The year 2021 may well become one of record growth for the global construction sector.
In 2020, COVID-19 triggered many project delays. General lockdowns introduced by governments froze economies and set off the economic crisis.
Today, as vaccination is gaining speed, the construction industry is prepared to play catch up. At the same time, many countries have introduced massive infrastructure development plans to boost their economic recoveries. Also, historically low cost of financing is providing another tailwind for the industry.
The construction and mining machinery industry has been a reliable indicator of the trends in construction. On Friday, Jan. 29, one of the major players, Caterpillar, released its fourth-quarter and full-year financial results for 2020. They indicated a major drop in sales and decreased profitability relative to the previous year.
“Sales and revenues for the fourth quarter of 2020 were $11.2 billion, a 15 per cent decrease compared with $13.1 billion in the fourth quarter of 2019. Fourth-quarter 2020 profit per share was $1.42 compared with $1.97 per share in the fourth quarter of 2019.”
Full-year 2020 revenues decreased by 22 per cent and the company’s annual 2020 profit was $5.46 per share, about half compared with $10.74 per share in 2019.
Despite the weakness, the reported financials exceeded market expectations and the company’s management reiterated potential recovery and reacceleration of sales this year. These hopes are based on several promising developments, including growing global infrastructure construction activity and rising sales of heavy machinery in China and the United States, partly due to the strong demand for residential structures. Additionally, climbing commodity prices are likely to result in the recovery of oil-exploration and the metals business.
In the article, Three Key Charts: Robust Growth Bounce-Back In 2021 For Global Construction Growth, published on Nov. 12, 2020, Fitch Solutions is cited as expecting worldwide construction industry ‘real’ (i.e., adjusted for inflation) growth to reach +4.1 per cent year-over-year in 2021, the fastest rate of gain over the last 20 years.
The highest real growth is projected for Latin America, +7.9 per cent y/y, due to a “low base” effect.
In 2020 the region was hit by dramatic slowdowns caused by government restrictions on construction activity.
Even though the growth in Asia is expected to be lower than in Latin America, +5.8 per cent y/y, the overall value of work this year is likely to reach US$2.1 trillion, with China contributing US$1.2 trillion, the same amount as Europe and somewhat higher than North America’s US$1.1 trillion.
In 2021, both Chinese and Australian construction companies will benefit from increased government spending on infrastructure projects to help the recovery of their economies. For fiscal year 2020/2021, the Australian government has increased its infrastructure investment commitment by $10 billion AUD. This will raise total planned spending on infrastructure over the next ten years to $110 billion AUD.
China has also committed to massive infrastructure investment, with an accent on high-tech and modern transportation systems, including the supporting hardware (e.g., charging stations) needed for the extensive deployment of electric vehicles. The funding for the projects will be provided through the issuance of infrastructure bonds by Chinese regional governments.
The U.S. is also studying major investments in infrastructure. During his election campaign, President Joe Biden announced a possible US$2 trillion infrastructure spending initiative.
Sales of excavators in China were strong in 2020 and the trend seems set to continue in 2021. According to Chinadaily.com, through the first 11 months of last year, China’s excavator manufacturers sold 296,075 units, +37.4 per cent more than in 2019. With many infrastructure projects about to go ahead in this current year, excavator demand in the country will remain strong. Similarly, 2021 sales of construction machinery will likely show strength in other parts of Asia, Latin America, Europe and the United States.
Positive expectations for the mining sector in 2021, based on a recovery in demand for commodities, is yet another indicator of an upcoming reacceleration in global construction activity. According to Fitch Solutions, market prices for most metals and minerals are likely to increase this year. The pickup in mining operations will also add to new construction work.
The outlook for the construction sector in 2021 appears quite promising. However, difficulty with the logistics of the vaccine roll-out and new virus strains could trigger major setbacks.
The key questions are: How serious might those issues be and how long will it take to deal with them, if they arise? Today, much more is known about COVID-19 than a year ago and finding solutions to new virus-related challenges should be faster. Even though 2021 promises to be a great year for construction globally, a fair portion of good luck will be required regardless.
Dmytro Konovalov has over 10 years of experience in equity research and analysis for global markets at leading international financial institutions.
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