Supplies are sufficient, but rising prices and delivery challenges are ever-present
By William Atkinson
Precast manufacturers remember the serious commodity problems two and three years ago, when cement and rebar were in short supply and prices were shooting through the roof. Supplies tend to be stable now, but because of continuing shipping constraints and anticipated increases in demand, prices continue to rise – though not as significantly as they did in the past.
Overall, the news is good for the precast industry, because price increases in cement, rebar and even diesel are expected to be moderate, while price increases in construction steel are rising significantly, creating challenges for contractors in that industry.
According to recent reports published by Associated General Contractors of America (AGC), homebuilding was down 2 percent in 2006 over 2005 and is not expected to show much of an upturn until at least late 2007. However, private nonresidential construction is up 16 percent, and public nonresidential construction is up 10 percent.
AGC adds that there are no noteworthy material shortages. But there are “persistently higher increases for construction materials than for the overall economy” (Source: “Sorting Out the Outlook for Construction and Materials,” AGC, February 2007).
Overall, AGC is reporting that diesel prices are down 1 percent from a year ago, cement prices are up 6 percent from a year ago, and iron and scrap steel are up 20 percent from a year ago.
The annual rate of change for construction material prices as a whole was about 3 percent over the past 12 months. This is expected to be between 4 percent and 6 percent this summer and by the end of 2007 could be rising at a rate of 6 percent to 8 percent.
One reason for rising prices despite sufficient supply is that shipping rates have increased significantly in the past few years, including ocean, rail, barge and truck. This is the result of increased demand for shipping, which is straining some forms of transportation (especially ocean-going ships), as well as increasing fuel prices. In addition, shippers are adding fuel surcharges to their bills, and since all construction materials must be delivered, these costs are being passed on to precasters and others who purchase raw materials.
As is well-known, there were significant shortages of cement in 2004 and 2005 in more than 30 states due to increased construction demand that outpaced constant domestic supply.
Things are better these days, but not perfect. According to the Portland Cement Association (PCA), cement consumption reached 124 million metric tons in 2006, a 2.3 percent gain over 2005. There were no cement shortages in 2006 similar to those that existed in 2004 and 2005. This is in large part due to an increase of exports from China and the easing of the tariff on Mexican cement.
However, PCA doesn’t believe that the increases in imports from other countries can be sustained. The increases in 2005 and 2006 were the result of favorable global shipping conditions. With increasing growth in China, tighter shipping conditions have resurfaced, which may lead to some increased shortages in 2007. However, new domestic capacity is expected to come online in 2008 and beyond, reducing import demand. (Imports in 2007 are expected to reach about 39 million metric tons and then drop to about 30 million metric tons in 2008.)
PCA reports a 5.6 percent increase in worldwide consumption in 2006 and expects a 5.5 percent increase in 2007. Overall, the growth in consumption is expected to be on par with estimates for planned capacity expansions, most of which will occur in China.
According to Ed Sullivan, chief economist with PCA, the shortages in 2004 and 2005 were not the result of shortages of cement but the result of China putting pressure on dry bulk carriers (ships used to import cement). That is, large numbers of ships that had typically been used to export cement from other countries to the United States were being used for other commodity imports to and exports from China. In sum, there was enough cement around the world to meet U.S. demand. There just weren’t enough ships to bring it stateside.
Still, imports increased dramatically in 2005, leading to a new record, but it wasn’t enough. “In the first half of 2006, imports increased even more,” says Sullivan. “At the same time, demand in the housing market slowed, so shortages were wiped out and inventory started to build.” In the second half of 2006, freight rates increased again, reflecting availability issues. “As a result, imports declined, but there is still more than enough inventory,” he adds. However, as imports remain at reduced levels, this may draw down (tighten) some of the inventory.
According to AGC, despite continued growth in demand for cement, there were no reported shortages of cement in 2006 due largely to the reduction of the antidumping duty with Mexico. And while Mexican imports increased, imports from China increased even more (double the amount imported from China in 2005). The reason for China’s export program is that the country had built a large number of new plants near the coast and, for a while, had excess capacity.
The U.S. cement industry has continued to add capacity, but, according to AGC, it will take as much as four years for that capacity to come online and keep up with growing demand, let alone substitute for existing imports.
Of the top five publicly held cement producers in the world, only one is a U.S. company. The top five (in terms of market capitalization), according to Yahoo Finance, are:
- Lafarge (France) – $25 billion
- Cemex S.A.B. (Mexico) – $24 billion
- CRH (Ireland) – $23 billion
- Rinker (Australia) – $13 billion
- Florida Rock (U.S.) – $ 4 billion.
In terms of the future, according to AGC, cement prices are expected to continue to rise in 2007, but not as much as the 11 percent increase from October 2005 to September 2006.
Bill Ray, principal with Precast Consulting Services of Snellville, Ga., offers additional perspective. “In 2006, as the antidumping duty was taken off in stages, a limited amount of cement from Mexico was allowed to flow into the U.S.,” he says. “This has led to a modest increase in supply through early 2007.”
