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The US cement market: does form follow function?

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World Cement,

Raluca Cercel, CW Group.

Political instability has filtered its way into seemingly all aspects of the US economy. Although a first look at the country’s economy and construction sector may give solid reasons for this bullish perspective, the underlying reality is that lowering productivity, trade wars with neighbouring countries, and market volatility (which has already been abundant in 2018) are risks that are likely to counterbalance consumers’ and businesses’ chipper attitude in the aftermath of tax cuts. Not to say that we are looking at a recession, but all signs do point to an imminent slowdown.

In its most recent World Economic Outlook, the International Monetary Fund (IMF) expects the economy to be stimulated by investors’ response to the corporate income tax, but the temporary nature of some of the package’s provisions will mean the renewed growth is only an economic sweet spot, and not the new normal.

The construction sector, after a rather lacklustre 2017 in terms of public works, might reap the fruits of the tax bill, but growth is reserved for the few and not for the many. It is worthwhile to do a quick run through the evolution of the US construction sector. Construction (at a seasonally adjusted annual rate) increased at a CAGR of around 13% in the 2014 − 2017 period, to a total of US$1.438 billion, out of which 42% alone came from residential construction. The residential sector grew at a CAGR of more than 17% in the same period, a much quicker rate than the around 7% growth of the infrastructure segment (considering roads and highways only). The cost of building has also increased: private housing permits in units increased by 6% CAGR in the 2012 − 2017 period, whereas in US dollar terms growth was three times higher.

Rated D+ by the American Society of Civil Engineers, road infrastructure is in dire need of rehabilitation. The issue is not lost on the Trump administration, which has made the country’s “crumbling infrastructure” an aspect of its campaign. Long anticipated, the administration’s US$1.5 trillion plan is also surprisingly hands-off from a federal perspective. The plan, deemed a “hocus-pocus” plan by Kevin DeGood, Director of Infrastructure Policy at the Liberal Centre for American Progress thinktank, assumes that a US$200 billion federal investment would lead to an extra US$1.5 trillion from the private sector, and from the city and state level.

It is noteworthy to mention how the needle moved in terms of infrastructure spending in 2017: investments by US municipalities in infrastructure stood at US$50.7 billion in the first seven months of 2017, lower by almost 20% year-on-year. This clearly shows that infrastructure spending has to be funded more substantially from the federal level. This reality is hard to conceive, given that national debt has topped US$1 trillion and the government had to bump up against its borrowing limit a month earlier than expected.

The future for US cement manufacturers

This leaves cement manufactures with some confidence in short-term opportunities only. In 2017, demand for cement improved by 2.4% year-on-year, a marginally more solid growth than the 1.7% growth of 2016, but below the 3.4 and 8.0% year-on-year growth rates for 2015 and 2014, respectively. Were it not for residential construction, 2017 could have ended with a marginal 0 − 0.5% growth, or even on the negative side. Hurricanes Harvey and Irma, coupled with wildfires and an early on-set of winter did little to deter growth, with demand in the January − November 2017 period up 3.6% year-on year (in Texas and some Southeastern states, demand fell below historical levels in September).

The US Southeast and Pacific West regions saw the largest CAGR growths in the 2012 − 2017 period, with 5.7% and 8.5% respectively. In contrast, demand in the Northeast fell by 2% in the same period. The latter region is also the one most in need of public funding for infrastructure rehabilitation. Out of the top 10 states that are most in need of reformation, eight states are in the Northeast. However, that is not to say that the dire situation of the region’s infrastructure will readily lead to a boom in cement demand. The Northeast is likely to be bypassed by the infrastructure investments, as critics are quick to point out that investments will be focused in Trump-friendly states in the South and Southeast.

Just like the country’s economy, growth in cement consumption is steadily declining. If in the 2012 − 2017 period demand improved by 3%, the team at CW Research forecast a below 3% CAGR growth for the 2017 − 2022 period, and below 2.5% growth in per capita terms.

