Analysts See Oil and Steel Price Drops As Growth Soars
Total construction starts are down 1% year-to-date, according to Dodge Data & Analytics, in line with what the company predicted as growth in the industry slows.
“Through 11 months [of 2019], construction starts continue to show signs of pulling back following nine years of growth,” says Richard Branch, chief economist at Dodge Data & Analytics. Dodge reports that total residential starts have dropped 4% on a year-to-date basis through November, with decreases in both single-family and multifamily sectors. Starts in non-residential construction over the same time period have declined as well, particularly in the retail, hotel, education and healthcare arenas.
“The stage remains set for a further pullback in 2020 as economy growth eases further,” he says.
Branch does, however, point to a few “bright spots” in the non-residential field. Office and warehouse construction remain strong, due to data centers and large distribution centers. On the non-building side, Dodge reported a 6% increase for the month of November, which Branch attributes to a number of LNG facilities and wind farms that recently began construction.
“Wind construction has been picking up this year, but November was a busy month with over $4 billion worth of projects breaking ground,” says Branch. A tax credit for wind projects expires at the end of 2019, so it would appear that there is a rush to get projects going in case it is not renewed.
On the material side, steel and energy are the “biggest movers and shakers,” says Deni Koenhemsi, senior economist at IHS Markit. The company is reporting a 12.8% drop in U.S. oil prices in 2019, followed by an 8.1% fall in 2020. The numbers are far lower than the decreases reported for 2019 and 2020 in the third quarter, at 8.2% and 0.8%, respectively. “We lowered our near-term oil price forecast significantly this quarter,” says Thomas McCartin, economist at IHS Markit. “The International Maritime Organization (IMO) 2020 standards shift for marine bunker fuel is still expected to provide a boost to demand as refineries will need more oil to produce lower sulfur fuels, but the downgraded oil demand outlook indicates that there will be a smaller quarter-to-quarter increase in oil prices in early 2020.”
McCartin adds that while IHS Markit is currently forecasting a price drop, risks exist that could cause prices to spike.
“Attacks on Saudi Arabian oil infrastructure represented the largest sudden oil supply lost in history,” he says. “The current cycle of oil supply surplus calmed markets, but the lasting effects of the reduced global spare oil production capacity indicate the market is less able to handle more disruptions. We expect this risk to linger until Saudi Arabia completely restores its facilities, likely in the second half of 2020.”
John Anton, associate director of pricing and purchasing at IHS Markit, expects steel rebar and structural steel prices to decline in 2020, at 8.5% and 6%, respectively. “Prices should have been lower in all of 2019, but stayed stubbornly high,” says Anton. “Fundamentals took over as construction activity waned and buyers cut orders,” he adds, accounting for the downturn in price.
Lumber prices are expected to fall 11.2% in 2019, according to IHS Markit’s fourth quarter report, slightly lower than the 10.4% drop predicted in the third quarter. Lumber prices are expected to rebound in 2020, with a 4.6% increase. The ENR 20-city average price for lumber is 5.4% lower in December 2019 than it was at this time last year.