The cement industry currently is engaged in an aggressive $6 billion capacity expansion: new clinker capacity of more than 4 million metric tons (mt) was projected to come on line in 2008, with an additional 10 million mt of new clinker capacity expected to come on line during 2009. Further expansions are planned for the years beyond, bringing total clinker capacity expansion to 25.5 million mt by the end of 2012. Overall, this investment will increase capacity more than 25% over 2007 levels. The expansion affects 25 plants, comprising a mix of seven greenfield sites and upgrades at existing facilities (see tables).

The capacity expansion coincides with the onset of an economic recession. In the context of aggressive capacity expansion, cement consumption is expected to experience a 30 million-mt cyclical peak (2005) to trough (2009) decline. Imbalances are expected to characterize the market during the next three years, resulting in elevated inventories, import reductions, prolonged maintenance downtimes, lower kiln utilization rates, accelerated retirement of wet kilns, and potential postponement or delay in planned commissioning dates for new plants.

INDUSTRY DYNAMICS: 2007

During 2007, cement consumption recorded a decline of roughly 11 million mt. At the same time, slightly more than 600,000 tons of new cement capacity came on line. The resulting potential market imbalance — estimated at 11.6 million mt — was completely absorbed by a 14 million-mt reduction in imports. Thus, a large build-up in inventories or reduced kiln utilization rates was minimized, despite regional variations.

INDUSTRY DYNAMICS: 2008

Portland Cement Association (PCA) predicted a 12 million-mt decline in cement consumption during 2008. Simultaneously, eight plant expansions and two greenfield plant developments were expected to contribute to a 4.2 million-mt capacity increase. (While some plants were commissioned in late 2007, much of the supply impact materialized in 2008.) The potential market imbalance for 2008 was estimated at 16.2 million mt, yet import reductions again would play a critical role in absorbing potential market imbalances, according to PCA.

Import volume during 2008 was expected to decline from 22.5 million to 9 million mt, reflecting a 13.5 million-mt reduction in supply. Contributing to the decline in imports were continued high freight rates, as well as depressed market conditions. PCA's baseline projections reflected a 60% reduction in import volume from depressed 2007 levels. In the event that cutting imports failed to achieve a complete absorption of market imbalances during 2008, PCA noted, longer kiln maintenance downtime, lower kiln utilization rates, and higher inventories would characterize the industry.

INDUSTRY DYNAMICS: 2009

During 2007-2008, import reductions played a key role in sheltering the industry from the need to make difficult decisions regarding extended kiln shutdowns and strategies to deal with a significant build-up in inventories. PCA believes little shelter by way of further import reductions will be forthcoming in 2009.

Cement consumption is expected to decline by another 6 million mt during 2009. An additional 10 million mt of new capacity is planned to come on line during the year. The expansion includes three greenfield plants with capacity totaling 6 million mt and five plant expansions accounting for the remainder. The potential market imbalance for 2009 is estimated at 16 million mt.

Since import volume already has been cut 75% from 2006 levels, further reduction in imports will not provide as much relief from market imbalances as in previous years. Consequently, reduction in capacity utilization rates and longer kiln downtimes are expected to absorb market imbalances that emerge. Additionally, higher inventory levels are likely to materialize.

According to PCA estimates, utilization rates may drop 10% during 2009 to restore market balance. That decline in utilization rates may be partially offset by an acceleration in retirement of older wet kilns. Roughly 14 million mt of wet-kiln capacity was in place at the end of 2006. Compared to dry kilns, wet kilns are typically less efficient and high energy users; thus, wet-kiln capacity has been declining at a rate of roughly 2 million mt annually. PCA's conjecture that at least a portion of market imbalances emerging in the next two years will be absorbed by an accelerated pace of wet kiln capacity retirements is highly plausible in view of high energy prices and the prospects of climate-change legislation that will raise clinker production compliance costs.

INDUSTRY DYNAMICS: 2010

Sustained improvement in economic conditions will gradually translate into stronger cement consumption, PCA predicts, targeting the second half of 2010 for strong consumption growth. By the second half of 2010, all regions of the United States are expected to experience a recovery in housing — with many areas reflecting double-digit growth. Nonresidential construction, too, is expected to begin its recovery at that time. Finally, after more than a year of job growth, the fiscal 2011 state budget outlook will improve, leading to stronger growth in public construction activity.

