Despite factors such as increased fuel costs, rising interest rates, continuing powder shortages, and an increase in demand due to hurricane-related rebuilding, the near-term outlook for construction remains positive but with clear signs to “proceed with caution” in the coming year. Economic and industry analysts who gathered in late October as part of Reed Construction Data's BuildingTeam Summit agreed that U.S. construction will continue to grow at a steady 3% to 3.5% during 2006.

Six experts and two panels of industry leaders at the two-day event in Washington, D.C., emphasized innovation in the areas of architectural design, capital investment and business practices as the critical elements necessary for construction to exceed the economic gains projected for the U.S. economy as a whole. Their consensus is that 2006 will continue the economic recovery seen in 2005, despite higher inflation driven by rising fuel costs. It was forecasted that the next two years will see a strengthening economy, accompanied by positive growth for several sectors of the building industry including commercial, public and other nonresidential segments.

Apparently concurring with this analysis is Portland Cement Association Chief Economist Ed Sullivan who put the construction scene in the perspective of cement consumption in his annual Fall 2005 Economic Forecast. “Keep in mind that the expected declines [in home building] will be coming off record 2005 cement consumption of 38.5 million metric tons (mt) in residential,” he says. “Furthermore, consumption gains in nonresidential and public segments are expected to more than offset the marginal declines in residential.”

In addition, PCA expects the rebuilding of New Orleans to begin in earnest during the second half of 2006 — adding further strength to the near-term outlook. Closely in line with its summer, pre-Katrina forecast, PCA projects cement consumption to reach 120 million mt in 2005 and 125 million mt in 2006, reflecting growth of 5.2% and 3.7%, respectively.

“This summer's hurricanes served as trigger points to start slightly slower economic growth,” explains Sullivan. “Higher home heating costs, rising inflation and rising interest rate levels will cause some construction slowdowns. Fortunately, the rebuilding of the Gulf Coast, particularly New Orleans in the latter half of 2006, will help keep cement consumption on track with earlier forecasts, as will increases in public construction.”

According to Sullivan, although rebuilding New Orleans could consume 650,000 to 1.8 million mt each year of an expected five-year process, additional powder imports will not necessarily fill this need. “The slightly more adverse economic environment early in 2006 will act to neutralize the additional cement consumption anticipated from the post-Katrina rebuilding efforts.”

The United States is expected to import 33 million mt of cement in 2005, roughly 27% of total consumption. PCA's fall forecast projects 2006 import levels to reach 35 million mt, in-line with earlier, pre-Katrina estimates.

PCA assumes a complete restoration of the building stock within greater New Orleans, and the potential for building code changes in the aftermath of Katrina could boost material requirements. Code changes have not been incorporated into PCA estimates, adds Sullivan.

Incorporating higher oil prices, inflation and interest rates beyond 2006, Sullivan expects modest 2% to 3% growth per year from 2007 to 2009, the year when cement consumption is forecast to top 140 million mt.

RESIDENTIAL SLOWDOWN

According to McGraw-Hill Construction's 2006 “Construction Outlook” (which anticipates an overall 3% construction increase in 2006), the important construction shift from recent years will be that single-family housing will no longer be a source of expansion. Although this slowdown had been anticipated (and avoided) for 2005, “the weight of evidence is mounting that single-family housing will finally begin a cool down,” says the report.

McGraw-Hill's report forecasts a reduced pace in 2006 for single-family homes in four of the five regions, with the Northeast and Midwest continuing declines in the 2% to 5% range. The South Atlantic is expected to slip about 5%, while the West takes the biggest hit with a 9% drop from a healthy 2005. The South Central region will stand apart with a modest increase, thanks to post-hurricane rebuilding.

Meanwhile, public construction provides the rationale for net gain, although PCA's Sullivan warns that the potential still remains that funds intended for construction and infrastructure building activity may be diverted to a greater extent than anticipated (with some calling for money to go away from highway needs into general taxpayer relief). Still, the passage of the new highway bill is expected to add significant strength to state highway projects in 2006. McGraw-Hill's outlook toward public works anticipates a 7% growth in 2006, after an 8% jump in 2005.

Sullivan adds that slower consumer spending activity and job creation reduce the expected improvement in vacancy and utilization rates, and hence, the expected return on investment — softening the expected growth in nonresidential construction. These signs — coupled with slightly slower revenue growth that implies a possibly tempered public spending scenario — point toward a more hostile outlook toward construction spending than PCA's previous summer forecast.

McGraw-Hill's report also named commercial building activity as finally beginning its recovery in the last year after four years of decline. Commercial is expected to see gains of more than 5% in 2005, with a 9% upturn next year. Institutional construction levels tend to remain more moderate through the construction cycle and are expected to rise about 2% this year before accelerating to more than 4% in 2006.

ASSESSMENT OF U.S.-MEXICAN TRADE AGREEMENT ON CEMENT

The U.S. and Mexican governments have reached an agreement — expected to go into effect in the second quarter of 2006 — regarding the level of U.S. tariffs on Mexican portland cement imports into the United States. This report, released by Portland Cement Association (PCA) Chief Economist Ed Sullivan, provides the latest available information about the arrangement and its potential impact on U.S. cement supply.

The U.S.-Mexican cement import agreement will reduce the tariff on portland cement imports originating from Mexico from $26 per ton to $3 per ton and introduce regional quotas. The total volume of Mexican imports is capped at 3 million metric tons (mt) for the first year of the agreement.

