Commodities: Up? Down? Sideways?

Times are tough, but the outlook is good.

By William Atkinson

Things are a lot different than they were five years ago, when precasters were scrambling to get cement, stone, sand, rebar and diesel, and were having to pay handsomely for most of it. And things in fact are quite a bit different than they were just two years ago.

“The big difference between this year and 2008 is that the world economy, while it is growing, has a huge amount of slack, and capacity is nowhere near as tight as it was two years ago,” says Ken Simonson, chief economist with the Associated General Contractors of America. “As a result, it is difficult for producers to impose the same price increases.” Inventories have been very low in many materials, so a small increase in demand can cause a price spike. However, according to Simonson, unlike two years ago, suppliers can crank up another mine or another furnace to meet the demand.

Cement, sand and stone
According to Simonson, in terms of cement and aggregate there has been very little price movement. For example, the producer price index for concrete products was down 2.2 percent from April 2009 to April 2010. The index for precast concrete products was up 0.9 percent. “In other words, there is not much movement either way,” he says. The producer price index for cement was down 6.7 percent, and the price index for construction sand, gravel and crushed stone was essentially flat.

Ed Sullivan, chief economist for the Portland Cement Association, sees cement demand increasing. “We think that the trough point of the cycle for cement consumption occurred between October 2009 and February 2010,” he says. “In March, we saw our first monthly year-over-year gain in three years, even though it was marginal.” However, he adds, in April, there was a much larger year-over-year gain, and May has been shaping up to be another very good month.
The official information that the PCA receives is delayed, because it is from the U.S. Geological Survey, which can be two to three months behind. “However, we can get a better feel for what is happening by looking at rail shipments,” says Sullivan. The American Association of Railroads (AAR) publishes weekly rail data, classified by commodities. One of these is aggregate. “There are only two things that aggregate is used for: asphalt and concrete,” notes Sullivan. “In looking at AAR data, we are seeing a 22 percent increase year-over-year in May.”

Why is this happening? First, according to Sullivan, residential has done well. However, this has been somewhat artificial, because the gains that have been seen in sales and drawdown in inventory, and perhaps also in the improvement in starts, has been associated with the tax credits, which expired in April. “As a result, we expect to see residential ebb a bit over the next few months,” he says. “However, we don’t expect that to be dramatic. Certainly, there are still issues related to foreclosures. On the other hand, we are starting to see job growth, which will be a positive contribution to residential.”

A second area is nonresidential (retail, malls, offices). The conditions here correlate with the economy. In 2008, nonresidential cement consumption declined about 23 percent from 2007. In 2009, it declined another 50 percent. “In 2010, we are expecting another 29 percent decline for the year,” says Sullivan. “Typically, you don’t start to see a recovery in nonresidential until labor markets turn. However, we have recorded a few good months in labor markets, and I think this will be sustained.” As a result, Sullivan expects to see an underlying improvement in the fundamentals for nonresidential. This could take six months to a year, though. As such, looking at it in terms of the cement market, he still sees the nonresidential sector as being a drag.

In sum, in the private sector: residential, mild positive; nonresidential, mild negative.
On the public side, things are being dominated by two issues. One is the state deficits. “States are in tremendous distress in terms of dealing with their fiscal responsibilities,” notes Sullivan. States have made dramatic cuts, including transportation. These deficits will continue. However, he believes they have cut transportation about as much as they can.

The other is stimulus money. Since there was so much urgency to get projects underway, most of them focused on “shovel-ready” projects, which usually means paving roads with asphalt. The larger projects that involve cement, though, take longer to get in line. “Recently, though, these have started to materialize and will continue to materialize this year,” says Sullivan. “As such, the key driver for the increases we are seeing in demand for cement is coming from stimulus projects.”

For Chris Haus, concrete specialist with Dutchland Inc., Gap, Pa., who purchases cement, sand and stone for the company, there is a lot to be happy about. “The supply of cement is not an issue as it was maybe five years ago,” he says. With the economy the way it is, the producers found themselves with a surplus of material, rather than a shortage. “Since they have to look for business, it has affected their pricing,” he continues. “It’s not a given that they’re going to sell millions of tons of cement. This has been a plus to us as an end user. We have been able to negotiate some pretty good deals.” In addition, he says, the quality is very good and very consistent, because the producers have plenty of time to make the material slowly and concentrate on what they’re doing.