While 2010 contains upside risks, cement consumption is expected to increase by 2 million to 3 million mt. At the same time, more than 5 million mt of new capacity is expected to come on line. The anticipated net result is roughly a 2 million- to 3 million-mt supply overhang during 2010. Further reductions in plant utilization rates and inventory build-up are expected to absorb the anticipated market imbalance.

While PCA believes this scenario has a 50% chance of materializing, year 2010 represents a sufficiently long time horizon for cement companies planning expansions to postpone plant commissioning until stronger demand materializes in 2011. The advisable postponement of one or two plant commissionings, allowing capacity growth to match anticipated growth in cement consumption, suggests a trough point in kiln utilization rates may be achieved in 2009. Somewhat slower improvement in kiln utilization rates is seen to materialize in 2011 and beyond.

INDUSTRY DYNAMICS: 2011 AND BEYOND

Strong growth rates in cement consumption are anticipated beyond 2010. If PCA is correct in its assessment, residential, nonresidential, and public construction will record synchronized growth — a condition consistent with strong growth rates in cement consumption. Given the magnitude of the 2007-2009 decline, strong growth rates in cement consumption may materialize in the years 2011 and beyond. In this context, plant utilization rates are likely to improve significantly, leading the way for an eventual increase in import volumes.

The Capacity Expansion Update report was provided by Portland Cement Association Chief Economist Ed Sullivan, esullivan@cement.org.

NET CAPACITY EXPANSION ESTIMATES, BY YEAR OF ESTIMATED COMPLETION
(Clinker, Thousands of Metric Tons)

				Net Expansion
Company	Location	Year On Stream	Capacity	2008	2009	2010	2011	2012	Total
Total Expansion				4,155	9,954	5,677	2,887	2,812	25,484
- Estimated Dollar Investment ($ Millions)				$993	$2,378	$1,356	$690	$672	$6,088
2007
Eagle Materials	LaSalle, Illinois	2007	0	0	0	0	0	0	0
GCC of America	Pueblo, Colorado (G)	2007	825	825	0	0	0	0	825
Texas Industries	Oro Grande, California	2007	675	675	0	0	0	0	675
2008
American Cement	Sumterville, Florida (G)	2008	990	495	495	0	0	0	990
Buzzi Unicem	Festus, Missouri	2008	900	450	450	0	0	0	900
Continental Cement	Hannibal, Missouri	2008	540	540	0	0	0	0	540
Eagle Materials	Laramie, Wyoming	2008	360	90	270	0	0	0	360
Eagle Materials	Fernley, Nevada	2008	450	113	338	0	0	0	450
Essroc Cement	Martinsburg, W.V.	2008	630	315	315	0	0	0	630
Giant/Keystone	Bath, Pennsylvania	2008	270	203	68	0	0	0	270
Cemex	Brooksville, Florida	2008	900	450	450	0	0	0	900
2009
Ash Grove Cement	Foreman, Arkansas	2009	630	0	180	450	0	0	630
Cemex	New Braunfels, Texas	2009	990	0	990	0	0	0	990
California Portland	Rillito, Arizona	2009	900	0	450	450	0	0	900
Drake Cement	Paulden, Arizona (G)	2009	594	0	594	0	0	0	594
Florida Rock	Newberry, Florida	2009	675	0	675	0	0	0	675
Holcim Cement	St. Genevieve, Mo. (G)	2009	3,960	0	2,700	1,260	0	0	3,960
Sumter Cement Co.	Center Hill, Florida (G)	2009	1,350	0	1,350	0	0	0	1,350
Texas Industries	New Braunfels, Texas	2009	1,260	0	630	630	0	0	1,260
2010
Houston American	Perry, Georgia (G)	2010	810	0	0	405	405	0	810
Lafarge	Exshaw, Alberta	2010	891	0	0	446	446	0	891
Lafarge	Grand Chain, Illinois	2010	1,643	0	0	821	821	0	1,643
Lafarge	Harleyville, S.C.	2010	1,260	0	0	630	630	0	1,260
National Cement	Ragland, Alabama	2010	1,170	0	0	585	585	0	1,170
2012
Cemex	Seligman, Arizona (G)	2012	1,710	0	0	0	0	1,710	1,710
Lehigh	Mitchell, Indiana	2012	1,102	0	0	0		1,102	1,102
Net North American Capacity Changes				4,155	9,954	5,677	2,887	2,812	25,484
Net United States Capacity Changes				4,155	9,954	5,231	2,441	2,812	24,593
Net Canadian Capacity Changes				0	0	446	446	0	891
(G) designates a greenfield plant. All other listings reflect expansions.
Source: Portland Cement Association (updated 4-4-08)

