Construction hauling will grow in 2010 with gradual improvement of the economy
Jan 1, 2010 12:00 PM
ALTHOUGH it's no surprise that his Year-End 2008 Forecast anticipated a severe 2009 downturn, Portland Cement Association's Chief Economist Edward Sullivan (and most of his equivalents in other agencies and associations related to the construction industry) did not even come close to predicting just how low cement consumption figures would go. His 88 million-metric ton forecast for year-end 2009 was overly optimistic to the tune of 17 million metric tons, or down roughly 26.6% (to 71 million metric tons) from already weak 2008 consumption levels.
PCA expects 2009 will represent this recession's trough for United States total cement consumption. The cyclical downturn, measure peak-to-trough, represents a 54 million-metric ton decline from 2005 peak levels — the worst volume decline in history. This downturn coincided with a period of aggressive expansion and modernization, and large market imbalances have materialized, resulting in a contraction of import supply, excess inventory accumulation, low utilization rates, extended maintenance downtime, sporadic furloughs for employees, and plant shutdowns.
While recent economic news regarding third-quarter real GDP growth of 3.5% may suggest a technical end of the recession, the conditions facing residential and nonresidential construction are likely to remain critically weak for another year or more. Still, the latest PCA forecast of cement, concrete and construction isn't all gloom and doom. Sullivan predicts a 5.0% increase in cement consumption for 2010 to bring the metric tonnage to 74.4 million. This is a significant change from Sullivan's expectation for 2010, which he believed would continue the downward trend. Better still, Sullivan anticipates double-digit growth each year after next through 2013 (2011, up 17.1%; 2012, up 14.5%; 2013, up 11.9%, to 111. 6 million metric tons).
The residential sector has largely run it course as a significant contributor to construction declines, says Sullivan. The expectation of a slow reduction in home inventories suggests that this sector will be a non-contributor to cement consumption growth through mid-2010. Whatever gains materialize in the meantime will be meager. Since its 2005 peak, residential powder consumption has declined nearly 30 million metric tons, accounting for roughly 55% of the total decline in cement consumption.
PCA estimates regarding the timing and magnitude of a residential turnaround remain conservative compared to most construction analysts. Still, beginning in the second half of 2010, Sullivan expects to see the residential sector become a strong contributor to growth in cement consumption.
Supporting this outlook, McGraw-Hill Construction's “Outlook 2010” report forecasts single-family starts will begin to rise 30% to 560,000 units, after a trough of 430,000 units in 2009, 74% lower than at the 2005 peak. By comparison, however, the average level of single-family housing starts over the past 15 years was nearly 1.2 million units.
The downturn came much more slowly for multifamily starts than single-family. Multifamily was somewhat shielded by the continued start of large, multi-million-dollar projects that take many years to move through the planning pipeline. In 2009, the deepening economic downturn and continued scarcity in financing were expected to create another 55% plunge in multifamily housing, bringing starts down to 140,000 units, down 73% from the 2005 peak. Fortunately, 2009 was expected to be the bottom of the cycle, and as the economy begins to stabilize in 2010, these starts will advance 14% to 160,000 units, anticipates McGraw-Hill Construction.
Kenneth Simonson, chief economist for The Associated General Contractors of America (AGC) adds his outlook: “I expect single-family homebuilding to rebound sharply (up 20% to 30% from a very depressed spending total in 2009). Multifamily will continue to plunge as more people lose jobs and are force to double up, but also as renters become homeowners.”
No relief for nonresidenital
Nonresidential construction is expected to continue its sharp decline during 2010, says PCA's Sullivan. According to contract awards data, new contracts are down 60% year-to-date compared to weak 2008 levels. Since the start of the recession, the economy has shed 7.3 million jobs. Of these, office worker job losses total 2.3 million, or about one-third of total job losses. As these losses continues, occupancy rates will decline and vacancy rates increase.
PCA expects job losses to continue and vacancy rates to rise, eventually reaching 18.5% during the first half of 2010. As job creation gains traction, vacancy rates will begin to improve. Sullivan predicts an office construction decline of nearly 30% in 2009 and another 25% in 2010. Second-half 2011 gains are expected to offset first-half losses.
AGC's Simonson adds, “Total nonresidential construction spending put in place will be down 1% to 5% in 2010, following a decrease of 3% to 7% in 2009. The only private category likely to do well is power (conventional power plants, wind and solar installations, and transmission lines). By the second half of the year, there should be the beginnings of a pickup in university, hospital and, perhaps, small retail.”
Tracking nonresidential construction starts for 2009, Reed Construction Data said that despite a September 20% fall from August, “the starts trend have improved after the plunge in June. Starts averaged 5% higher in July-September than in the same period in 2008.”
This trend is consistent with RCD's forecast, which expects construction spending to drop slightly more in the winter and then recover slowly, changing little well into the new year with a turn to expansion late in 2010.
States budget woes
Given the weak outlook for private sector work, public construction activity will play an extremely important role in determining the industry's near-term outlook, according to Sullivan, with highway projects playing the most important role for cement consumption specifically. The highway construction outlook is expected to be dominated by two competing influences — American Recovery and Reinvestment Act (ARRA) stimulus spending and deteriorating state fiscal balances.
PCA has become more pessimistic compared to previous forecasts with regard to the net stimulatory impact of public construction for 2010 cement consumption, and its current forecast incorporates larger state deficits and a strong sterilization of ARRA arising from state and local spending. Due to delays in the release of these monies, there is a growing perception within the cement industry that the stimulus will have no impact on 2010-2011 powder consumption. PCA disagrees and views this as a timing issue, rather than a complete dismissal of ARRA's potential impact. Even using highly conservative cement intensities, more than 5 million metric tons of ARRA highway cement consumption should materialize in the second half of 2010 through 2011, says Sullivan.
Simonson concurs that the categories with the best prospects are highway, water, wastewater, transit and military base realignment. “Little of the stimulus money was turned into construction spending in 2009,” he says. “Much more will be awarded and spent in 2010. In addition, it is increasingly likely that Congress will pass a ‘jobs’ bill that will focus on construction. However, federal funding will not be enough to make up for a steep, ongoing drop in private and state and local government-funded construction.”
Associated Builders and Contractors Chief Economist Anirban Basu also sees 2010 as a transitional but sluggish year on the road to recovery. “One of the bigger beneficiaries of the ARRA in 2010 will be the public sector,” he explains. “Public buildings — particularly courthouses and federal facilities in need of modernization — will receive a sizable increase next year due to stimulus funds reaching the market.”
Basu also warned forecasters that rising construction costs for the next one to four years could change the construction game more than anyone is anticipating currently. “Rising construction costs will be an issue due to a number of global factors, including China's increasing demand for construction materials,” he said. “Construction firms should prepare for a 4%-6% percent growth in construction costs per year during the next several years, which is considerably slower than the two-year average for 2008 and 2009.
This special Bulk Transporter report on construction is a joint project involving Concrete Products, and Cement Americas, both sister publications of Bulk Transporter.
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