Infrastructure spending levels being increased. The continued lack of progress in reauthorizing the national highway transportation program bears a striking resemblance to Bill Murray’s movie “Groundhog Day,” FMI said, in which the main character must relive the same day repeatedly. Each new proposal and each new round of deadlines comes and goes with no real progress made.
Transportation stakeholders watching the proceedings in Washington seem to have little hope of seeing Congress develop a comprehensive, functional approach to funding infrastructure spending in a way that gives them any clarity about the future of the market.
While some infrastructure markets have a generally positive funding outlook, there is a growing concern for how the nation will get past the current political grandstanding and solve the underlying funding issues.
While Washington has been keen to politicize the issue, it has not been aggressive in seeking a long-term solution. FMI does not expect this situation to change, even in the post-election setting of 2015. The expectation is that more action will take place at the state and local levels; and evidence of this trend is already occurring.
Continued positive growth in housing. Housing on the other hand, continues to improve, and in 2014, for the first time in many years, housing starts exceeded the 1 million annualized new construction rate, FMI said.
This has improved the fortunes of many construction-materials producers. The only dark cloud on the horizon is that of rising interest rates. Producers in the areas where housing starts have rebounded are finally seeing strong market improvements after what has been a bleak five years.
FMI expects new housing construction to begin to level off as inventory levels stabilize in hot markets and as interest rates rise. Even with this leveling, the industry should continue to enjoy improving margins and production volumes as commercial construction, which inevitably follows new housing construction, takes place.
Acceleration of industry consolidation. The last significant trend to watch for in construction materials in 2015 will be an acceleration of industry consolidation, according to FMI.
In 2014 the largest merger in the history of the cement industry was announced between Holcim and Lafarge. As the No. 1 and No. 2 largest global cement producers, respectively, this merger has strong consequences, including the following:
- Smaller producers will face increased pressure to merge or acquire in order to maintain competitive economies of scale and geographic footprints.
- Downstream vertical integration will continue and potentially accelerate as the opportunities to grow profitability via the large-scale mergers decrease.
- Increased antitrust scrutiny in markets with only one or two major producers will be likely.
In the aggregates-focused markets, the key merger announcement of 2014 was between Martin Marietta and Texas Industries Inc. On a domestic scale, this acquisition represents the further consolidation of aggregates production in the United States.
FMI sees no immediate end in sight to this continued consolidation, and it is noteworthy that many key markets are now effectively consolidated with few or no independent producers remaining.