Infrastructure growth sparks recycled metals opportunity

Construction is poised to grow this year, with infrastructure projects driving the sector while residential work lags.

Infrastructure construction is largely being boosted by the Infrastructure Investment and Jobs Act (IIJA) and the CHIPS act, noted Veronika Akhmadieva, senior economist at CRU Group. The $1.2 trillion IIJA funds are going into programs focused on infrastructure, transport and sustainability.

“By November last year, less than half of the total IIJA funds were allocated, with around $400 billion going to more than 40,000 infrastructure projects, so there is much more to come,” she said. “We already witnessed solid 7% year-over-year growth in infrastructure construction in 2023 as more projects passed the funding stage and construction began. Expansion was recorded across a wide range of the infrastructure sector, with the highest investment recorded in highways, streets, power and transportation.”

The Dodge Momentum Index (DMI) last week revealed that July clocked in at 216.3, 7.9% above June’s revised reading of 200.5. July’s reading is a 17% surge year-over-year. It’s also the highest level since December 2022. The DMI tracks the value of nonresidential construction projects entering the planning stages. It typically leads construction spending by about 12 months.

Though construction spending in the U.S. was slightly lower in June, falling for the second straight month, spending has risen y/y, according to the latest figures from the U.S. Census Bureau. June construction spending was an estimated $2.15 trillion on a seasonally adjusted annual rate. While this was just 0.3% below May’s spending rate, it was 6.4% higher than spending in June 2023. Within the nonresidential category, spending was highest on manufacturing construction, climbing 0.1% month-over-month to $223.8 billion in June. This is positive for scrap, which is the feedstock for building materials.

The Federal Reserve has signaled that it would cut interest rates in September. That would reduce short-term borrowing costs, which would boost some parts of the sector, but it isn’t a cure-all. For instance, lending conditions are still tight and large manufacturing projects have a longer horizon for payback. Additionally, publicly funded construction tends to be driven more by long-term Treasury rates, according to Ken Simonson, chief economist for the Associated General Contractors of America.

According to Simonson mortgage rates are coming down, which is good news for the single-family residential sector, but he says there has been a steep drop in multifamily construction, office construction, warehouse construction, which may continue to persist even if the Fed does reduce its short-term interest rates.

“Demand is weak for those kinds of structures, and there’s a lot of new additions to the stock to absorb,” he said.

But, as Simonson points out, those negatives will be overtaken by things like data center construction, transportation and renewable energy projects.

“I do think that construction spending will be increasing into 2025, and quite likely through the year,” Simonson said. “And I think the economy, as a whole, is also going to avoid recession.”