non-residential construction.

"The big gaping hole everyone talks about is non-residential construction," Tanners said. "Public and private non-residential construction is very important. Public is kind of running out of steam. I don't think we're going to be able to spend a lot on public infrastructure any time soon, but I think the private side is more robust."

The non-residential construction industry is expected to rise 5 percent in 2013, according to the American Institute of Architects' semi-annual Consensus Construction Forecast released in January.

The ABI measures demand for commercial and industrial building activity by monitoring architecture firms' billing activity for the previous month.

"After seeing construction activity seesaw for much of last year, there is a much stronger sense that we have entered a recovery phase and the industry is positioned to see continued economic improvement as we move through the year and into 2014," said AIA chief economist Kermit Baker in a statement. "The resurgent housing market has led to a ripple effect where there is a need for more retail establishments and office buildings across the country."

Johnston expressed a wary optimism about the steel market in the upcoming year. "2013 could prove some improvement, but we could also see it as being similar to the past couple of years," she said. "We should see demand begin to improve along with a slowly improving economy."

Tanners, too, was hesitantly positive. "All signs are pointing to the recovery, but it seems kind of slow," she said.

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