Although it’s no surprise that his Year-End 2008 Forecast anticipated a severe 2009 downturn, Portland Cement Association’s Chief Economist Edward Sullivan
Although it’s no surprise that his Year-End 2008 Forecast anticipated a severe 2009 downturn, Portland Cement Association’s Chief Economist Edward Sullivan (and most of his peers in other agencies and associations related to the construction industry) did not even come close to predicting just how low cement consumption figures would go. His 88 million-metric ton forecast for year-end 2009 was overly optimistic to the tune of 17 million metric tons, actual consumption trending down roughly 26.6 percent (to 71 million metric tons) from already weak 2008 consumption levels.
PCA expects 2009 will represent this recession’s trough for United States total cement consumption. The cyclical downturn, measuring peak-to-trough, represents a 54 million-metric ton decline from 2005 levels Û the worst volume decline in history. This downturn has coincided with a period of aggressive cement plant expansion and modernization; and, large market imbalances have materialized, resulting in a contraction of import supply, excess inventory accumulation, low utilization rates, extended maintenance downtime, sporadic furloughs for employees, and kiln shutdowns.
While recent economic news regarding third-quarter real GDP growth of 3.5 percent may suggest a technical end of the recession, the conditions facing residential and nonresidential construction are likely to remain critically weak for another year or more. Still, the latest PCA forecast of cement, concrete and construction isn’t all gloom and doom. Sullivan now predicts a 5.0 percent increase in cement consumption for 2010 to bring the metric tonnage to 74.4 million. This is a significant change from Sullivan’s prior-year projection for 2010, which he believed would continue the downward trend. Better still, Sullivan anticipates double-digit growth each year after next through 2013 (2011, up 17.1 percent; 2012, up 14.5 percent; 2013, up 11.9 percent, to 111. 6 million metric tons).
HOUSING A NEUTRAL CONTRIBUTOR
The residential sector has largely run its course as a significant contributor to construction declines, says Sullivan. Yet, the expectation of a slow reduction in home inventories suggests that this sector will be a noncontributor to cement consumption growth through mid-2010. Whatever gains materialize in the meantime will be meager. Since its 2005 peak, residential powder consumption has declined nearly 30 million metric tons, accounting for roughly 55 percent of the total decline in cement consumption.
PCA estimates regarding the timing and magnitude of a residential turnaround remain conservative compared to most construction analysts. Still, beginning in the second half of 2010, Sullivan expects to see the residential sector become a strong contributor to growth in cement consumption.
Supporting this position, McGraw-Hill Construction’s Outlook 2010 report forecasts single-family starts will begin to rise 30 percent to 560,000 units, after a trough of 430,000 units in 2009, 74 percent lower than at the 2005 peak. By comparison, however, the average level of single-family housing starts over the past 15 years was nearly 1.2 million units.
The downturn came much more slowly for multifamily starts than single-family. Multifamily was somewhat shielded by the continued start of large, multi-million-dollar projects that take many years to move through the planning pipeline. In 2009, the deepening economic downturn and continued scarcity in financing are expected to create another 55 percent plunge in multifamily housing, bringing starts down to 140,000 units Û 73 percent off from the 2005 peak. Fortunately, the cycle is expected to bottom out in 2009, and as the economy begins to stabilize in 2010, multifamily housing starts will advance 14 percent to 160,000 units, McGraw-Hill Construction anticipates .
Kenneth Simonson, chief economist for The Associated General Contractors of America (AGC), adds his outlook: I expect single-family homebuilding to rebound sharply, up 20 to 30 percent from a very depressed spending total in 2009. Multifamily will continue to plunge as more people lose jobs and are forced to double up, but also as renters become owners.
NO RELIEF FOR NONRESIDENITAL
Nonresidential construction is expected to continue its sharp decline during 2010, says PCA’s Sullivan. According to contract awards data, new contracts are down 60 percent year-to-date compared to weak 2008 levels. Since the start of the recession, the economy has shed 7.3 million jobs. Of these, office worker job losses total 2.3 million, or about one-third of total jobs eliminated. As the trend continues, occupancy rates will decline and vacancy rates increase.
PCA expects job losses to continue and vacancy rates to rise, eventually reaching 18.5 percent during the first half of 2010. As job creation gains traction, vacancy rates will begin to improve. Sullivan sees office construction activity declining nearly 30 percent in 2009 and another 25 percent in 2010. Second-half 2011 gains are expected to offset first-half losses.
AGC’s Simonson adds, Total nonresidential construction spending put in place will be down 1 to 5 percent in 2010, following a decrease of 3 to 7 percent in 2009. The only private category likely to do well is power, i.e., conventional power plants, wind and solar installations, and transmission lines. By the second half of the year, there should be the beginnings of a pickup in university, hospital and, perhaps, small retail.
