A Steeper Slump in Cement Consumption in 2007

Implications: The Portland Cement Association (PCA) is now suggesting a dimmer outlook for construction activity and cement consumption than previously forecast. Cement demand in 2007 had been forecast by the PCA to decline only 1.5%, but is now suggesting a drop of 3%-4% as the more likely scenario. Could this be the beginning of even further downward revisions in the outlook for construction materials demand in 2007? And, perhaps more importantly, how will pricing hold up in the face of declining demand?

Analysis: With data trickling in regarding construction spending in the first part of the year, it is becoming increasingly likely that the housing slump is a greater drag on the construction sector than previously thought. It is also looking more likely that the slump in housing will continue longer than many had anticipated, stretching well into 2008. For the construction materials sector, the good news so far has been continued strength in the non residential construction and public works sectors, which has cushioned some of the blow from the housing slump. Already, the PCA is suggesting that their previous forecast for a small decline in cement consumption is looking more like a moderate decline of 3%-4%. Even this revised outlook might be optimistic. I would expect the first half year over year comparisons (2007 vs. 2006) to reflect double digit declines in cement demand. One can expect similar declines in construction aggregates. However, there will be dramatic regional disparities in this demand picture, with those markets most severely impacted by the housing drop suffering the most (Florida, California, Las Vegas, Phoenix to name a few).

Now that it appears clear that we are in a declining market for construction materials, small or large depending on the region of the country, a more important question might be the possible impact on pricing. Cement, concrete and construction aggregates have all enjoyed significant increases in pricing the last 2 or 3 years. Is this coming to an end? I offer a few observations below relative to the pricing outlook:

Cement: The announced early year price increases are being met with mixed results. The announced price increases are meeting resistance in markets that are being most severely impacted by the residential real estate bust, such as Florida. Markets that are still stable or growing, such as much of Texas and certain Mountain states are likely to experience price increases. The cement industry is cutting back on its supplies of imported cement in response to the market slowdown, which may prevent oversupply in most markets.

Aggregates: Although the market in 2007 is clearly weaker than in the past couple of years, pricing appears to be holding up in most markets. There still appears to be a lot of positive momentum carrying over from 2006 which will favorably impact the first half price data. The fundamentals of the industry may be strong enough to support some additional pricing improvement in 2007.

Concrete: As a very local business, pricing in this sector is likely to be the most volatile. Price declines are likely to be experienced in the markets impacted by a housing collapse. Otherwise, look for concrete pricing to generally follow trends similar to cement.