Although in his July Mid-Year 2008 Forecast, Portland Cement Association Chief Economist Edward Sullivan stated his belief that the current massive cement consumption decline would last only four years (2006-2009) and see levels fall by 30 million metric tons, his end-of-year outlook painted a much bleaker picture.
The weak economy and tight credit conditions, coupled with severe job losses and the resulting decline in state government revenues, will translate into significant weakness for the construction industry through 2010. Sullivan is adjusting his cement consumption forecast further down, with 2010 levels off 33%, or 42 million metric tons, against the industry's record figures in 2005.
The latest PCA forecast of cement, concrete, and construction predicted a 12.8% decline in cement consumption in 2008 — to dip just under the 100 million metric ton mark, followed by 11.9% and 2.1% declines in 2009 and 2010, respectively. Sullivan predicted a recovery to begin in 2011 with a 10.3% increase compared to 2010 consumption, and a return to near-record consumption levels (of about 115 million metric tons) by 2013.
The PCA report cites the continued drop in residential starts and erosion of strong fundamentals supporting nonresidential construction as major factors leading to reduced cement consumption. The weak economy also has affected the public construction sector. PCA expects cement consumption in residential to decline 31.7% in 2008 and 16.9% in 2009, but a rebound of the market in the second half of 2010 will lead to a 12.1% housing sector increase for the year. Consumption in the nonresidential sector is expected to decline 22.2% in 2009, and the public sector will see 6.6% declines in 2009 and 2010.
Not drastically different than PCA expectations for the coming year, McGraw-Hill Construction's annual Construction Outlook report forecasts a drop in overall US construction starts for 2009, as the tough funding environment continues, construction projects are deferred, and financial stress gradually eases. Against this backdrop, the level of construction starts in 2009 is expected to decline 7.0%, to $515 billion, following a 12% decline predicted for 2008.
“The speed and scope of events in September and October were startling,” said Robert Murray, vice-president of economic affairs for McGraw-Hill Construction at a 2008 conference in Washington DC. “Tighter lending standards are a major constraint for the construction industry. For single family housing, declines are continuing and showing no sign of an upturn. Home prices are continuing to drop, a 20% drop so far this year, and we expect another 10% decline through the first half of 2009. Then, things should level off. Store construction has taken the biggest hit — we're looking at a 30% decline in retail square footage starts this year.”
Even the Department of Commerce is predicting a 7.5% decline in total new construction put-in-place in 2009, following last year's 6.3% drop.
National Association of Home-builders Chief Economist David Seiders says he believes the recent downward momentum in housing markets is bound to extend into 2009, “aided and abetted by a weakening national economy and stringent financial market conditions. And, of course, there is still a daunting overhang of vacant housing units on both for-sale and for-rent components of the housing market.”
NAHB trimmed its estimates of new-home sales and housing starts for the fourth quarter of 2008 and for 2009, with housing starts posting their fourth consecutive year of double-digit declines, plus another 16.2% drop this year. This means that the housing production component of GDP (residential fixed investment) will continue to put heavy downward pressure on US economic activity through mid-2009 and will provide only mild support to GDP growth in the second half of the year. But, that switch in direction is essential to the beginnings of economic recovery in the latter part of 2009.
PCA's Sullivan agrees: “Lacking a recovery in the pace of home sales, inventories will remain elevated. Home builders typically do not accelerate starts activity until inventory reaches at least five months' supply. Based on five months' supply of desired inventory, excess inventory is estimated at two million homes. Continued cutbacks in starts and marginal gains in sales are expected to be more than offset by increases in sub-prime foreclosures added to the market during 2008 and early 2009. As a result, inventory levels are expected to remain in excess of 10 months' supply throughout 2009. Desired months' supply is not expected to be reached until the second half of 2010.”
This toxic mix of weak economic conditions, tight credit conditions, tepid sales, and high inventories resulted in PCA's single-family starts projection of a 40% decline for 2008, followed by an additional 16% decline in 2009. Many expect a recovery in housing to begin sooner.
Total cement consumption was expected to decline by 14.6 million metric tons in 2008. Most of this decline (10 million metric tons) was attributed to the drop in residential construction. PCA expects total cement consumption will decline by an additional 11 million metric tons during 2009. Roughly 4 million metric tons is attributed to weakness in residential construction. While the adverse impact of residential woes on cement consumption is expected to dissipate in 2010, the sector is not expected to become a significant contributor to growth until 2011.
