The US cement industry: economic clouds are lifting

Overview

Spring is traditionally a time of renewal and growth. After a long, hard industry winter marred by recession and economic unrest it appears that the US cement industry is finally seeing sunny days – or at least partly cloudy. This year brings more reasons for optimism for the first time this decade. Emerging trends for the economy, construction activity and cement/concrete usage all point towards growth. The Portland Cement Association (PCA) expects volume increases this year equal to 2012 levels – yielding 8% growth in consumption in 2014.

Several factors contribute to this. Residential construction is on the upswing. Nonresidential is entering the third year of recovery and although the pace is slower than residential, it is expected to accelerate significantly after 2014. Cement consumption in the public sector has reached a trough point and is predicted to achieve sustained gains during the next several years. When all three construction sectors are growing, large volume and percentage gains materialise.

Economic outlook

PCA went out on a limb a year ago and predicted real GDP growth during the second half of 2013 to exceed 3.5%. Although political drama in Washington, DC could cause a setback for growth early in 2014, the continued improvement in the underlying fundamentals will most likely generate a return to stronger economic growth. Fundamentals include:

• Private debt: Private debt has been in decline as a share of disposable income since 2005. The cost to service this debt has approached an 18-year low. Consumers have effectively increased their discretionary spendable income – to the benefit of economic growth.
• Corporate liquidity: Private businesses are flush with cash. Many businesses have benefited from favourable debt levels, low bond rates and improved earnings. It is tough to argue that businesses do not have the means to fuel private recovery.
• Banking strength: Banks have raised hundreds of billions in new capital, putting important benchmark ratios near all-time highs. This means a gradual easing in lending standards and, more importantly, a willingness to loan funds to business and consumers.
• Pent-up demand: Sub-trend economic growth has generally characterised the economy for the better part of six years – an extraordinarily long period of time and implying huge pent-up demand has been generated and may be waiting on the sidelines for its release – adding to possible future real GDP growth.

Residential

Nearly half of 2014 cement consumption growth is expected to be generated from residential construction. Home inventories are lean and home prices are rising, sending a clear signal to homebuilders to accelerate activity. Housing starts are expected to reach more than 1& million units, with single-family construction near 750 000 starts during 2014.

Low mortgage interest rates and declining home prices in the context of steady job growth result in a dramatic improvement in home affordability measures. This is amplified due to the large presence of distressed properties in the market resulting from short-sales and property defaults. At its peak, roughly 36% of total single-family sales during 2010 involved distressed properties. These “bargains” enabled marginal prospective buyers an unprecedented opportunity to purchase a home as well as attracting cash-paying real estate investors. Both factors played a significant role in single-family sales gains during the past two years.

Based on a 20-year average, new homes sales represented 14% of all home sales. Since 2009, this number was cut more than in half to 6.7%. This gradual refocusing on new homes is expected to add support to stronger new home construction outlook going forward.

Achieving sustained gains in home sales will increasingly fall on the underlying improvement in homebuyer fundamentals. PCA believes the pieces are in place to make this happen.

Nonresidential

Several issues still confront nonresidential construction recovery.

Expected ROI will continue to be hindered by high but improving vacancy rates and soft but improving leasing rates. Commercial asset prices are expected to rise gradually with the slow easing in tight lending standards. The rate of improvement will depend on job creation. Job creation, either directly or indirectly, translates into higher occupancy and leasing rates.

Combined, these factors determine the expected return on investment for most commercial properties. Nearly 7.5 million jobs have been created since the economic collapse. PCA expects 2.2 million additional jobs will be created in 2014 and an additional 10.3 million new jobs will be created by the end of the forecast horizon. Such growth sends a signal to investors regarding the need for commercial expansion.

Public

Roadway construction accounts for the largest area of public cement consumption and is tied to a recovery in state and local finances.

State revenue collections have been increasing in tandem with job creation. PCA expects 2.2 million jobs will be created in 2014, 2.4 million in 2015 and even stronger job growth in the out years of the forecast. This signals a continued strong growth in state revenue collections and an eventual return to surpluses by fiscal 2015.

PCA expects state spending dedicated to road construction will increase once state fiscal conditions turn to surpluses. This increase in spending is mindful of competing state spending priorities, but also recognises that infrastructure spending has been neglected during the downturn and the potential of pent-up demand has been generated. The combination of stronger fiscal conditions and the potential of a gradual increase in emphasis on infrastructure spending within state budgets implies stronger state spending.

Furthermore, the new highway bill reinforces the likelihood that state and local spending will increase significantly during the forecast horizon. According to the new highway bill, a ten-fold increase in funding of The Transportation Infrastructure Finance and Innovation Act (TIFIA) is planned. Compared to fiscal 2012 funding levels of US$122 million, TIFIA funding increased to US$750 million in fiscal 2013 and reaches US$1 billion in 2014. These increases provide greater ability for state and local governments to finance large-scale construction projects.

Finally, PCA believes a trough point in local spending on public construction has already been reached. While localities receive state and other funding, roughly 75% of tax revenues are based on property taxes. Using local employment as a proxy for local spending activity and home prices as a proxy for property taxes, PCA estimates that there is a three-year lag between changes in home prices and local spending activity. On a national basis, home prices began recording sustained gains in mid-2012. This implies an increase in local spending activity could begin soon.

Summary

Taking PCA’s assessments of the economy and the key sub-sectors of construction, the prospects for acceleration in cement consumption this year are good. The 8% growth projected for 2014 equals the volume growth achieved in 2012. As the economy strengthens this year and beyond, utilisation rates will improve and decisions regarding plant re-openings will come into sight. By the end of PCA’s forecast horizon (2018) Portland cement consumption is expected to reach nearly 119 million t – roughly 3% below the past cyclical peak (2005). This scenario implies a 14-year recovery.

Summer may be late in arriving, but it is clearly in the forecast.

Written by Ed Sullivan, PCA. This is an abridged version of the full article, which appeared in World Cement’s IEEE-IAS/PCA Conference Supplement 2014. Subscribers can view the full article by logging in.

Read the article online at: https://www.worldcement.com/the-americas/27032014/us_cement_industry_economic_clouds_are_lifting_938/