Reflecting a rather harsh decline in housing starts and conservative estimates regarding nonresidential and public sector growth, total construction activity
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 percent during 2007, according to Portland Cement Association Chief Economist Ed Sullivan at his formal Fall Forecast unveiling in early November. Still, despite this contraction in activity, portland cement consumption is expected to record marginal (about 0.3 percent) gains in 2007 after a slightly better 0.6 percent 2006 uptick. According to Sullivan, a still-record-high powder consumption of 127.5 million metric tons is expected in 2006, with Î07 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 valley 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, says the McGraw-Hill report, other parts of the construction industry in 2006 have performed well. The commercial sector is seeing another healthy amount of store construction, and new hotel projects are up substantially. Office construction is strengthening after a slow 2005. And despite the cancellation of many condominium projects, multifamily housing in 2006 will end up about even with 2005. As for public works, highway construction reflects the great funding coming from the multiyear federal transportation bill, offsetting some deceleration for environmental work. And, electric utility construction is 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 percent decline, after a modest 1.0 percent gain in 2006 business.
Growth in cement intensity holds the key to the 2007 outlook, says PCA, and it is important to note that Ed 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.
As far as market conditions stand, to date, supply has far outstripped potential demand growth during 2006. Tight supply conditions that characterized the cement market during the past two years have been dramatically reduced or eliminated. According to PCA’s recent market survey, only two states have seen tight supply conditions, compared to more than 30 states in 2004 and 2005.
This reduction in market tightness is directly tied to the dramatic growth in import volume recorded thus far in 2006 Û now running at a 42 million metric ton annual rate. Compared to 2005’s record import level of 33.6 million metric tons, import volumes are running more than 8 million metric tons ahead of 2005. The current import rate implies a supply overhang of more than 6 million metric tons.
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 correlate with favorable global shipping conditions. But on the heels of surging economic growth in China, tight shipping conditions have recently resurfaced, as can be witnessed by increasing freight rates. Dry bulk carrier rates from Asia to the Gulf have increased 89 percent 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. These increases suggest a more moderate pace of imports through the remainder of 2006 and into early 2007.
MARKET STRENGTH EROSION
According to Sullivan, some industry observers now believe that the United States cement market may contract as much as 3-4 percent 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 Û induced in part by a large speculator withdrawal Û suggest.
Sullivan says 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 was up 15.6 percent 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 percent of total cement consumption. During June-August, single-family home sales averaged a 19.3 percent decline from 2005 levels and starts reflected a 17.3 percent decline. Given the importance of the residential sector, this suggests a 6.2 percent draw in cement consumption, which declined 2.3 percent during this period Û 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 ROIs 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.
EQUIPMENT MAKERS PREDICT SMALLER 2007 GAINS
Construction machinery manufacturers are anticipating smaller gains in overall industry business in 2007, following expected double-digit growth in 2006, according to the annual outlook forecast conducted by the Association of Equipment Manufacturers (AEM). Growth is expected for U.S., Canadian and worldwide markets, with the strongest 2007 gains anticipated overseas.
Machinery manufacturers participating in the annual AEM outlook survey expect overall construction equipment business in the U.S. to close out 2006 with increases of 11.2 percent compared to the previous year, and that business volume in Canada will gain 12.7 percent by year-end. Sales to other worldwide markets for 2006 are anticipated to grow 10.9 percent.
Looking to 2007, survey participants forecast increases of 3.9 percent for the U.S. and expect business volume in Canada to increase by 5.0 percent. They anticipate growth of 6.4 percent in other worldwide markets in 2007.
Although the U.S. economy is starting to show signs of slowing down, it has displayed surprising resilience, says Gerry Shaheen, 2006 AEM Chairman and a Group President of Peoria, Ill.-based Caterpillar Inc. For construction equipment manufacturing, the U.S. housing market has leveled off, but this has been offset by strength in nonresidential construction, road building and sales to global markets. We are cautiously optimistic that construction machinery sales will continue to grow through 2007, although at a more moderate pace than 2006.
Not surprisingly, the state of the general economy, including interest rate levels and consumer confidence, are top factors expected to influence future sales cited by equipment makers. Housing starts and highway funding will also have a major impact on the continued strength of the industry. Other key issues are steel prices and energy costs.
The strength of the U.S. housing market has certainly been a major factor in the continued business growth of our industry. Higher interest rates have adversely affected this segment with a softening of residential construction, Shaheen adds. Building and repair of highways, bridges and other public works is also a major contributor to overall construction activity, which makes it of primary importance to many equipment manufacturers. The certainty of highway funding for the next few years through passage of SAFETEA-LU legislation in 2005 has been a boon for business.
|Total Cement Consumption||120,060||126,764||127,536||127,889||131,345|
|Portland Share of Total (%)||95.7%||95.7%||95.7%||95.8%||95.9%|
|Cement and Clinker Imports||27,305||33,652||38,443||38,587||35,567|
|Import Share of Total (%)||23.8%||27.7%||31.5%||31.5%||28.2%|
|Total Cement Consumption||6.9%||5.6%||0.6%||0.3%||2.7%|
|Cement and Clinker Imports||17.5%||23.2%||14.2%||0.4%||-7.8%|
|Source: Portland Cement Association||*trending||**estimated|
|Total Starts (000)||1,950||2,073||1,844||1,620||1,726|
|New Single-Family Home Sales (000)||1,201||1,280||1,059||969||1,058|
|Existing Home Sales (000)||5,912||6,170||5,649||5,250||5,700|
|Source: National Association of Home Builders||*trending||**estimated|