Features: What We Build — January/February 2006

Between a Rock and a Hard Place

The national demand for cement continues to outpace supply and costs
are expected to jump even more in 2006

By Brad Fullmer

Scott parson has got cement on the brain these days, and it is giving him headaches. Mostly, he is worried about portland cement because, like a lot of other people in the industry, he just cannot get enough of it.

"The market hasn't been this tight in my career," says Parson, a 15-year industry veteran and chief operating officer of Staker Parson, Salt Lake City. His firm is one of the largest heavy/highway contractors and ready-mix suppliers in the Intermountain region. "From what I've been told, it hasn't been like this since the early '70s."

Parson, whose father, Jack B. Parson Jr., is a former president of the Associated General Contractors of America, is not alone in his concerns. The overwhelming demand for portland cement throughout the nation far outweighs domestic supplies. In addition, a shortage of rail cars, bottlenecks at ports and the wreckage left behind by hurricanes Katrina and Rita have hampered efforts to import foreign cement in a timely manner.

Widespread Concern

Add it all up, and the bottom line is a spike in cement prices that is not likely to drop any time soon. Ken Simonson, AGC's chief economist, says cement prices are up an average of 10 to 12% nationally from September 2004 to September 2005. The government's Producer Price Index puts the increase at 12% for the same time period. Prices are expected to rise another 10 to 15% in 2006.

"It's a widespread concern," Simonson says. "Prices are going up much faster than they used to. I keep getting reports of even steeper increases for those who can get cement. More and more people are saying that their allocation has been cut-the ratio of what the cement plant will give them compared to what they ordered last year."

"It's a classic case of supply and demand. It's that simple," says Ed Sullivan, chief economist for the Portland Cement Association in Skokie, Ill. "A thriving construction market like we're in now means we simply can't produce enough cement domestically to keep up with demand."

Other Shortages

In addition to portland cement, there are significant supply shortages of other construction materials such as steel, gypsum and polyvinyl chloride pipe.

"The most severe shortage I've been hearing about recently is for polyvinyl chloride pipe," Simonson says. "That's related to Hurricane Rita, which knocked out more than 10% of the U.S. supply of natural gas, a key ingredient in making PVC pipe and a variety of other construction plastics." Steel availability and pricing has stabilized in recent months, as demand has tapered off slightly from record levels of a year ago, Simonson says. "Steel has been fluctuating," he adds. "In the summer, supplies started catching up with demand, and prices were coming down a little."

The rebuilding currently under way on the Gulf Coast is a significant factor when gauging the future availability of cement powder and other construction materials nationwide, Simonson says. PCA analysts predict that rebuilding New Orleans alone will require more than 4 million tons of cement over the next four to five years and that this will have a ripple effect on availability across the country.

"Normally, hurricanes cause excessive wind damage, blowing off roofs, for example," Sullivan says. "However, water is responsible for most of the structural harm in New Orleans. Because of this 'bottom-up' damage, high concrete-intensity building sections like basements and foundations will need replacement. In addition, more nonresidential buildings than normal were damaged by the floodwater and will need to be replaced."

Increased Consumption

So why are there widespread shortages of construction materials? For starters, construction has been strong for the past two years in both the commercial and residential markets in nearly every region of the country. Total construction starts will have reached a record $636 billion nationwide by the end of 2005, according to a McGraw-Hill Construction forecast. That is an 8% increase over 2004 figures, well above the 2% increase originally forecast for 2005.

PCA reports that cement consumption in the U.S. rose to nearly 120 million metric tons in 2004, a 6.8% increase over 2003. Of that total, a record 25 million tons was imported from countries like Canada, China and Thailand, Sullivan says. U.S. cement production capacity currently is "maxed out" at 95 million metric tons, so as long as national consumption exceeds production, imports will continue to be critical, he says.

A 55% anti-dumping duty that applies only to Mexican cement has led importers to bring in cement from China, Korea, Greece, and Venezuela, adding to transit time and port congestion. But relying on the foreign cement is a risky proposition for U.S. contractors because rising freight costs are affecting material prices, AGC's Simonson says.

"We went from importing 20% in 2003 to 26% in 2005," Simonson says. "It's certainly significant when you see how congested the ports are and how expensive ships have gotten to charter.

"The dependence on those ships and ports, along with rail lines, has grown our vulnerability to any kind of congestion. Any kind of breakdown in any U.S. [cement] plant or the distribution chain from abroad means that we get these severe shortages."

Crisis Point?

"I don't want to call it a crisis, but if you're a small concrete subcontractor, it's probably a crisis," says Rich Thorn, AGC of Utah president/CEO. "You might be on the doorstep of going out of business because you can't make a living if product is not available."

Crisis or not, the shortages are not limited to specific regions of the country. "Cement shortages have been felt everywhere, and they're a reflection of the gap that has existed almost historically between domestic production capacity and domestic demand in times of very solid economic activity," says Tom Chizmadia, vice president of communications for Waltham, Mass.-based Holcim (U.S.) Inc., which operates 14 U.S. cement plants. "The past few years, we've seen a strong economy and construction environment and that has had an impact on domestic availability."

A recent PCA survey said that 35 states are experiencing cement shortages, with Texas, Arkansas, Missouri, Indiana, Ohio, Pennsylvania, New Jersey, Delaware, Vermont, New Hampshire, Arizona, New Mexico and Utah added to the list in the past six months.

Solutions

A short-term solution is nowhere to be found, but industry experts point to several factors that could help ease cement shortages.

One is to increase domestic production, which would mean expanding existing plants or constructing new ones. In the U.S., 39 companies currently operate 118 cement plants in 38 states. But building new plants requires months or even years of wading through environmental permitting processes. Once a permit is obtained, construction of a new cement plant generally takes a minimum of two years.

Ashgrove Cement Co., Overland Park, Kan., currently is considering building a new 1.7-million-ton-a-year plant in Moapa, Nev., 40 miles north of Las Vegas. The plant would help increase the cement supply in the West. The company hopes to obtain a permit by October 2006 and have the plant up and running by October 2008.
Overall, U.S. cement companies have announced plans to expand cement production by 17 million tons a year by 2009, about an 18% increase in domestic capacity.

Another possible short-term fix is to lift the 15-year-old U.S. tariff on Mexican-produced cement. The current $33-per-cu-yd tariff was imposed by Congress after a petition in 1990 by a group of U.S. cement producers called the Southern Tier Cement Committee, which claimed their businesses at the time were being hurt by Mexican cement producers dumping their product in the U.S. market.

"We think the most important step right now is to eliminate the anti-dumping duty on Mexican cement," says Simonson. "It's the best short-term solution [to the shortage that] we have. Without relief from the duty, cement supplies will continue to be a problem for [recovery in] hurricane-wracked southern states and the fast-growing areas in the Southwest."

Simonson also believes that other construction materials may have spot shortages in 2006 and that prices will be volatile.