TRG | The Bottom Line – 3/18

Inflation has been a theme in the construction and industrial industries Q4’20. This past week TRG had the opportunity to meet with top management teams across the value chain – heavy materials, building product distribution, and building products manufacturer (insulation, roofing, composite materials). It goes without saying that inflation has only ratcheted up in the wake of the Russian invasion of Ukraine. We are starting to see early stages of the domino effect from this event on the supply chain and pricing trends overall. Turkish cement imports are more expensive and harder to come by due to rising costs of Russian coal to run Turkish cement plants and increased cost and safety concerns shipping product out of Turkey. Liquid asphalt costs have skyrocketed at least 50%, according to one industry contact in the South. On top of that, interest rates are on the move up (as expected), and supply chains may be further stressed by Covid lockdowns in China. Will all of this kill construction? We still think not, although acknowledge that there will be bumps along the way. The multi-generation population shift to the Southeast and Southwest, even against a backdrop of a lower birth rate post Great Recession, should support residential, commercial and public construction for many years. These types of multi-generational population shifts occur with the combination of financial catalysts (Great Recession starting the migration to lower tax rates, less expensive geographies) and social disruptions (Covid-19). The headlines are tough, inflation is here for a bit, but in the medium term, we still expect steady construction growth in key markets impacted by the tailwinds of the ongoing U.S. population migration.