McGraw-Hill Construction believes single-family housing for 2009 will be down 2% in dollars, corresponding to a 4% drop in the number of units to 560,000 (McGraw-Hill Construction basis). Multifamily housing will retreat 6% in dollars and 8% in units, after the sharp plunge witnessed during 2008.
Nonresidential construction activity is closely tied to economic activity; and, the strong fundamentals supporting nonresidential construction collapsed in 2008. As the economy softens, the expected return on commercial investments will decline — reducing the incentive to invest. This, coupled with a tightening in commercial credit standards, suggests that nonresidential construction will decline. Indeed, the backlog of projects under contract has been depleted. Contract awards are off 33% year-to-date. If past trends hold, the percentage declines now materializing in contract awards data may materialize with similar intensity for put-in-place data during 2009.
Once nonresidential construction declines, it typically takes 18 months for a recovery to materialize from the onset of better economic conditions. Unfortunately, PCA now expects the current economic weakness will be longer lasting. This implies that nonresidential construction will probably record further declines in 2010 before tepid growth materializes in 2011. All totaled, nonresidential cement consumption is expected to decline by roughly 3.5 million metric tons during 2009, followed by another one million metric tons in 2010. PCA believes there is downside risk to these projections.
Retail construction is expected to experience the largest volume decline in 2009 cement consumption — accounting for roughly half of the expected decline in nonresidential consumption.
According to McGraw-Hill's report, commercial building will drop 12% in dollars and 15% in square feet in 2009, similar to the declines experienced in 2008. Stores and warehouses will continue to lose momentum, the office correction will be steeper, and hotel construction will finally pull back after its lengthy boom.
Public construction accounts for roughly half of total cement consumption in the United States, with more than 90% of such work performed at the state and local level. State fiscal conditions play an important role in the outlook for public construction. State revenue growth, and hence its overall fiscal condition, is highly dependent on job growth. A new worker added is essentially a new taxpayer addition. Until recently, job growth has been fairly robust, suggesting solid growth in state revenue conditions.
Rising unemployment, declining retail sales, and shrinking capital and corporate gains have eroded the tax base in many states. Coupled with rising unemployment claims and elevated Medicaid costs, the state fiscal outlook is gloomy through 2010 as 31 states are expected to incur budget shortfalls in 2009.
Diverse economies such as Texas will be less impacted, but states such as Oklahoma and Wyoming, which have much closer ties to commodities, are more exposed to commodity price fluctuations. The revenue outlook for the Southwest and Florida remains weak as these markets will be exposed to a prolonged residential recovery.
The manufacturing-driven Midwest will take some time to recover largely due to the struggling auto industry. The financial centers of the Northeast will also have adversely affected state revenues as the financial sector is beginning to experience dramatic declines in employment. The commodity producing Plains and Mountain states are in the best position to weather the fiscal crisis, but their budgets also will be pressured in the event of further weakening of energy prices.
PCA expects cement consumption in public projects will decline three million metric tons in 2009 and another three million metric tons in 2010. Upside risk is contained in these projections depending on the specifics of a federal stimulus program, if and when one is legislated.
As cited by Ken Simonson, chief economist, Associated General Contractors of America, the Center on Budget and Policy Priorities reported: “Mid-year shortfalls totaling $24.3 billion have opened up in the 2009 budgets of at least 31 states and the District of Columbia.”
States are countering with their own passed or proposed economic stimulus packages designed to reinvigorate local businesses with new construction, loans to hometown banks, and other job-creating activities.
This special Bulk Transporter report on construction is a joint project involving Concrete Products, and Cement Americas, both sister publications of Bulk Transporter.
OUTLOOK WEAKENS FOR CANADIAN CONSTRUCTION
DETERIORATING market demand led by downturns in the West signal a weakening outlook for Canadian construction and cement, according to a 2008 Canadian forecast released by Portland Cement Association.
Overall construction spending was expected to decline 3.5% in 2008 and an additional 5.1% in 2009. The housing sector is particularly hard hit, with new single-family units projected to decline by more than 9.0% in 2009 and multifamily units down 11%.
PCA expected portland cement use in Canada to decline by 3.5% in 2008, followed by a 5.0% decline in 2009. Signs of improvement should begin to emerge in late 2009 and 2010, when the economy and construction improve.