Is the end of economic growth and the unprecedented cement consumption that marked the 1990s actually in sight? The answer depends on who you ask. A look at economic indicators and construction activity and spending offers telling and sometimes conflicting accounts of what's to come in 2001 and beyond.

In his report to attendees at International Cement 2000 in Charleston, S.C. last December, Portland Cement Association Chief Economist William Toal said that there were already signs of economic slowdown. Auto sales and residential construction, two common indicators, have already slipped off. Manufacturing activity also has started to weaken. Combined with gyrations in the stock market, which took its toll on consumer confidence, we may be looking at the beginning of economic weakness. Toal believes that all of these factors, combined with recently announced poor corporate profit announcements and tightening of bank lending practices, will slow business capital spending.

Rising petroleum and natural gas prices, interest rate changes, stock valuations, weak holiday retail sales, record high foreign trade deficit are all fluctuating factors that could have a serious impact on economic forecast for 2001.

Toal does not anticipate a full-fledged recession in 2001, only a significant slowing in economic activity.

According to Toal, total cement consumption is expected to hit 110.5 million mt in 2000, up 1% from 1999 levels, with 2001 seeing a fractional (0.5%) increase to 111 million mt. Imports in 2000 dropped 4.5% to 28 million mt, with an additional 16.1% drop forecast for 2001.

Toal expects the Canadian cement marketplace to improve slightly as well in 2001, increasing from an expected 2000 portland cement consumption of 8.4 million mt to 8.5 million mt in 2001. Toal listed rising housing starts, nonresidental building, and government construction projects for the improvement. Meanwhile, cement exports from Canada are expected to drop gradually over through 2004 to about 4 million mt.

Construction outlook All three major areas of construction - residential, private nonresidential, and public construction - have been full partners in pushing construction activity to new record levels in what has become the longest economic expansion in history. Compared to past construction recoveries where activity accelerated to levels that were non-sustainable, this construction expansion has been moderate and steady. Supply and demand in most construction markets are at or near balance, a fact that could be good news when examining construction activity in the near future.

Residential construction may be the one major area on construction where some downward adjustment could occur, according to Toal. Housing starts already have retreated from the higher levels of 1999 and early 2000. Most of the decline has occurred in the single-family construction market. Multifamily construction, which has shown little if any recovery, should hold near 2000 levels in 2001, with a chance of a slight increase. Overall, housing starts should run near 1.6 million units in 2000 and then slip to 1.45 million units in both 2001 and 2002.

Private nonresidential construction after several years of expansion dipped slightly in 1999. Still, no significant decline in nonresidential construction should occur as most of these markets are in supply and demand balance. Office vacancy rates have dropped below 9% from more than 20% in the early 1990s. Therefore, office construction should remain one of the stronger areas of nonresidential construction in 2000 and 2001.

Another area that should show outstanding growth is school construction. Demographics show that the primary and secondary school age population is on the rise again, and there is a desperate need for both new school construction and remodeling of existing facilities. Countering these strong markets is an expected downturn in hotel construction.

Retail building should slow with the economy. Industrial construction, which dropped sharply in 1999 but recovered throughout 2000, is expected to slow in 2001 as a result of the recent weakness in manufacturing. Overall, private nonresidential construction, after a strong rebound in 2000, is forecast to be flat for both 2001 and 2002, according to Toal.

Public construction continues its run as a strong and steady area. State and local government budgets are in the best condition in years. Therefore, these units of government have the ability to fund major public works programs. The passage of two pieces of federal legislation also will continue to support increases in public works construction. In 1998, the TEA-21 highway and bridge construction bill was passed and was finally starting to have an impact on the industry at year's end. Early in 2000, a new bill was passed at the federal level (AIR-21) that increases airport construction funding. While highway construction in 2000 was below expectations, these pieces of legislation should lead to a sizable increase in public construction down the road.

The American Road & Transportation Builders Association (ARTBA) believes the highway construction market will grow 7% to 10% in 2001 thanks to more than $30 billion in federal funding. State transportation departments will get a $3.1 billion "revenue aligned budget authority bonus" for FY2001, due to the strong growth of gas tax revenues into the Highway Trust Fund. This amounts to each state receiving about 10% more federal aid for its core highway programs in 2001 than the 1998 highway act promised, according to ARTBA.

Other special highway-related projects include: $1.37 billion for a list of 91 congressionally earmarked new demo projects; $600 million for the replacement of the Woodrow Wilson Bridge in Washington, D.C.; and $720 million to compensate states for emergency repairs to highways damaged by natural disasters.

ARTBA mentioned certain factors that could impact or slow market growth including litigation aimed at stopping highway projects in a few areas around the country, inadequate staffing levels at some state departments of transportation, a shortfall of matching funds or a reduction of states funding for highway programs in some states, and a reluctance by some states to outsource preliminary engineering to the private sector.

