The next cab off the rank for the Biden Administration is a giant infrastructure package. According to Morgan Stanley, Australia does not benefit much. MS estimates that only an additional 7.5mt of steel will be needed per annum. That’s mostly going to be covered by scrap with some small marginal lift in iron ore. The big winner is cement:
Odds of an infrastructure deal are up, the result underinvestment in infrastructure combined with the 2-4x economic multiplier of infrastructure investments and a light Blue Wave(Democrats winning control of both houses of Congress). We stop short of making an infrastructure deal our base case since hurdles remain between now and this summer, as our chief public policy strategist Michael Zezas cautions. Using scenario analysis, in our bull case, a deal similar to the Moving Forward Act (US$1.5 trillion over 10 years) would add almost US$100 billion to annual surface transportation, 60% more than the Fast Act (our base case). Michael sees a higher probability of something akin to the Moving Forward Act passing, which would drive a meaningful uptick in infrastructure spending. The Moving Forward Act targets fixing existing infrastructure before constructing new roads and bridges, with more immediate impact on local economies.
An infrastructure package could catapult building materials into a Super Cycle similar to the 1950s. We are 10 years into the current construction cycle, exiting a recession, and potentially facing a government-underwritten cycle of another 10 years. With the US cement industry at 90% capacity utilization and 30% import capacity utilization, upward pricing pressure would be material. We estimate that a 15-20% real price increase could double US cement EBITDA. Aggregates would also see material impact, but capacity is constrained, while pricing power is more local. Steel is less affected as a global industry.
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AlphaWise provided unique mapping of $3 trillion in needed infrastructure repairs and companies that can provide them. We overlay bridges and roads in unsatisfactory condition on top of infra-structure supply to estimate companies’ exposure and potential revenue uplift. Our analysis shows in detail how much work needs to be done. We decompose the US$3 trillion into US$398 billion for concrete bridges, US$796 billion on concrete roads, steel bridges atUS$300 billion, and US$1.6 trillion to take asphalt roads from poor to good condition. Without changing assumptions on housing or commercial construction, we show that the uplift from infrastructure would be enough to produce another Super Cycle.
We estimate that a total of ~9 billion metric tons of aggregates and more than 200 million tons of cement will be needed to fully address the US$3 trillion of road and bridge repairs identified by our AlphaWise analysis. This equates to ~4 years of aggregate demand(which averages ~2.3 metric tons per year) and~2 years of cement demand. However, any infrastructure proposal will address only a fraction of this demand. We estimate a $1.5 trillion/10-year infra-structure package with ~$640 billion focused on surface infrastructure would create an additional 1.1 billion metric tons of aggregate demand vs. our current forecasts (~4.5% upside to total aggregate demand)and ~40 million tons of cement demand between 2022 and 2030.