NET CAPACITY EXPANSION ESTIMATES, BY REGION
(Clinker, Thousands of Metric Tons)

			Net Expansion
Company	Location	Year On Stream	Capacity	2008	2009	2010	2011	2012	Total
Total Expansion				4,155	9,954	5,677	2,887	2,812	25,484
- Estimated Dollar Investment ($ Millions)				$993	$2,378	$1,356	$690	$672	$6,088
New England
Middle Atlantic
Giant/Keystone	Bath, Pennsylvania	2008	270	203	68	0	0	0	270
Subtotal			270	203	68	0	0	0	270
East North Central
Eagle Materials	LaSalle, Illinois	2007	0	0	0	0	0	0	0
Lafarge	Grand Chain, Illinois	2010	1,643	0	0	821	821	0	1,643
Lehigh	Mitchell, Indiana	2012	1,102	0	0	0	0	1,102	1,102
Subtotal			2,744	0	0	821	821	1,102	2,744
West North Central
Buzzi Cement	Festus, Missouri	2008	900	450	450	0	0	0	900
Continental Cement	Hannibal, Missouri	2008	540	540	0	0	0	0	540
Holcim Cement	St. Genevieve, Mo. (G)	2009	3,960	0	2,700	1,260	0	0	3,960
Subtotal			5,400	990	3,150	1,260	0	0	5,400
South Atlantic
American Cement	Sumterville, Florida (G)	2008	990	495	495	0	0	0	990
Essroc Cement	Martinsburg, W.V.	2008	630	315	315	0	0	0	630
Cemex	Brooksville, Florida	2008	900	450	450	0	0	0	900
Florida Rock	Newberry, Florida	2009	675	0	675	0	0	0	675
Sumter Cement Co.	Center Hill, Florida (G)	2009	1,350	0	1,350	0	0	0	1,350
Houston American	Perry, Georgia (G)	2010	810	0	0	405	405	0	810
Lafarge	Harleyville, S.C.	2010	1,260	0	0	630	630	0	1,260
Subtotal			6,615	1,260	3,285	1,035	1,035	0	6,615
East South Central
National Cement	Ragland, Alabama	2010	1,170	0	0	585	585	0	1,170
Subtotal			1,170	0	0	585	585	0	1,170
West South Central
Ash Grove Cement	Foreman, Arkansas	2009	630	0	180	450	0	0	630
Cemex	New Braunfels, Texas	2009	990	0	990	0	0	0	990
Texas Industries	New Braunfels, Texas	2010	1,260	0	630	630	0	0	1,260
Subtotal			2,880	0	1,800	1,080	0	0	2,880
Mountain
Eagle Materials	Laramie, Wyoming	2008	360	90	270	0	0	0	360
Eagle Materials	Fernley, Nevada	2008	450	113	338	0	0	0	450
California Portland	Rillito, Arizona	2009	900	0	450	450	0	0	900
Drake Cement	Paulden, Azrizona (G)	2009	594	0	594	0	0	0	594
GCC of America	Pueblo, Colorado (G)	2009	825	825	0	0	0	0	825
Cemex	Seligman, Arizona (G)	2012	1,710	0	0	0	0	1,710	1,710
Subtotal			4,839	1,028	1,652	450	0	1,710	4,839
Pacific
Texas Industries	Oro Grande, California	2007	675	675	0	0	0	0	675
Subtotal			675	675	0	0	0	0	675
Canada
Lafarge	Exshaw, Alberta	2010	891	0	0	446	446	0	891
Subtotal			891	0	0	446	446	0	891
Net North American Capacity Changes				4,155	9,954	5,677	2,887	2,812	25,48
(G) designates a greenfield plant. All other listings reflect expansions.
Source: Portland Cement Association (updated 4-4-08)