US cement: on the recovery path

This week saw US building materials producer Eagle Materials report a return to profitability in its fiscal fourth quarter with the company noting an improvement in construction activity across most of its markets. These favourable results reflect an overall trend witnessed by a number of producers in recent quarterly figures, giving rise to optimism that a US recovery may be on the way.

Cement consumption volumes in the US have declined rapidly in recent years: from the peak in 2005-06 to the trough in 2009, demand dropped 45%. In 2009 alone, volumes collapsed by 27%. The first nine months of 2011 showed no improvement with demand only bettering the same period the year before by less than 1%. However, in 4Q11, consumption turned a corner and rose 6% YoY to realise full-year growth of 2.2% and growth in real construction volumes turned positive after years in negative territory. Nevertheless, although slightly higher than levels in 2009–10, sales volumes in 2011 were still more than 57Mt below the record level of 2005, according to USGS estimates.

An extremely mild weather has played a significant role in the improved demand scenario and the US even recorded its mildest 1Q in history. However, other factors helping to revive the construction sector include the recovery in the residential sector, supported by low mortgage rates and strong job creation. The industrial and commercial sector has seen increased spending but infrastructure investments remained at a modest level due to the winding down of the infrastructure stimulus programme and uncertainty over federal funding.

Following first-quarter results from the main Western European cement producers, Fitch Ratings noted that the positive trend seen in US markets is more encouraging than anticipated at the start of the year. The agency was not expecting any major recovery in the market but 1Q12 results for the major rated cement producers showed good progression in volume sales, with double-digit growth. “However, this volume improvement is largely attributable to more favourable weather conditions in the quarter and is unlikely to be maintained for the rest of the year,” the ratings agency notes. Bernstein, echoes these sentiments stating in a recent research note that “any current optimism is premature and continue to see 2012 as a year of stabilisation rather than of recovery in US construction spend.”

Cemex, meanwhile, reported positive volume dynamics in 1Q12 and said its US turnover reversed the decline seen in recent years with a 35.1% advance to US$684.3m, helped by the initial consolidation of the Ready Mix USA business in addition to an underlying increase in demand during the period. March was the company’s eighth-consecutive month of YoY growth in cement volumes. For 2012, it forecasts mid-single digit growth for its cement, ready-mix and aggregate divisions.

US pricing has also begun its transition from stability to moderate increases, with some price hikes already passed in 1Q12 and others to take effect from 1Q12. In addition, the impact of low shale gas prices is easing energy cost inflation. “If these trends continue, profitability in the region will be better than anticipated,” Fitch forecasts.

Analysts at Morgan Stanley also agree that even if a major recovery in the United States is not imminent, most likely it is no longer than a year away. It believes the revival of residential construction is unlikely to be sufficient to immediately lift demand, primarily because of falls in highway and street expenditure. (According to PCA estimates, this sector currently accounts for almost 40% of US cement consumption.) Non-residential building is not likely to add much to demand in 2012, with a stabilisation expected this year and robust growth starting from 2013. Within this, private construction should grow noticeably faster than public. The real problem for 2012 is a continued elimination of the 2009 stimulus package. However, it notes: “Rigorous growth in volumes is set to commence from 2013 and accelerate from there. It is quite possible that by 2015-16, when annual volume growth rates reach 10%, that the US will be among the fastest-growing cement markets globally.” Read more from Morgan Stanley’s comprehensive US report for the May issue of International Cement Review here on CemNet.com