With construction industries still challenged by tight
credit markets and weak demand, a more-stable,
climate-controlled atmosphere doesn't appear to be in the
immediate cards for the heating, ventilation and air
conditioning (HVAC) sector.
HVAC is inextricably tied to construction, providing the
ductwork necessary in any new building. And even if residential
projects pick up this year, the commercial side of the business
is still seeking bottom.
Slow sales, high inventory levels and a weak pricing
environment are still plaguing residential construction,
according to the Portland Cement Association (PCA), a Skokie,
Ill.-based construction trade group. "Despite recent data
suggesting increased sales activity, foreclosure improvement
and inventory reduction, the environment for a sustained
improvement in single-family housing starts may not be as
positive as it seems," PCA chief economist Ed Sullivan said.
"Homebuilders are unlikely to accelerate construction activity
until two critical conditions are met low inventory levels of
unsold new homes and stable or rising home prices."
Residential construction continues to be sidelined partially
by volatility in housing prices and foreclosures still making
their way to the market. "Homebuilders have no guarantee of an
adequate return on investment," he said, "and there is little
to suggest that this will change in the near future."
Not only are foreclosures prevalent, their pace could
accelerate this year. Sullivan expects a "tepid" increase in
residential construction to materialize in the second half of
2010, but slow job growth and tight lending standards could
hinder sales. "More substantive gains (are) expected in 2011
and beyond," he said.
"The residential construction market is probably going to be
flat as opposed to last year as new housing starts has kind of
hit a bottom," John Packard, publisher of Steel Market
Update, said. "Commercial construction, particularly areas
that do not use government funds, is very weak this year-2010
is worse than 2009 in the commercial sector. The only part of
the construction industry that may be doing well is hospitals,
schools and public projects, where funding is available."
Packard, who spent nearly three decades selling galvanized
coil earmarked for HVAC use, said residential construction
"should slowly start to come back in 2011 and commercial
construction will bottom out-fingers crossed-this year and
start to recover in 2012." But the improvements will be slow,
and he doesn't see a return to the 2006-07 boom levels for
quite some time.
As a result, he believes that galvanized steel buyers will
continue to exhibit cautious buying patterns. "Everybody is
being more conservative and only buying what they need."
A number of nonautomotive galvanizing mills are heavily tied
to the HVAC market, including Steel Dynamics Inc. subsidiary
The Techs in Pittsburgh; Sharon Coating LLC, Sharon, Pa.; CSN
LLC, Terre Haute, Ind.; and Severstal Sparrows Point,
UBS Investment Research analyst Timna Tanners agrees that
nonresidential construction is still seeking its bottom and
won't recover until 2012. "Nonresidential construction demand
may not have seen the worst of the downturn. We see a
less-severe retreat than witnessed in residential construction,
where oversupply was more problematic, but we think it is
pretty clear nonresidential construction spending will not
return to recent peaks until at least 2015," she said.
"Macro data and company commentary show lack of credit as a
leading reason construction demand will be slow to recover,"
she added. "Because many projects take at least 18 months to
finish, today's weak credit markets can stifle spending well
into 2011. Construction cycles tend to move slowly so we would
avoid preempting a rebound."
Retail is the most heavily challenged nonresidential
construction sector, and there appears to be nothing on the
horizon to improve vacancy rates, said Tanners, who considers
lending patterns and vacancy rates leading indicators.
"Peak losses in 2010 from commercial construction and
commercial and term commercial real estate losses not peaking
until 2011" provide another sour note, Tanners said, although
she does suggest that more stability in public-sector spending
appears to be brewing and there is further potential for
increased infrastructure spending. "Investors looking for a
return to more peak spending levels should be prepared to wait
The UBS analyst sees "a delayed recovery amid anemic
financing for the commercial and industrial sector. The
residential side is showing signs of improvement and could see
a small recovery by year's end."
Residential spending is poised to improve, and even if
nonresidential construction does begin to rebound "we think
2012's total construction spending will still only return to
2003 levels, prior to the 2004-08 boom cycle," Tanners
UBS has already trimmed its assessment of 2010 housing
starts and is forecasting a 25-percent improvement over last
year compared with its earlier assessment that home
construction would increase 43 percent this year.