Economists may say that we are officially out of the recession of 2009, but that doesn’t mean the tough times are completely behind us. For many metal construction companies and suppliers, the budgets for expenditures in 2010 were set using 2009 revenue numbers as a guideline for what this year may bring. Given the economic downturn last year, many of those budgets can be described as conservative at best.
However, that does not mean companies aren’t spending money. The question is: How are they spending money in 2010? Will the metal construction industry as a whole be “circling the wagons” and acting very conservatively to try and weather the storm? Or will companies invest internally in R&D and new products, preparing to emerge as a market leader once the financial markets and global economy improve? Is the industry buying, renting, leasing, saving or hoarding? What are the current capital spending trends, and how will they develop and evolve throughout 2010?These are the questions to which many industry experts are searching for answers.
“Most companies in the metal construction business are still being very cautious about spending and are still looking for ways to reduce costs, since 2010 is projected to have less total construction opportunity than we saw in 2009,” said John Bernardi, president of Firestone Metal Products, Anoka, Minn., and member of The Metal Initiative. “However, to the degree that technological and other productivity tools and their related expenditure scan help reduce operational costs through enhanced efficiencies, these types of expenditures are still looked upon favorably.”
Sid Peterson, vice president of sales and marketing for Alcoa Architectural Products,Eastman, Ga., and member of The Metal Initiative, agrees that “cautious” is the buzzword these days. “Every design, plan and development is being scrutinized to death. We are seeing reviews of reviews. The term ‘value engineering’ has come to mean ‘squeeze the last dollar out of the proposal,'” he said. “Philosophically [metal construction companies] want to establish growth for the future, but realistically they are circling the wagons.”
It’s obvious that across the country, construction of all types has dipped as financing has dried up, and the metal construction industry is not immune to the effects of those symptoms.
“We believe that people certainly are curtailing their capital spending,” said Pat Finan, president of Bluescope Buildings North America, Kansas City, Mo., and member of The Metal Initiative. “That’s probably one of the biggest challenges that we have as a construction business—people just aren’t investing much capital in building development. Some of that is driven by outright demand—there are a lot of vacancies out there. A large portion of that is driven by access to capital, and it’s just very, very restrictive to get any loans for new construction. As an industry that’s probably the biggest challenge we all face.”
The good news for the industry, according to Bernardi, is that growth within the industry has not necessarily been stunted, but rather limited or simply adjusted in focus.
“In general, the metal industry is still growth orientated. Metal has a lot to offer the market and has been gaining share over other building materials for a number of years. While this economic downturn may be generally causing metal companies to put non-core growth initiatives on hold,there remains a tenacious industry-wide effort to grow the metal construction businesses share of the total construction industry,” he added.
Research and development are key areas that helped this industry build momentum going into the recession and will continue to play a significant role in its growth coming out the other end.
“There are a number of industry-wide R&D programs going on to support the growth of metal construction,” Bernardi said. “For example, individual metal products manufacturing companies conduct their own research and development activities. In addition to these efforts by the manufacturing companies, various trade organizations such as Metal Construction Association and American Iron and Steel Institute are supporting further industry-wide research programs designed to advance the utilization of metal in the construction industry.”
While R&D is certainly an area of focus, many companies can’t wait for delayed gratification,according to Peterson. “All budgets, including R&D, are being analyzed and challenged. Now may be the time to be investing in new product development, but everybody is looking for short term returns as well.”
Smart Money
Those efforts, among other factors, point to the industry as a whole concentrating on the intelligent utilization of capital. Metal construction companies will certainly spend money in 2010, but the allocation of funds will be more closely monitored and analyzed,especially since financing opportunities are less abundant.
“Companies are trying to conserve cash whenever practical. Companies are still not inclined to make big capital purchases at this early stage of the economic recovery,” Bernardi added “Where significant capital equipment is needed, leasing or renting may be a preferred approach for the immediate term. However, a company might still move forward with buying an item if it is available at a deep discount and there are a number of items being sold at distressed pricing during these difficult economic times.
“Each company in the metal construction business, whether manufacturer, supplier or contractor, has to make its own decisions relative to maintaining its asset base or growing it via organic or acquisition strategies. Certainly, it is more difficult to find money available from financial institutions today for financing construction company growth strategies than there was available a couple years ago, but there is still money available and selective acquisition deals are still happening.”
Peterson took it a step further, explaining that in these times, the financially strong get stronger, and vice versa.
“It’s the old saying, ‘The Golden Rule: the guy that’s got the gold, makes the rules.’ It’s no different now. Those that are financially able to take advantage of opportunities to expand will do so. Those who don’t have the financial strength may be the ones that get acquired,” he said.
Given the depth and breadth of the economic downturn that began in late 2008 and extended through most of 2009, it makes sense that economic advisors across nearly every industry have pointed to 2011 as the actual point when the economy should rebound. It seems that 2010 is the critical time when companies make the final moves to stabilize and set themselves up for near-term growth. Is this also true of the metal construction industry? Bernardi believes so.
“The various construction reporting agencies are suggesting that the decline in total construction starts is decelerating in 2010, and they are collectively projecting actual non-residential construction spending growth to occur in 2011. At the same time, various metal components such as metal roofing and metal cladding have been gaining share in all types of building construction,even through the most recent downturn. The combination of increased share for metal components and increased construction spending in 2011 should spell are turn to healthy growth rates for the industry before the end of 2011,” he said.
Foggy Future
If 2011 is the year when strong growth rates reappear, when will it bring the metal construction industry back to the relative prosperity of pre-recession 2008? That’s the question that seems to leave everyone’s crystal ball foggier than we’d like. And with a lack of recent acquisitions that could point toward new growth, predicting that potential growth becomes all the more difficult.
“Within the metal building industry, I would imagine that the capital investment had slowed to a snail’s pace in 2009 and maybe the latter half of 2008,” Finan said. “The metal building participants are all particularly challenged with the downturn in construction and we’ve certainly read more about downsizing than we have about growth and acquisitions.”
Bernardi added with a laugh: “It seems that we can all look back on 2008 now and say it was a pretty good year. Different segments of the metal construction industry have seen different rates of changes in demand since 2008 and will undoubtedly see different growth rates going forward. For example, those segments of the metal construction industry that are focused more on institutional or the energy construction segments, will likely return to 2008business levels earlier than those companies focused on the commercial building segment.”
In general, it seems the metal construction industry is still a few years away from pre-recession numbers, and Peterson sees a direct relationship with the health of the financial industry and the loosening up of lending practices.
“We don’t see 2008-type numbers in the near future—probably not before 2012 or 2013,” he said. “Speeding up the timeline is going to be based more on the financial industry than on ours. When companies can obtain decent financing at reasonable rates, they will once again give consideration to expansion, which would include new building. Government projects, school construction and health care facilities may be where the demand will first be noticed, but if financing remains difficult, the return to significant growth will continue to be stymied.”
Bernardi agreed, adding that advocacy groups and associations become even more important in tough times. “It doesn’t appear that the industry will be getting back to those robust 2008 business levels for at least a few years. In the meantime, supporting the various metal trade associations that actively promote the use of metal construction, such as the MCA does through its The Metal Initiative program, can help positively influence the demand for metal construction.”