Haus is seeing a lot of similarity in the sand and stone market, too. “However, there has been more of a spike in the last couple of months,” he says. “Some of the homebuilding industry has not picked up greatly, but it has to a certain extent, to the point where they are finally starting to move some material again.” However, while delivery and service have not been a problem, Haus has seen some problems with material consistency, grading and quality. “This may be the result of the cutbacks they made over the last couple of years, such as manpower cutbacks or lack of familiarity with the personnel that they do have,” he explains. “They may not be able to maintain the same quality levels now that things are picking up a bit.”

Steel
Simonson continues to see a lot of volatility with metal prices. “There have been a number of price increases in steel, both with scrap iron and iron ore,” he says. “However, in the last couple of months, the major producers of structural steel announced that they were holding the line on price.”

Rick Jones, vice president of procurement for Oldcastle Precast, Auburn, Wash., has seen increases in steel prices that are counterintuitive to the decreased steel consumption in the United States. “One reason is that the U.S. no longer has a primary influence on the global steel market,” he explains. “Rather, the continued strong demand for steel in Asia and the Middle East now mostly determines worldwide steel commodity pricing. As a result, the price of scrap steel has been seeing steady increases over the last six months.” Price increases for steel are further compounded by reductions in domestic steel production, as steel companies take mills off-line to rationalize their costs.

Ira Altman, C.P.M., purchasing manager for Dutchland Inc., purchased 94 truckloads of rebar over a period of 11 months (July 2009 to May 2010). “During this time, prices fluctuated, as they always have,” he says. Several years ago, when the housing boom was in full swing and construction was strong, the price jumped from about 25 cents a pound to almost 50 cents a pound. A couple of years before that, it jumped from 14 cents to 28 cents. “Since January of this year, it has gone up a couple of times,” he says. “It is now about 32 cents a pound. Earlier in the year, it was about 25 cents a pound.”

Because of the fluctuations, Altman tries to get an idea for what is driving the cost of rebar so that he has an idea of what is a reasonable price and what prices may be doing in the future. “To do this, I try to keep track of the price changes of scrap metal as well as the cost of energy, and I also study supply and demand situations,” he notes.
One effective strategy he has found has been to establish strong relationships with local suppliers and continue to check competitive pricing. However, pricing is only one component. Quality is important, as is reliable delivery. “For example, we usually want job-site delivery rather than production facility delivery, and it is very critical to have it delivered within a certain time window,” he adds.

On some jobs, Dutchland has requirements for domestic steel rather than imported steel, so Altman has to make sure he purchases that. “Some of this is the result of the new stimulus bill,” he says. “In addition, since we build municipal projects such as wastewater treatment plants and water storage tanks, the Pennsylvania Steel Procurement Act requires domestic steel.”

Diesel
Simonson continues to see a lot of volatility with oil prices. The price of crude oil got as low as $33 a barrel in early 2009, and then up to $86 a barrel in the spring of 2010. “In the last few weeks, it has retreated to the $65 to $73 range,” he says. “However, I don’t see any danger of going back to the record highs of 2008.” Simonson watches the Energy Information Administration’s weekly diesel survey. That got back up to over $3 a gallon in early May. However, by early June, it was back to $2.19. “As such, it doesn’t look like it will challenge the record $4.76 from July 2008,” he notes.

Perspective
Sullivan expects some good news for cement this year. “I think we will begin to see some sustained growth starting in 2011,” he says.

In terms of nonresidential construction activity, Simonson sees weakness through 2010 on developer-financed categories. However, the public works side will be a mixed picture. “There is a lot of stimulus money coming in, but state and local governments have had to dial back their own spending,” he explains. He believes that nonresidential construction activity should bottom out in early 2011, but even after that, the recovery will be very gradual. “As such, I don’t see sustained upward pressure on material costs next year.” Long-term, though, he believes that once the money from the stimulus bill is spent, infrastructure spending will go into 2011 at least, infrastructure spending will hold level unless Congress and state legislators may be willing to provide additional funding via tax increases.

“Across the board, I see things remaining pretty flat for the rest of the year,” says Haus. “Of course, there are always seasonal changes, but I don’t see any huge spikes.” In addition, a lot of the stimulus money that was supposed to be injected into the Department of Transportation, such as bridgework, never panned out the way the federal government hoped it would. “People from some of the companies that deal with these structures have told me that the timeframes the government put on the use of this money were unrealistic, in terms of the companies being able to design and get a project through,” he explains. “It couldn’t happen that fast.”

However, as a wastewater and water structure company, Dutchland has been having a good year and expects to continue that for the rest of the year. “Not only has there been some stimulus money available, but some recent environmental legislation has continued to keep us busy,” says Haus.

William Atkinson, Cartersville, Ill., is a freelance writer who covers business and safety issues.