The outlook for total construction is for a minor pullback but it should remain at near record levels. A 2% decline is forecast by Toal for 2001 after a 3% rise in 2000. Construction should begin to recover again by 2002 from this small dip.

Industry activity Against a background of a softening economy (but no actual economic downturn yet) and an expected dip in 2001 construction spending, what is the outlook for the U.S. cement industry? First, the construction drop is not all that it appears to be. The less cement-intensive residential construction area will drop slightly while the more cement-intensive public works construction areas should continue to rise. As a result, cement consumption should hold up better than overall construction. Also, over the past few years the use of cement relative to total construction activity has trended upward. At least some of this increase is related to the promotional efforts of the cement industry. The pay back for promotion should continue for many years to come.

The current PCA forecast projects portland cement consumption to rise 1.1% in 2000 to 106.1 million mt. A smaller increase of 0.7% to 106.9 million mt is anticipated for 2001.

By the final year of the forecast period (2004) consumption is expected to reach 114.3 million mt. Each year should bring a new record level of activity, and no decline is projected in that time.

But certain wild cards may come into play. For example, blended cement from fly ash to slag cements are being used more and more. While some of this falls under the heading of portland cement, much does not.

The forecast for masonry cement is not quite as good. Tied closely to the residential construction market, masonry cement consumption is expected to slip in tandem with that area. A 1.5% decline is forecast for 2000. Declines also are expected in 2001 and 2002 before recovery begins, said Toal.

Capacity squeeze With record levels of cement demand, the industry was caught in a tight capacity squeeze, and, not surprisingly, operating rates in the industry are at record highs. The industry has met the high levels of demand by sourcing cement from other parts of the world. Imports of cement and clinker rose to 29.3 million mt in 1999. Imports from Canada have always been a source of supply for U.S. markets, but increasingly imports from Asia have become important avenues for product. The largest exporter of cement to the U.S. market today is Thailand (with nearly 4.2 million mt in 2000), followed closely by Canada (just under 3.2 million mt in 2000), and China/Taiwan (2.26 million mt).

The U.S. cement industry responded to the strong record levels of demand in another way. While imports act as the short-term solution, new domestic capacity is expected to take care of the long-term issues. Today, new capacity expansion programs are announced that could add up to 27 million mt of new industry capacity. Several of these modernizations are greenfield plants. Several of these projects were completed in 1999 and 2000, totaling more than 6 million mt of new capacity. The presumption is that as this capacity continues to be added, imports will decline.

Therefore, the forecast for cement and clinker imports is expected to drop to 28 million mt in 2000, and 23.5 million mt in 2001. Further declines to near 20 million mt will continue through 2004.

It is interesting to note that a large proportion of the imports coming into the United States today are being brought in by domestic producers who are adding to their own domestic capacity. Also, the imports that have surged into the U.S. market during the past three years from the Asian countries may not always be there as these countries' economies continue to recover and delayed construction projects are restarted.

Regional patterns Through September 2000, portland cement consumption in the West North Central states (Iowa, Kansas, Minnesota, Missouri, Nebraska, and North and South Dakota) was showing the greatest improvement (up 6.2%) compared to the same period in 1999. But it was the South Atlantic states (the east coast states from Delaware to Florida) that had consumed the most portland cement (14.8 million mt through September, up 4.2% from the same period in 1999), making this region the third most improved year-over-year behind New England (up 5.1%).

Only the East South Central states (Alabama, Kentucky, Mississippi, and Tennessee) were showing a slight drop in portland cement consumption, down 0.3% through September. Other regional improvements in the first three quarters of 2000 included the Middle Atlantic states (up 3.6%); East North Central (up 0.8%); West South Central (up 2.6%); Mountain (up 3.8%); and Pacific (up 4.0%). Overall through September 2000, U.S. portland cement consumption had increased 3.3% compared to the same period in 1999. Masonry cement through September 2000 had gone up only 0.2% compared to 1999 figures.

Interviews conducted by Cement Americas with producers in California seem to support PCA's forecast of small if any improvements to cement consumption in 2001. Cement companies in Northern California cited airport expansion and various highway and bridge improvement projects as being driving forces in the near future, but forecasts from these producers ranged from down 3% to up 3% in 2001 with prices falling as much as 10% in some areas. One respondent said that business generated by highway work was being undercut by a decreased number of residential and commercial projects.

Several states in the East North Central part of the country experienced mostly flat or mildly improved business in 2000 and were anticipating 1% change in 2001. Some named higher interest rates and loss of consumer confidence as the primary reason for the stagnant state of affairs.