Building materials face strong headwinds.
Elizabeth Knight’s article on the domestic building materials industry caught my eye. Although a week old, I thought it worthy of discussion.
The article says that the current annualised trend for building approvals in Australia printed 174,000 in June, whereas over the past 5 years the building materials industry as a whole has built itself around a 225,000 approvals rate (according to UBS).
Back of the envelope, these numbers suggest that approvals are running ~23% below trend.
The article also says that year-on-year building approvals for houses have fallen 14.5%, and approvals for apartments have plunged a whopping 38%.
Whilst the article was prompted by Adelaide Brighton’s recent profit downgrade/impairment; almost all domestic building materials companies will be facing similar headwinds.
However, it was the comment: “In the meantime, building materials companies will wear the pain of operating during this cyclical low,” which conjured up for me the all too familiar image of the real casualties, i.e., the employees and sub-contractors, and the ripple effect a material slowdown in construction has on the wider community.
At present, the headwinds are particularly strong for Adelaide Brighton (ABC), however other market participants will not be immune and CSR and Boral (BLD) are already down trend.
These headwinds also effect building companies, real estate companies and their respective support industries.
Let’s take a quick look at the key headwinds.
Headwind 1 – a strong USD/weak AUD.
This is not so good for domestic (only) materials companies which import cement clinker (for cement and concrete production) and other inputs denominated in USD.
It’s even worse during a cyclical low because demand tends to be sporadic, causing a double whammy of volume and price.
Currently, there are a number of factors playing into this headwind, namely:
In Australia, it looks like interest rates may go lower and stay there for longer, which weakens our currency against the USD (more clues from the RBA on Tuesday).
Iron ore supply in other parts of the world (Brazil) potentially re-ramping quicker than expected, which may push down prices and weaken the AUD (you will see that BHP and FMG took decent hits on Monday).
In the US, the recent ‘mid-cycle adjustment’ rate cut appears to be signalling a data-dependent Fed which may not buckle to the Don’s wishes for multiple rate cuts, and this may keep a floor under the USD and slow/reverse Gold’s ascendancy, other things being equal.
This all spells a lower AUD, and a steady-sideways USD.
Headwind 2 – Falling home loan approvals, Protectionism, China slows/Tariffs, Banks/APRA, ACCC.
Property investment in Australia is no longer as safe as houses and while negative gearing is so far intact, the lending criteria of banks favors owner occupier loans versus investment loans and overall, mortgage approvals are down trend.
The dollar value of investment loan approvals in Australia appears to be similar to the trough period which occurred immediately after the GFC.
Changing interest rate buffer testing policies specified by APRA.
A slowing China has been further slowed by tariffs.
10% tariffs on the ~$340 billion balance of Chinese goods imported into the US will come into effect in September, on top of the US$200 Billion of aluminium, steel and other 25% tariffs already in place.
Real estate purchasing by mainland Chinese has been significantly curtailed for a few years now as FIRB, Chinese bans on certain non-OBOR related investments and other complicated restrictions have all but eaten up that trade.
The ACCC is usually quite negative about purchase and sale transactions in this sector due to the potentiality for transactions to lessen competition in specific states and/or regions. This probably means that any sale of material assets by Boral and/or other domestic players to major market participants will more than likely come under ACCC scrutiny, potentially closing down certain M&A strategies designed to take market share from competitors, in a shrinking market.
Headwind 3 - Disruptive building technologies displacing traditional cement/bricks.
Concrete is possibly the world’s most used material. This has created some very large building materials companies across the globe, with Australia being no exception.
However, as a result of climate change, environmental directives and millennial/populist movements, there are a number of materials and technologies which are starting to disrupt its status.
Here are some examples.
Prefab timber and aluminium homes with footings.
Modularised low cost ‘dongas’ and containers used for residential housing.
Smart bricks and robotic bricklayers.
3D concrete and bio-plastic printers.
Lightweight aggregate concrete.
Passive cooling bio-ceramics, bio-masonry.
Photo-voltaic roofing and recyclable aluminium.
Other low carbon economy building materials.
Yes, concrete is omnipresent, however based on the low margins derived by building materials companies, some culling in the industry would probably be a good thing.
To survive what Elizabeth Knight and others are saying might be a 2 year plus low, bosses of building materials companies (and builders themselves) need to consider where to tread next in order to withstand these headwinds.
Dancing around old economy girders with shiny leather soled shoes - probably won’t work.
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