Past cement industry growth levels are “unsustainable,” economist says

Edward Sullivan, the chief economist for the Portland Cement Association, said during a March 23 Webcast that while he expects 2007 to see a slowdown similar to what was seen in 2006, 2008-2010 should pick up for the cement and building industry.

According to a press release from the PCA, an on-going correction in residential construction is expected to drag on overall 2007 construction activity. And PCA’s Economic Research department said that despite a record 18% growth since 2003, cement consumption in 2007 is projected to decline by 1.5%.

Sullivan said during the Webcast that the economy has performed about as well as could be expected over the past few years – GDP growth has averaged 3.5% per year and unemployment has remained below 5%; interest rates and mortgage rates are low, and there has been a housing boom. Sullivan noted that during this period, cement consumption growth averaged 5.5%, reaching a new record.

Consumer spending could weaken

Part of the country’s economic success in recent years was fueled by easing of credit standards and an “over-reliance” on debt, Sullivan said. Debt levels have hovered near record highs, and defaults and delinquencies have been on the rise. “The bottom line is that we think these issues will weigh on economic growth. We are expecting that economic growth will slow to 2.4%. That’s compared to 3.3% last year,” Sullivan said.

However, Sullivan also said that past growth rates of 3.3% were unsustainable, partly because housing starts will be down in the future as consumer spending weakens.

Consumer spending – which accounts for $2 out of every $3 that our economy generates – averaged a growth rate of 3.2% in the last three quarters of 2006. But consumers have been relying on debt, and savings have faltered. “That means we’re spending more than we earn. … This is often a precursor to a reduction in consumption growth and could lead to a wider-spread economic slowdown,” Sullivan explained.

Now, lending standards are being tightened, Sullivan said. Many home loans that started out low were subject to one-, three- and five-year resets; and sure enough, those loans are being reset. “Monthly payments could increase 50% or more,” Sullivan said. “That will put a burden on consumer spending.”

However, the potential drop in consumer spending is cushioned by two key factors: persistent job growth and steady interest rates. But in the event that either of those two factors falter, the forthcoming drop in consumer spending will pack a greater punch to the economy. “Our economy is extremely vulnerable at this point to an interest rate increase,” Sullivan said.

What will drive growth?

There are three key sectors that fuel cement consumption growth: residential, non-residential and public. According to the PCA, the residential piece accounts for 40.5% of Virginia’s cement consumption, non-residential accounts for 21% and public accounts for 38.4%.

While the public and non-residential sectors are doing well recently, Sullivan said the residential sector is expected to see a slow-down in 2007 similar to the drop it saw in 2006. Including single family, multi-family, and maintenance, residential cement consumption in Virginia is expected to experience a 159,748 metric ton decline during the 2005-2007 period. However, that decline should end for the most part in most regions of the U.S, in 2007, Sullivan said.

Sullivan also noted that construction is expected to decline in 2007 by 3% nationally, which takes into account an 18% drop in housing starts. Cement consumption is expected to decline by 1.5%.  “We believe that our forecast contains significant downside risks,” Sullivan added.

However, he noted that the 3% decline is down from what were very strong levels of growth. And “if all you look at is the construction activity, you’re missing a big piece of the pie in terms of cement consumption,” Sullivan said.

While construction activity may be down, PCA expects cement intensities to rise. In 2003, for example, construction activity did not rise, but cement consumption rose 3% because projects were using more cement and concrete. PCA expects cement intensity growth to be 5% nationally next year. Asphalt and steel prices have gone up considerably, which improves the competitiveness of cement and concrete.

The non-residential sector saw tremendous momentum at the end of 2006 with growth of 12.3%, but that will dissipate slightly, Sullivan said. “Nevertheless, we are still expecting a very strong 8.4% gain in non-residential construction [in 2007],” he said.

In Virginia, total non-residential cement consumption is expected to experience a 92,068 metric ton increase during the 2005-2007 period. And total cement consumption in the public sector is expected to experience a 104,191 metric ton increase during the 2005-2007 period in the commonwealth.

After 2007

Sullivan said that the return of the residential sector, coupled with strong results in the non-residential and public sectors, should lead to a resumption of growth in 2008, 2009 and 2010.

Gains in the labor market should also bolster government spending since each new laborer means a new taxpayer. State revenue conditions are expected to remain relatively strong. (See chart below for Virginia-specific figures).

And in the residential sector, in most markets except boom/bust markets, 2008 should be a positive contributor.

Virginia Cement and Ready-Mix Figures**

	2002	2003	2004	2005	2006	2007
Cement Consumption (Million Metric Tons)	2.11	2.10	2.47	2.66	2.68	2.70
Annual Growth	-8.9%	-0.9%	18.0%	7.6%	0.7%	0.7%
Concrete Consumption (Million Cubic Yards)	9.34	9.26	10.92	11.75	11.83	11.92
Number of Ready-Mix Plants	152	153	178	191	194	194
Total Value of Ready-Mix Shipments ($ Millions)	$553	$558	$684	$823	$937	$999

 

Virginia Economic Figures**

	2002	2003	2004	2005	2006	2007
Nominal Gross State product ($ Billions)	$288	$304	$329	$357	$382	$401
Annual Growth Rate	4.2%	5.3%	8.3%	8.5%	7.2%	4.9%
Total State Govt. Revenue ($ Billions)	$23.5	$28.1	$28.7	$31.8	$35.4	$37.2
Annual Growth Rate	3.6%	19.5%	2.0%	11.0%	11.2%	5.1%
Total State Govt. Expenditures ($ Billions)	$28.0	$29.1	$29.7	$31.6	$34.4	$36.8
Annual Growth Rate	4.7%	3.9%	2.1%	6.4%	8.8%	7.1%
Implied Surplus/Deficit ($ Millions)	-$4,458	-$944	-$1,002	$263	$1,069	$435
Unemployment Rate	4.2%	4.1%	3.7%	3.5%	3.2%	3.4%
Total Population (Millions)	7.28	7.38	7.48	7.56	7.65	7.75

** Selected figures from Cement.org. Complete figures on Virginia are available at:
http://www.cement.org/econ/ind_stats_state.asp?state=48

A complete methodology and details on the figures is available at:
http://www.cement.org/econ/pdf/Description.pdf