At the start of 2004, some believed the construction industry's “smooth sailing” outlook for the coming years was too good to be true. Their caution was apparently warranted. Higher oil prices will slow overall economic activity in 2005, delaying a recovery in nonresidential and public construction, according to Portland Cement Association Chief Economist Ed Sullivan. In addition, while a continuation of relatively low mortgage rates will prolong the boom in residential building, inflation will run stronger, consumer spending will be partially compromised, job gains will be smaller, and sentiment in both the consumer and business areas will be more sedated.
“In retrospect, 2004 represented a year of transition for the U.S. construction market,” says Sullivan in his latest economic forecast. “The strengthening economy and an increase in interest rates have set the stage for a recovery in public and nonresidential activity. The wildcard in PCA's forecast is oil prices.”
For 2005, Sullivan believes construction spending will reach an inflation-adjusted level of $745 billion, or 2.9 percent growth compared to $724 billion in 2004. Given that the construction market has been performing near historical peaks, he adds, these growth rates are impressive. Through 2008, nonresidential and public spending are expected to assume the mantel of growth leadership, as residential building activity will step down to become the growth laggard while maintaining historically strong levels.
Tight cement supply conditions now prevail in portions of 35 states. However, not all portions of each state are characterized by tight supplies. Where cement is in short supply, the reasons are typically twofold: cement demand due largely to strong residential building activity and limited availability of ships to transport imported cement. PCA forecasts Portland cement consumption of 112 million metric tons in 2004, a 4.4 percent gain from 2003. Gains of 2.9 percent and 2.1 percent are forecast for 2005 and 2006, respectively.
Of course, when Sullivan assembled his summer forecast, a scenario was presented where an easement in shortage conditions could potentially be achieved in 2004's fourth quarter, assuming mortgage rates rose. In the current forecast, PCA has lowered the projected near-term path of mortgage rates, suggesting that the vibrant single-family housing sector will show more strength than previously expected — at least through the first quarter of 2005. Sullivan now expects to see a slight ease in single-family unit building in the second half of 2005.
Supply conditions hold the key to determining growth in the US cement market for 2004 and beyond. Domestic production has been stretched to its limits and inventory levels have been squeezed tight. Further increase from domestic operations is limited. According to PCA estimates of capacity expansions, operating rate, and inventory assumptions, domestic supply is expected to increase by 2.3 percent in 2004, followed by 1.8 percent and 1.7 percent in 2005 and 2006, respectively. These estimates reflect operating rates in excess of 98 percent and, therefore, may contain modest downside risks.
Overall, PCA expects public construction-driven cement demand to grow 3.8 percent in 2005 and 4.1 percent in 2006. But this relatively optimistic outlook is tempered by supply conditions. Through the 2005 — 2008 period, powder producers have announced plans to add roughly 11 million tons of capacity. Total US cement supply is expected to grow 4.5 percent in 2004 and 3.0 percent in 2005.
Beyond 2005, PCA has incorporated a higher TEA-21 reauthorization funding level. PCA's previous highway-funding estimates reflected an average of the Bush administration, Senate and House proposals, translating into a $280 billion bill beginning in FY2005. But with the administration's apparent willingness to support a higher funding level, PCA raised its projected level to $299 billion. That figure has been integrated into the new forecast along with a FY2006 starting point.
Another component Sullivan factors into his forecast is the improving price competitiveness of concrete versus steel building products. Steel mill prices have increased 43.3 percent during the past year. Tied to scrap shortages largely induced by a dramatic increase in demand from China as the country undergoes a massive construction effort in preparation for the 2008 Olympic games, elevated steel prices are not expected to be reversed anytime soon, according to PCA.
Ed Sullivan, along with a handful of construction industry experts, and economists, gathered in mid-October at Reed Construction Data's North American Construction Forecast conference in Washington, DC. The group's consensus was that 2005 would be the beginning of an economic recovery expected to continue and strengthen through 2007, despite increasing interest rates and sluggish job growth. It was forecasted that the next two years would not only provide an increasingly stronger economy, but also a positive upswing for several construction sectors, including industrial, public, and other nonresidential building.
Cement Supply Survey
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**estimated
EQUIPMENT MAKERS PROJECT CONTINUED MARKET GROWTH
Concrete and aggregate equipment and construction machinery manufacturers anticipate finishing 2004 with robust business growth, followed by continued but more moderate gains in 2005, according to the Association of Equipment Manufacturers' annual outlook forecast. Gains are expected to be strongest for US markets, both in 2004 and 2005.
Manufacturers participating in the latest outlook survey from Milwaukee-based AEM expect construction equipment markets to close out 2004 with double-digit gains in the US (16.1 percent) and Canada (14.3 percent) and an increase of 8.8 percent in other worldwide business. For 2005, market growth is predicted to continue but at a slower pace: an 8.4 percent increase in the US, a gain of 6.6 percent for Canada and a 7.0 percent jump in other worldwide markets. The business volume of concrete and aggregate equipment is predicted to show year-end 2004 growth of 12.3 percent in the US, 5.2 percent in Canada and 10.1 percent for other export sales. Sales in 2005 are anticipated to grow 9.5 percent for the US, 5.2 percent for Canada and 10.2 percent for other port markets. Machines in this category include crushers, screens, feeders, conveyors, washing equipment, rock drills, concrete batch plants, and pavers.