Tracking nonresidential construction starts for 2009, Reed Construction Data reports that, despite a 20 percent fall from August to September, the starts trend has recently improved after the plunge in June. Starts averaged 5 percent higher in July-September than in the same period last year.
This trend is consistent with RCD’s forecast, which expects construction spending to drop slightly more in the winter and then recover slowly, changing little well into the new year with a turn to expansion late in 2010.
STATES’ BUDGET WOES STILL HURTING PUBLIC CONSTRUCTION
Given the weak outlook for private-sector work, public construction activity will play an extremely important role in determining the industry’s near-term outlook, according to Ed Sullivan, with highway projects representing the most important factor for cement consumption. The highway construction outlook is expected to be dominated by two competing influences Û American Recovery and Reinvestment Act (ARRA) stimulus spending and deteriorating state fiscal balances.
PCA has become more pessimistic compared to previous forecasts with regard to the net stimulatory impact of public construction for 2010 cement consumption, and its current forecast incorporates larger state deficits and neutralization of ARRA tied to lower state and local spending. Due to delays in the release of these monies, a growing perception within the cement industry is that the stimulus will have no impact on 2010-2011 powder consumption. By contrast, PCA emphasizes the timing issue, rather than completely dismissing ARRA’s potential impact. Even using highly conservative cement intensities, says Sullivan, more than 5 million metric tons of ARRA highway cement consumption should materialize in the second half of 2010 through 2011.
Simonson concurs that categories with the best prospects include highway, water, wastewater, transit and military base realignment. Little of the stimulus money was turned into construction spending this year, he says. Much more will be awarded and spent in 2010. In addition, it is increasingly likely that Congress will pass a ÎjobsÌ bill that will focus on construction. However, federal funding will not be enough to make up for a steep, ongoing drop in private and state and local government-funded construction.
Associated Builders and Contractors Chief Economist Anirban Basu also sees 2010 to be a transitional but sluggish year on the road to recovery. One of the bigger beneficiaries of the ARRA in 2010 will be the public sector, he explains. Public buildings Û particularly courthouses and federal facilities in need of modernization Û will receive a sizable increase next year, due to stimulus funds reaching the market.
Basu also warns forecasters that rising construction costs for the next one to four years could change the construction game more than anyone is anticipating currently. Rising construction costs will be an issue due to a number of global factors, including China’s increasing demand for construction materials, he asserts. Construction firms should prepare for a 4-6 percent growth in [materials] costs per year during the next several years, which is considerably slower than the two-year average for 2008 and 2009.
PROJECTED U.S. POWDER CONSUMPTION (000 Metric Tons)
|2007||2008||2009 *||2010 **||2011 **|
|Total Cement Shipments||114,455||96,543||70,871||74,410||87,124|
|Portland Share of Total||96.3%||96.8%||97.3%||97.4%||97.0%|
|Cement and Clinker Imports||22,729||11,295||5,739||5,700||5,700|
|Import Share of Total||20.6%||12.1%||8.3%||7.9%||6.7%|
|Percent Change (from prior year)|
|Total Cement Shipments||-10.1%||-15.6%||-26.6%||5.0%||17.1%|
|Cement and Clinker Imports||-36.7%||-49.3%||-50.3%||-49.2%||0.7%|
|Source: Portland Cement Association||*trending||**estimated|
LONG-TERM CEMENT USAGE COULD SPELL 100 MILLION-MT SHORTFALL
Although United States’ cement consumption is expected to decline to 71 million metric tons in 2009, compared to near-record 2005 levels of 128 million metric tons, a Portland Cement Association Economic Research 25-year forecast cites market factors that could propel domestic powder demand upwards of 192 million metric tons by 2035.
One of the more startling aspects of this outlook is that consumption trends appear to spell both short- and long-term domestic production shortfalls. Climate-change legislation, plant emissions regulations, and sustained high oil prices are likely to result in the elimination of wet process cement Û approximately 15 percent of all U.S. powder produced Û and could force the closure of a significant portion of domestic mill capacity.
Add to that the likely growth in cement usage even in the next five years (consumption levels are expected to hit 122 million metric tons by 2015), the potential for a 100 million-metric ton domestic supply gap may materialize by 2035. Large investments, in either new import terminals or new domestic capacity, will be required to close the supply gap.
PCA’s long-term outlook shows an aging population, structural changes in world demand for oil and raw commodities, climate impacts on energy prices, and the potential for large federal deficits due to rising costs of entitlement programs will create modest gains in per capita cement consumption. State and local government financial stresses and the potential difficulties in funding public construction projects also will be a factor in future powder consumption. However, new opportunities could emerge for cement as a result of a sustained and large improvement in concrete pavement costs against asphalt alternatives; government policies aimed at energy independence; and, green-building priorities.