Since cement production in China has increased substantially, this has “rippled back” to greater availability in the United States. “There have been a number of small expansions in North American cement production capacity, which has also been helping a bit,” he continues. “In addition, some very large new plants are under construction.” While cement consumption has decreased recently because of the residential construction market slowdown, the United States will still continue to be a net importer of cement, according to Ray.
And according to PCA’s Sullivan, between 2007 and 2010, the U.S. cement industry will be expanding capacity by 20 percent, investing about $5 billion. “For a small industry like us, that is huge,” he says. “Even then, we will still rely on imports, although not as much.” After 2010, PCA expects demand to continue to rise, and, as such, it expects imports to rise again after 2010 as the 20 percent increase in domestic supply is eventually absorbed.
There is another wrinkle that precasters will have to take into account. According to a new report, “The Business of Climate Change” (February 2007, Lehman Brothers), cement producers are expected to face economic challenges due to increasing demands for more environmentally friendly production.
This will particularly be the case in European countries that follow the Kyoto Protocol. First they will face higher electricity costs as tighter regulation increases the cost of energy. Producers will also have to meet new carbon emission standards by upgrading manufacturing units, replacing fossil fuels with alternative fuels, and/or reducing the clinker/cement ratio through the use of slag or fly ash.
Steel and rebar
According to the American Institute of Steel Construction (AISC), the demand for steel in the United States will continue to grow in 2007 with about a 2 percent increase in demand over 2006. Members of the steel industry are anticipating the demand and are actually increasing domestic production capacity by 10 percent, largely as a result of mill expansions currently under construction.
According to the International Iron and Steel Institute, world crude steel production for the 64 countries reporting to the Institute was 108 million metric tons for January 2007, 13.5 percent higher than January 2006. China, a huge consumer of steel, produced just over a third of this amount (38 million metric tons), which was 27 percent higher than January 2006. The United States produced 8 million metric tons, an increase of 3 percent from last January, while Canada produced 1 million metric tons, a decrease of 19 percent from last January.
According to Yahoo Finance, of the five largest publicly held steel producers in the world, none are U.S. companies. The five largest in the world (in terms of market capitalization) are:
- Companhia Vale do Rio Doce (Brazil) – $81 billion
- Arcelor Mittal (Netherlands) – $72 billion
- Rio Tinto (U.K.) – $69 billion
- POSCO (South Korea) – $29 billion
- Tenaris (Luxembourg) – $26 billion.
No. 6 is Nucor (U.S.) with $18 billion of market capitalization. The only other U.S. company in the top 10 is IPSCO (No. 10), with a market capitalization of $5 billion.
In November 2006, according to the American Iron and Steel Institute, the United States imported a total of 4 million net tons of steel, up 45 percent from November 2005. The estimated 2006 total (46 million net tons) was expected to be higher than the previous annual high of 42 million net tons set in 1998. The largest exporter of steel to the United States was China, up 135 percent from 2005.
A January 2007 member survey by www.thefabricator.com (whose members manufacture and fabricate metal) found that their No. 1 concern was steel prices. (Skilled labor shortage and health care costs were No. 2 and No. 3, respectively.) Steel prices were mentioned as No. 1 by 28 percent of members, up from 23 percent two years ago. AK Steel said it anticipated that its first-quarter 2007 average per-ton selling price would be 4 percent to 5 percent higher than the last quarter of 2006. And World Steel Dynamics, an industry consulting firm, cautioned that prices would continue to be volatile throughout 2007.
Fortunately for the precast industry, while certain types of steel remain and will continue to be volatile in terms of supply and price, supply and price for rebar tends to be more stable. According to AGC, in February 2007, the price of rebar increased for the second month in a row to offset rising scrap steel costs, and prices are expected to continue to rise.
The other commodity of interest to precasters is diesel. “Overall, prices are increasing, because it is a world commodity in a world economy, and fuel prices are rising as demand continues to increase,” says Precast Consulting’s Ray. The balance of supply and demand for refined product (diesel and fuel oil) has improved a bit in the United States recently because refineries in the Gulf of Mexico have been substantially restored, and there has been a reduction of bottlenecking at other refineries in North America. “In addition, the mild winter reduced demand,” he adds. However, the price of crude has increased recently as international demand has increased.
According to the Energy Information Administration (U.S. Department of Energy), total U.S. petroleum product consumption is projected to increase in 2007 by 1.4 percent and in 2008 by 1.5 percent. In terms of prices, diesel averaged $2.41 a gallon in 2005, $2.71 in 2006 and is expected to average $2.60 in 2007 and $2.68 in 2008.
If projections hold (and, of course, there is no guarantee that they will), the future looks optimistic for precasters in terms of the availability of the raw materials they need. And while pricing is expected to continue to increase, additional availability of cement and rebar should keep price increases at reasonable levels. The big unknown, though, is shipping. If the need to ship other commodities and products takes precedence over cement and steel, it’s anyone’s guess as to what will happen with availability and pricing for cement, rebar and, to some extent, even diesel.