After a year in which total housing starts are expected to drop to 1.363 million, things don't look much better in this market for 2008, where the numbers are forecast to plummet 11.9% to 1.2 million, according to National Association of Home Builders projections. NAHB Chief Economist David Seiders anticipates single-family unit starts to show a 50% decline from their peak in the first quarter of 2006 to a trough in next year's second quarter.

Though the outlook for the current housing downswing is bleak — with starts, sales, prices and permits off — some economists are saying they expect the industry to bottom out and start turning around in 2008. Seiders' short-term forecast is based on several assumptions: skillful management of monetary policy by the Federal Reserve, maintenance of solid growth in personal income and employment, a manageable wave of home mortgage foreclosures, and better performance of mortgage markets going forward. However, he observed that the long-term potential for housing activity is good. “By the end of 2009, we may be at a pace of 1.5 million units of new housing production (including manufactured homes),” he explains. “Once we are out of the woods, we should see good growth in front of us — maybe 2 million [units] per year.”

McGraw-Hill Construction's annual Construction Outlook report sees more positives in the 2008 market than some, forecasting an overall drop in U.S. construction spending for next year, fueled by tighter lending conditions and weaker job growth. Against this backdrop, the level of new construction is expected to decline 2%, to $614 billion, following an 8% fall in 2007.

POWDER PLUMMET

Mirroring the NAHB forecast, Portland Cement Association (PCA) Chief Economist Ed Sullivan sees real construction spending contracting in 2007 and 2008. He does not anticipate a recovery in housing starts until mid-2009, with regions experiencing boom/bust conditions to endure a longer recovery. In addition, the prospects of slower economic growth combined with tighter credit conditions are likely to result in a contraction of nonresidential construction activity during 2008. Sullivan expects a more subdued pace of job creation to moderate growth in state revenues and materialize in more subdued growth in public construction activity in 2009 and 2010.

PCA believes the possibility of a recession materializing in the next six months is 40%. It expects the Federal Reserve to reduce the interest rate 75 basis points during the next three quarters. However, if the impact of the sub-prime mortgage crisis is worse than expected and energy costs hit consumers harder, a recession is possible.

“If a recession occurs, construction spending will decline nearly 13%, causing a 10% decline in 2008 cement consumption and decreasing kiln utilization rates to 85%,” said Sullivan. “An additional 3.8 consumption decline would occur in 2009, followed by growth in 2010.”

PCA now expects 2007 cement consumption to decline 6.9%, followed by a 2.5% fall for 2008. Gradually, powder usage is expected to recover in 2009, but volumes are expected to remain below the record levels (set in 2005 and 2006) until 2011. According to PCA's baseline cement consumption scenario, the current peak to trough reflects nearly a 12 million metric ton reduction, or a 9.1% decline (2005-2008). It is likely that domestic capacity increases will outstrip growth in consumption during 2007-2009. Reduction in imports, lower capacity utilization rates and potentially higher-than-desired inventory levels may characterize this period.

Significant increases in clinker capacity are expected to materialize during 2008 — 2012. The U.S. cement industry has announced plans to increase clinker capacity by nearly 25 million metric tons between 2007 and 2012. The aggressive capacity expansion reflects a $5.9 billion investment, which will increase capacity 27% compared to 2006 U.S. clinker capacity. The expansion spans seven greenfield sites and expansion of 18 existing facilities.

The likelihood of weaker near-term cement consumption, coupled with the aggressive expansion in capacity, may result in lower kiln utilization rates. During the height of the past cyclical peak (2005), PCA calculated kiln utilization rates at 95%. These rates could slip to a range of 85% to 87% during 2008 — 2009. A 1.0% reduction in utilization rates translates into a 1 million-metric ton reduction in domestic supply.

Powder import volumes are expected to show a sustained decline throughout most of the forecast — remaining at or below 20 million metric tons. Imports are expected to decline 33% during 2007, followed by an additional 17% reduction in 2008, an 11% drop in 2009, and a 5% fall in 2010. The expectation of stronger consumption leads to a small increase in imports by 2011, according to PCA's forecast, however, the likelihood of sustained high freight rates adds downside risk to these import projections.

Increases in demand for seaborne trade have pushed freight rates to record levels. Through September, rates from Asia to the United States have increased $17 per ton, or 31%, since a year ago. Transatlantic freight rates have reached nearly $16 per ton, or 52%, since 2006. While dry-bulk freight rates are highly volatile, PCA believes that further tightening may materialize during the next two years or longer.

CONSTRUCTION DURESS

According to PCA, real construction spending is expected to decline 3.9% in 2007 and 3.7% during 2008, leading Ed Sullivan to expect the residential building recession to continue into 2009. Given the number of expected housing starts through 2008, plus the unsold home inventory, likely foreclosure rates and new structural lending restraints on home purchases, PCA does not believe a recovery in starts activity will materialize for at least another six quarters. Critical cement-consuming states that fully participated in the housing boom, such as Florida and California, may not see a housing recovery until 2010.

In past forecasts, strong sustained growth in nonresidential construction was expected to cushion the adverse impact on cement consumption arising from housing sector weakness. While the potential still exists for this scenario, PCA now expects a modest decline in nonresidential construction to materialize in 2008, compared to strong 2007 levels.