In the second and third years of the agreement, the first-year regional quotas will be increased or decreased by the percent change in apparent consumption of cement for the most recent 12-month period for which data is available compared to the previous 12 months. The maximum adjustment is ± 4.5%. The government agreement allocates Mexican imports among eight U.S. regions. Based on PCA projections for market growth, Table 1 provides an estimate of the permitted import levels by region.

The agreement contains two other provisions: 1). under certain conditions, the quotas can be increased by 200,000 mt for natural-disaster rebuilding, and 2). both governments reaffirmed their commitment to open trade and will fully investigate any specific allegation of a market access barrier or practice that prevents cement from entering either country. Furthermore, both governments with the support of their respective industries have agreed to establish a North American Cement Committee to facilitate trade between the countries. The agreement will expire in three years, at which time all duties and quotas would be completely eliminated for every Mexican cement producer that has not breached the quotas.

Point 1:

The new trade agreement could increase 2006-2008 United States cement supply nearly 1%, and allows Mexican cement producers to initially export as much as 3 million mt of cement annually at a tariff rate of $3 per ton. U.S. imports from Mexico were running at a 2 million mt, seasonally adjusted annual rate (SAAR) through November 2005. At quota maximums, this implies an incremental increase of 1 million mt of additional import supply into the United States market compared to 2005 levels. United States' cement consumption was running at a 120 million mt SAAR and total imports at a 33 million mt SAAR through November 2005. The higher level of Mexican imports represents a 3% increase in total import volume and nearly a 1% total increase in U.S. cement supply.

Point 2:

PCA expects sustained moderate growth in U.S. cement consumption during the next three years. Strong demand conditions have characterized the market during the past two years resulting in a record level of cement consumption in 2005. Gains in nonresidential and public construction activity are expected to outweigh modest declines in residential construction in the years ahead. Rebuilding activity in New Orleans could also add to future cement demand, although the extent of this activity is still unknown. Combined, PCA believes these factors will result in moderate annual growth in U.S. cement consumption during the next three years.

Point 3:

Incremental increases in Mexican imports will supply the southern U.S. markets. States in the southern regions have experienced the strongest demographic, economic, and cement-consumption growth in the United States during the past few years. The potential incremental increase in Mexican import tonnage will be allocated among eight U.S. regions. Areas with tight market conditions have received a higher allocation than other regions. These markets also are characterized by relative ease of logistical access. Therefore, the increased imports from Mexico will be more significant in southern regions.

Point 4:

While the new trade agreement will help, tight supply conditions may persist in the future. Tight supply conditions have materialized in certain regional markets during the past two years. Conservative estimates of cement market growth during the next three years result in at least a 10 million-mt increase in consumption over 2005 levels. The potential increase in Mexican imports of 1 million mt will improve supply conditions, but by itself will not be enough to result in an elimination of concerns regarding future tight market conditions.

Point 5:

In addition to increased imports, domestic investment in plant expansion will help meet market demand. Investment in U.S. cement production facilities remains a major factor in meeting longer term market demand. To this end domestic producers have announced plans to invest nearly $3 billion through 2009. If these plans come to fruition, kiln capacity will increase by 14.66 million mt — roughly a 15.5% increase in existing capacity. Long-term economic growth, however, will result in additional growth in cement consumption and the need for continued investment. Rigidities in local zoning and permitting remain the key hurdle limiting expansion of U.S. cement production capacity.

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

	2004	2005*	2006**	2007**
Total Cement Consumption	119,281	126,143	130,768	134,259
Portland Cement	114,716	120,693	125,138	128,512
Masonry Cement	5,172	5,449	5,630	5,748
Portland Share of Total (%)	95.7%	95.7%	95.7%	95.7%
Cement and Clinker Imports	27,305	33,276	35,234	35,713
Import Share of Total (%)	23.8%	27.6%	28.2%	27.8%
Percent Change
Total Cement Consumption	6.8%	5.2%	3.7%	2.7%
Portland Cement	6.7%	5.2%	3.7%	2.7%
Masonry Cement	9.0%	5.4%	3.3%	2.1%
Cement and Clinker Imports	17.5%	21.9%	5.9%	1.4%
Source: Portland Cement Association *trending **estimated

MEXICAN IMPORT AGREEMENT: ESTIMATED VOLUMES*

	2005	2006	2007	2008
Portland Cement Consumption	120,693	125,138	128,512	131,709
Market Growth (%)	-----	3.7%	2.7%	2.5%
Total Mexican Imports	2,000	3,000	3,110	3,194
Hurricane Relief	-----	0	0	0
Mexican Quota**	-----	3,000	3,110	3,194
Total Mexican Quota		3,000	3,110	3,194
- California	-----	150	156	160
- Arizona	-----	1,250	1,296	1,331
- New Mexico/El Paso	-----	725	752	772
- Rest of Texas	-----	215	223	229
- Louisiana	-----	280	290	298
- Mississippi/Alabama	-----	55	57	59
- Florida	-----	200	207	213
- Rest of United States	-----	125	130	133
Source: NAHB, Nation's Building News * Units of thousand tons. 2007-2008 Volumes Estimated from PCA Market Growth Projections. **Mexican quota is adjusted each year depending upon market growth in the preceding year to a maximum change of ± 4.5%