REFLECTING a rather harsh decline in housing starts and conservative estimates regarding nonresidential and public sector growth, total construction activity is expected to retreat 1.5% to 2% during 2007, according to Portland Cement Association Chief Economist Ed Sullivan at his formal Fall Forecast unveiling in early November 2006. Still, despite this contraction in activity, portland cement consumption is expected to record marginal (about 0.3%) gains in 2007 after a slightly better 0.6% 2006 uptick. According to Sullivan, a still-record-high powder consumption of 127.5 million metric tons was expected in 2006, with ‘07 levels to reach 127.9 million.
McGraw-Hill Construction's annual Construction Outlook report agrees in principle with Sullivan's analysis of the construction market's peaks and valleys and his observation that the positive 2006 situation changed by mid-year. According to McGraw-Hill, it became clear that the boom for single-family housing was deflated, and it was occurring at a faster pace than widely anticipated. On a percent change basis, this year's housing downturn will match what took place in the early 1990s, marking a significant shift from the supportive role played by single-family unit activity over the first half of the decade.
At the same time, said the McGraw-Hill report, other parts of the construction industry in 2006 performed well. The commercial sector saw another healthy amount of store construction, and new hotel projects were up substantially. Office construction strengthened after a slow 2005. And despite the cancellation of many condominium projects, multifamily housing in 2006 ended up about even with 2005. As for public works, highway construction reflected the great funding coming from the multiyear federal transportation bill, offsetting some deceleration for environmental work. And, electric utility construction was on track to register a large increase.
As a result of these ups and downs, McGraw-Hill forecasts the 2007 construction market will result in total construction spending of $668 billion, a 1.0% decline, after a modest 1.0% gain in 2006 business.
Growth in cement intensity holds the key to the 2007 outlook, says PCA, and it is important to note that Sullivan does not expect consumption increases to be shared evenly across the United States. The Great Lakes, Northeast, and Middle Atlantic states, for example, face meager growth conditions and in some cases outright market reduction. In contrast, markets in the South, West, and Mountain regions are expected to achieve somewhat stronger growth rates. This differential in regional growth reflects the relative strength in the regional economies, as well as each state's unique exposure to declines in residential activity.
Supply far outstripped potential demand growth during 2006. Tight supply conditions that characterized the cement market during the previous two years were dramatically reduced or eliminated. According to PCA's recent market survey, only two states saw tight supply conditions in 2006, compared to more than 30 states in 2004 and 2005.
This reduction in market tightness was directly tied to the dramatic growth in import volume recorded thus far in 2006 — now running at a 42-million-metric-tonne annual rate. Compared to 2005's record import level of 33.6 million metric tonnes, import volumes were running more than eight million metric tonnes ahead of 2005. The current import rate implies a supply overhang of more than six million metric tonnes.
Sullivan does not believe the gains in import volume can be sustained, saying that the impressive import gains throughout 2005 and into the first six months of 2006 correlated with favorable global shipping conditions. But on the heels of surging economic growth in China, tight shipping conditions have resurfaced, as can be witnessed by increasing freight rates. Dry bulk carrier rates from Asia to the Gulf Coast have increased 89% since the beginning of 2006 and now stand at more than $50 per ton, with most of these gains having materialized in the past three months of 2006. These increases suggest a more moderate pace of imports through the remainder of 2006 and into early 2007.
According to Sullivan, some industry observers now believe that the US cement market might contract as much as 3% to 4% during 2007. While PCA does not buy into this scenario on a national scale, some regional markets may experience significantly more adverse conditions, particularly those east of the Mississippi River. A recovery in nonresidential and public construction is ongoing. While housing is expected to weaken through 2008, the underlying fundamentals are stronger than the recent sales declines — induced in part by a large speculator withdrawal — suggest.
Sullivan said a confluence of negative factors emerged in the third quarter that generated declines in powder consumption, with some being transitory in nature and whose adverse impact is expected to diminish.
Weather conditions and first-quarter payback: Due to favorable weather, first-quarter consumption in 2006 was up 15.6% over strong 2005 levels. The early seasonal pouring of concrete represented a pull forward of business to the detriment of consumption normally expected later in the year. This may have played a factor in depressing mid-year consumption, particularly in the Northeast where winter weather was unusually mild.
Housing declines: During the past three years, the residential sector accounted for 36% of total cement consumption. During June-August, single-family home sales averaged a 19.3% decline from 2005 levels and starts reflected a 17.3% decline. Given the importance of the residential sector, this suggests a 6.2% draw in cement consumption, which declined 2.3 percent during this period — implying healthy conditions for nonresidential, public and cement intensity. But Sullivan believes that the mid-year declines in housing are unsustainable, explaining the correction in home prices, lower mortgage rates, and improved affordability.
High oil and asphalt prices: The run-up in oil prices that materialized during the summer months may have reduced expected returns on investment and caused a moderation in nonresidential construction activity. More importantly, the high oil prices resulted in an increase in asphalt prices. According to some departments of transportation, a push in highway construction materialized in the spring to beat announced price increases in material costs, particularly asphalt. This implies a pull forward in highway construction activity may have materialized at the expense of activity later in the year.