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% 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%) gains in 2007 after a slightly better 0.6% 2006 uptick. According to Sullivan, a still-record-high powder consumption of 127.5 million metric tons is expected in 2006, with ‘07 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% decline, after a modest 1.0% gain in 2006 business.

POWDER PARAMETERS

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 — 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% 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% to 4% 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 — induced in part by a large speculator withdrawal — 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% 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% of total cement consumption. During June-August, single-family home sales averaged a 19.3% decline from 2005 levels and starts reflected a 17.3% decline. Given the importance of the residential sector, this suggests a 6.2% draw in cement consumption, which declined 2.3% during this period — 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.

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

	2004	2005	2006*	2007**	2008**
Total Cement Consumption	120,060	126,764	127,536	127,889	131,345
Portland Cement	114,889	121,275	122,056	122,457	125,949
Masonry Cement	5,172	5,489	5,480	5,432	5,396
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%
Percent Change
Total Cement Consumption	6.9%	5.6%	0.6%	0.3%	2.7%
Portland Cement	6.8%	5.0%	0.0%	0.3%	2.9%
Masonry Cement	9.0%	6.1%	-0.2%	-0.9%	-0.7%
Cement and Clinker Imports	17.5%	23.2%	14.2%	0.4%	-7.8%
Source: Portland Cement Association			*trending	**estimated

HOUSING AND INTEREST RATE FORECAST

	2004	2005	2006*	2007**	2008**
Total Starts (000)	1,950	2,073	1,844	1,620	1,726
Single-family (000)	1,604	1,719	1,505	1,310	1,395
Multifamily (000)	345	354	339	310	331
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

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% compared to the previous year, and that business volume in Canada will gain 12.7% by year-end. Sales to other worldwide markets for 2006 are anticipated to grow 10.9%.

Looking to 2007, survey participants forecast increases of 3.9% for the U.S. and expect business volume in Canada to increase by 5.0%. They anticipate growth of 6.4% 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.”

Ready mixed,cement business to stay strong through 2010

Despite a slowdown in home building, the market supply for cement and ready mixed concrete is expected to accelerate to meet demands in other end-use sectors, taking the market valued at about $25 million in 2005 to $30 billion in 2010.

According to market research Specialists in Business Information (SBI) cites in its Cement and Readymix Concrete in the U.S. report, sustained growth in commercial, government, and institutional construction, as well as rebuilding efforts in hurricane-damaged areas in the Gulf Coast region, will increase the market supply value of cement by a compound annual growth rate of 4% during the period of 2006 to 2010, with ready mixed showing similar gains at 3% during the same period.

Notes Tatjana Meerman, managing editor of SBI, “As energy and limestone costs continue to rise, and concerns over the environmental impact of manufacturing escalate, the cement industry is responding by investing in more dry-process [production], reducing emissions, and curtailing corporate costs to limit cost increases to the end-user.”

Priced at $3,000, the report contains import/export data, competitive profiles, mergers and acquisitions within the industry, and construction and housing market trends that affect demand and production of cement and ready mixed concrete. It can be ordered through www.MarketResearch.com

World cement usage climbing 130 million tons/year

Led by an expected 8.5% growth in China, worldwide portland cement consumption will increase 5.6% in 2006, followed by a rise of 5.5% in 2007, according to the Portland Cement Association's first-ever international cement consumption forecast. The growth level equates to an average of nearly 130 million metric tons annually.

The report cites growth conditions in the developing world, particularly China, as playing a critical role in consumption trends. About 20% of cement consumption growth will occur outside of China and the industrialized world, mostly in other Asian nations, the Middle East, Eastern Europe, and South America. “While the major developed economies like the U.S. and Western Europe have generally performed well,” says PCA Chief Economist Ed Sullivan, “world economic growth has been characterized by buoyant growth outside these industrial countries.”

During 2002-2005, world cement consumption increased 457 million metric tons, representing a 25% gain. Put into perspective, North American and Western European markets grew by only 35 million metric tons in those four years, accounting for 7.5% of world growth. In contrast, the Chinese market expanded by 327 million metric tons between 2002 and 2005. The 2005 Chinese market is estimated at 1.2 billion metric tons, or 45% of world consumption, and this is expected to grow at an average annual rate of 8.5% (or 90 million metric tons) during the 2006-2007 period.

According to U.S. Geological Survey estimates, production has kept pace with growth in world consumption during 2002-2005 through major capacity expansions across the globe. Three quarters of world production increases during this period materialized in China, with more expansion coming on line during the next several years. At the same time, China also plans for the retirement of 250 million metric tons' capacity tied to old and inefficient vertical kilns.