Net trade will see a much smoother growth compared to the rapid acceleration observed in the 2012 − 2017 period. Imports will continue to be essential in meeting demand, but CW analysts foresee domestic producers improving their ability to keep up with the growth rate of consumption. So far, only a handful of plants have yet to convert from wet clinker production to dry. In 2017, LafargeHolcim in Ravena, New York, and Oklahoma completed two such conversions.

According to equipment suppliers to the US market, there are quite a few mothballed operations across the nation’s geographies. Even if demand were to grow, there is no need for new integrated capacity (which is very difficult to launch even with the current administration’s more open environmental position).

Improving capacity

That is not to say producers are idling: almost all US cement manufacturers are engaged in either a small or large-scale activity, meant to optimise cement manufacturing, that translates into heightened environmental compliance, control, or addition of some small extra production capacity. Environmentally, even if the US Environemtnal Protection Agency’s stance is more relaxed, manufacturers are well aware that it is from the local communities that they have to gain the seal of approval. In the near future, CW Research expects that adding more capacity will happen rather unconventionally. Looking at recent attempts to enhance capacity in the conventional way in the US, they are either trapped in year-long hearings and debates that end up dissuading the potential investor, or stopped before construction by local communities. Historically, such has been the case for Titan Cement in North Carolina, LafargeHolcim in New York, Grupos Cimentos Chihuahua in New Mexico, and most recently, Ecocem’s plans in San Francisco.

Adding new capacity is likely to happen through mobile grinding plants installed at sea or rail terminal location. Though there are no such pieces of equipment in the US (most recently, there have been some small capacity grinding plants installed at terminal level, but not mobile ones), all market indicators point to the benefits of such equipment. Importing clinker from abroad is easier and cheaper than ever, to both the West and East Coasts, as sources become more and more diversified. Manufacturers in the US are largely part of international groups that can easily use trading networks to connect to the US, meaning sub-regional consumption hotspots are shifting quicker than ever.

New capacity, however, is not a priority for North American producers, which are trying to limit CAPEX and increase pricing to bring profits back to healthy levels. That also explains why 2017 was an eventful year in terms of mergers and acquisitions. CRH sold its distribution business, but is frontrunner to buy Suwannee American Cement from Votorantim and the privately-held Ash Grove Cement. HeidelbergCement sold its stake in Lehigh White Cement, but purchased seven quarries and three ready-mix plants in the Northwest from CEMEX. The Turkish Cimsa, which exports white and gray cement to the US, launched a subsidiary that enables its to bypass third parties in distributing its products. Cementos Argos, after a buying spree in the US in the last couple of years, emerges as a dominant player in the Southeast.

Most companies in the US increased their ex-works pricing for cement in 2017, but not only because of the foundation provided by growing demand. Input costs of coal, petcoke, and freight saw an uptick during the year. The healthy EBITDA growth all US cement operations witnessed during the year would have likely been offset were it not for the price growth strategies adopted by manufacturers.


If anything, 2018 already seems to be a more turbulent year than 2017, but CW Research expects that the cement sector will have to absorb fewer shocks than it has had to in the past. Despite the controversy around the infrastructure plans, CW Research argues that at least a small fraction of them will start in 2018, even if only due to populist reasoning. The backbone of the industry, however, will not be made out of infrastructure projects, but in the residential sector that will continue to take the lead, supported by favourable interest rates and single-family construction. Looking at the evolution of demand long term to 2050, CW Research anticipates that consumption per capita will plateau and moderately decrease, in an indirect relationship to the positive growth of GDP per capita.

About the author: Raluca Cercel is a Senior Analyst and Consultant responsible for various ongoing research activities. Cercel works on consulting projects, multi-client studies, and various key initiatives, including global market price assessments and market intelligence activities. Cercel holds a degree in International Relations and a Masters in Transatlantic Studies from Babes-Bolyai University in Romania.

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