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Aggregate Producers Positioned for a Recovery in 2010

The multiyear decline in demand for construction materials may be over soon.

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After a forecasted 40% peak-to-trough decline in domestic demand for construction materials by the end of 2009, we expect volumes to begin to gradually trend up starting in 2010. By that time, we expect stimulus spending on roads and infrastructure and a recovery in residential construction to drive growth in demand for construction materials, which will be somewhat offset by declines in nonresidential construction spending. Starting in 2011, we expect an improving economy will support construction spending growth across end markets, including the nonresidential segment. We think domestic aggregate producers  Vulcan Materials (VMC) and  Martin Marietta (MLM) are well positioned to benefit from this recovery. However, while demand for cement will also enjoy similar growth drivers, we think there is a risk that potential emission regulations could weigh on the industry's profitability.

Indicators Suggest Demand for Construction Materials Will Turn Positive in 2010
According to the U.S. Census construction spending figures, growth in public spending on highways and streets has been tepid in 2009, which reflects the slow startup of stimulus spending, and lower state and local spending due to weakening budgets. However, we are optimistic that stimulus-driven road construction activity will pick up in the spring of 2010--highway construction awards reached a record high of $6.8 billion in June, which was followed by $6.2 billion in awards in July. We estimate about 60% to 70% of the $28 billion in stimulus allocated for road work will be spent in 2010, and this boost in federal spending will offset a slowdown in state and local spending. Public spending on roads and highways accounts for a significant portion of demand for construction materials--about 30% to 40%. If we include spending on infrastructure projects such as sewers and bridges, this figure rises to 45% to 55% of total demand.

Patricia Oey does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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