Short and long-term forecasts for the US cement industry

Overview
PCA expects 2009 will represent this recession’s trough for United States’ total cement consumption – reflecting a 26.6% decline (Portland cement – 26.3%) from weak 2008 levels. The cyclical downturn in total cement consumption, measured peak-to-trough, represents a 54 million t decline from 2005 peak levels – the worst volume decline in history. This downturn has coincided with a period of aggressive expansion and modernisation. Large market imbalances have materialised, resulting in a contraction of import supply, excess inventory accumulation, low utilisation rates, extended maintenance downtime, sporadic furloughs, and plant shutdowns. Unfortunately, the gains in cement consumption expected for next year are expected to be meagre and probably back-ended. This implies current harsh conditions facing the industry will persist through 2010 and beyond. Utilisation rates are not expected to reach 80% until 2012.

The fundamentals for a recovery in construction
While recent economic government reports regarding third quarter real GDP growth of 3.5% may suggest a technical end of the recession, the conditions facing residential and non-residential construction are likely to remain critically weak for another year or more. The construction fundamentals will not begin to improve until labour markets have stabilised.

Construction sector performance
The residential sector has largely run its course as a significant contributor to construction declines. The expectation of a slow reduction in home inventories suggests that this sector will likely be a neutral contributor to cement consumption growth rates through mid-2010. Whatever gains materialise in the meantime will be meagre. Despite the stabilisation in residential construction, non-residential construction is expected to exert a significant drag on construction activity during 2010. By 2011, the non-residential drag on growth is expected to become milder and is expected to become a contributor to growth by the end of 2011. Substantial gains are expected to materialise in non-residential construction in 2012 and beyond. These gains in non-residential construction activity are expected to coincide with gains in non-residential cement intensities – amplifying gains in cement consumption.

Beyond the crisis
Longer term, PCA expects the United States’ economic growth rate will under-perform consensus projections of 3% to 3.5% annually. As the United States’ population ages, slower economic growth may materialise. The argument for slower, future long-term economic growth rates is anchored in future demographic changes and its likely impact on spending habits among age groups. The persistent and sustained ageing of the population will slow consumer spending. Furthermore, demographics suggest that entitlement spending, including Medicare and Social Security, could increase significantly during the forecast horizon. This could imply the likelihood of large sustained deficits at both the state and federal level. Large government deficits cannot be sustained without a negative compromise to economic growth. Two outcomes are possible – higher tax rates or higher government borrowing rates to pay debt. Finally, it is likely that long term economic growth will slow compared to past long-term levels due to higher energy costs, and the potential adverse impacts resulting from climate change legislation. Given these potential adversities, PCA’s long-term cement consumption projections are based on 2.2% real GDP growth – far below the historical average.

Even using conservative real GDP growth estimates, PCA projects long-term cement consumption will reach 190 million t by 2035. Roughly three quarters of the growth in cement consumption is driven by growth in population. The remaining is driven by gains in economic growth. While the industry is currently mired in excess capacity, and engaged in aggressive capacity expansion, the cement industry’s supply capability to meet potential demand could begin to show stress by 2015. By that time, demand will have fully recovered from the cyclical downturn. In addition, the EPA’s environmental NESHAP standards could shut down 20 million t of capacity in 2013. The combination of improved demand and NESHAP-induced domestic plant shut downs could eventually push domestic kiln capacity to 95%, a level assumed to be the maximum sustained potential operating rate. Further increases in market demand are expected to be met by increased reliance on imports. Import terminal capacity is estimated at 40 million t. By 2020, PCA estimates that the utilisation rate among domestic plants and import terminals will average 95%. This represents a theoretical maximum.

Difficult decisions facing senior level cement executives in today’s environment are focused on survival. Longer term, the difficult decisions may shift focus with regard to sourcing the United States cement market.

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