Year-to-date, real nonresidential put-in-place construction spending is 17% above 2006 levels. In contrast, Dodge contract awards data has shown declines in nonresidential construction activity for 10 consecutive months. Nonresidential construction activity is highly sensitive to changes in broader economic conditions and can result in rather sudden and dramatic changes in volume.

McGraw-Hill's Construction Outlook finds some positives in 2008. Transportation projects should continue to see moderate growth amid a renewed emphasis on infrastructure maintenance and upgrades, particularly in the aftermath of the I-35W bridge collapse in Minneapolis. Financing from public sources will stay generally supportive, and the growth of public-private partnerships also offers the potential for greater funding. Finally, growth in “green” construction practices means that the demand for sustainable building design and materials will continue to rise.

The report also highlights institutional building, which it says will rise 4% in dollar volume, while square footage edges up 1.0%. School construction is poised to strengthen again after its 2007 pause, and transportation terminals also are expected to grow. The other institutional structure types, including healthcare facilities, will see a modest loss in momentum. In addition, manufacturing buildings will retreat 11% in dollar volume, after a 40% surge in 2007 that featured the start of several unusually costly projects plus a large number of ethanol plants. Square footage for manufacturing buildings in 2008 is expected to advance 5%.

PROJECTED U.S. POWDER CONSUMPTION (000 METRIC TONS)

2005	2006	2007*	2008**	2009**
Total Cement Consumption	128,035	127,251	117,995	115,464	118,399
Portland Cement	122,546	121,850	113,463	111,017	113,848
Masonry Cement	5,489	5,401	4,532	4,447	4,551
Portland Share of Total	95.7%	95.8%	96.2%	96.1%	96.2%
Cement and Clinker Imports	33,652	35,895	24,659	20,257	18,099
Import Share of Total	27.5%	29.5%	21.6%	18.2%	15.9%
Percent Change
Total Cement Consumption	5.6%	-0.7%	-6.8%	-2.5%	2.5%
Portland Cement	5.6%	-0.6%	-6.4%	-2.5%	2.6%
Masonry Cement	6.1%	-1.6%	-15.7%	-2.2%	2.3%
Cement and Clinker Imports	23.2%	6.7%	-31.3%	-17.8%	-10.7%
Source: Portland Cement Association *trending **estimated

HOUSING ACTIVITY FORECAST

2005	2006	2007*	2008**	2009**
Total Starts (000)	2,073	1,812	1,363	1,180	1,320
Single-family (000)	1,719	1,474	1,072	911	1,025
Multifamily (000)	354	339	291	269	295
New Single-Family Home Sales (000)	1,279	1,049	809	781	877
Existing Single-Family Home Sales (000)	6,182	5,708	4,977	4,525	4,950
Source: National Association of Home Builders *trending **estimated

PCA LONG-TERM FORECAST: CEMENT CONSUMPTION UP 43% BY 2030

By 2030, the U.S. population is expected to grow by 63 million (or 21%), reaching 363.5 million, according to the U.S. Census Bureau. Supplying the needed housing, buildings, and roads will lead to a 43% growth in U.S. cement consumption by that year. According to Edward Sullivan, Portland Cement Association chief economist, annual cement consumption will hit 183 million metric tons, reflecting a nearly 56 million-metric ton increase compared to the past cyclical peak level in 2005

Sixty three million more people will be living in the United States in 2030 and they will need homes, schools, hospitals, and roads. This construction will boost demand for cement to record levels. While 50% of the rise in cement consumption is due to population growth, the remaining half will be driven by per capita cement consumption.

One sector that Sullivan predicts will incur large growth is highway construction. Today, this segment accounts for 30% of total annual cement consumption. To meet the demand of the expected additional 49 million drivers, at least 400,000 additional lane miles of highway must be added by 2030. Efforts to reduce congestion and wasted fuel (and its associated emissions) could further increase the number of miles.

Additionally, energy and environmental concerns are predicted to boost cement intensities, the tons of cement per dollar of construction activity. For example, houses built with insulating concrete form walls (ICFs) can require up to 44% less energy to heat and 32% less energy to cool than comparable frame homes. As more homeowners and builders seek energy efficient houses, the insulated concrete wall market share is expected to increase to 30% all new homes, compared to its seven percent share today. “If these ‘green’ conditions materialize residential concrete construction will add roughly eight million metric tons to the cement intensities in 2030,” Sullivan said.

While the industry has been expanding modestly during the past few years, significant increases in capacity are expected to materialize during 2008-2012. The U.S. cement industry has announced plans to increase clinker capacity nearly 25 million mt between 2007 and 2012, reflecting a $5.9 billion investment that will increase capacity 27% over 2006 clinker capacities and affects 25 plants with a mix of greenfield sites (7), as well as expansions of existing facilities (18).

After the current wave of upgrades is completed, and acccounting for limestone additions, domestic cement supply is expected to reach 114 million mt. With U.S. cement consumption expected to reach 183 million mt by 2030, this implies a 69 million-mt shortfall in supply, suggesting increases in domestic production and import volume will be required. If the supply gap is completely filled with imports, import share would rise from roughly 20% currently to 38% by 2030, requiring significant new investment in import terminals from 2015 to 2030. PCA estimates current import terminal capacity at 40 million mt. Without further investment, a 29 million-mt shortfall in terminal capacity would materiazlize by 2030.