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Management Bulletin

The Cement ShortageBill Ray
Here we go again?

By Bill Ray

Update
October 2004

I n early May, some precast producers got a call from their cement supplier informing them that there was a pending cement shortage in the US; and that there would be allocations of the available cement supply.  This was a surprise.  The call came on the heels of a cement price increase; or two. Somehow China was involved; again. Now it turns out that the US is dependent on imports of cement; of all things. The specter of the runaway price spike in reinforcing steel came to mind; then came a sick feeling.  If it isn't one thing, it is another.  And just when the order file is recovering; and margins are finally improving.  You can't run a business this way

Executive Summary
Cement will be in short supply for several years.  Allocations will affect cement markets that are dependent on ship delivered foreign cement.  Prices are likely to go up in all markets, by 15% to 20%.  For a quick summary, look through the illustrations and read the captions in this bulletin.

What is really going on in cement supply and demand?  What's happening with those cement allocations?  Where is cement price going over the remainder of this year?  How do you bid work?  What practical steps can or should be taken?  Is there a silver lining to this bad news?  This bulletin provides some answers.

Cement Demand
Cement demand has gone up as the US economy has recovered.  Cement shipments have increased 8.3% over the last six months according to the Portland Cement Association (PCA).  With many plants at capacity, inventories have been drawn down to meet this surge in demand.   Many markets had a mild winter and an early construction season, further contributing to the surge in cement shipments.

Cement Supply
Imports have risen through the years to about one quarter of US cement demand today. Supplying nations are Canada, Mexico, Caribbean nations, Colombia, and others. Canadian supply is important only to bordering states.  Mexican imports have been substantial but have been under special US duties since 1990 due to dumping infractions.Many US cement kilns are running 24-7; near capacity

Almost half of cement used in Florida is imported, The Mid-Atlantic and Gulf States and Southern California are also import dependent.

The PCA has issued Flash Reports on this subject and they are well done. The reports can be found on the PCA web site.

Many US cement kilns are running 24-7; near capacity

Here are some key facts

  1. The domestic cement industry is now operating above 90% of capacity.
  2. Cement exports from the US are trivial.  Export conspiracy theories are groundless.
  3. Cement production upsets and late startups contributed to the recent cement supply problems.
  4. An 11% capacity expansion is scheduled by US cement producers, but that may take up to 4 years to put in place due to permitting and other delays.
  5. There is excess capacity in Mexico but the special duties of $57 per ton largely block this supply.


The China Factor
Most of the imported cement comes to the US by bulk marine carrier.  In addition to cement, such ships can carry scrap steel, iron ore, and the like.  China's economy has grown very rapidly.  There has been a lot of spending on housing, factories, roads and bridges, a massive new dam, not mention the 2008 Olympics for which the country is preparing as a point of national pride.

It is important to remember that China is still a Communist nation and thereby subject to the whims of central planning.  The nature of that planning has been such that China's growth has become dependent upon raw material imports such as cement and scrap steel.  What has happened as a practical matter is that there are not enough bottoms to carry all the bulk freight.  The bulk carrier fleet, of all nations, has been substantially unchanged in its’ capacity since the mid 1980’s.Bulk carrier capacity has been stagnant for 20 years

Many bulk carriers have been put under charter to carry raw materials to China.  They are not available to carry cement to the US.

Further, port facilities in China have not been up to the task.  Bulk carriers typically expect to unload and proceed in a matter of a day or two; but often they have been tied up for weeks on end waiting to unload in China's ports.
 

Bulk carrier capacity has been stagnant for 20 years


 The result has been bulk shipping rates that are up globally; both in Europe and in the Orient.   See graph below.

Allocations
Cement allocation first began in Florida in April.  Shipments are based on last year's deliveries and often involve a voucher.  As a practical matter, the allocations have typically not been limiting because cement volume in Florida was high last year.  The Mid-Atlantic States, some Gulf Coast markets, and Southern California have also come under allocation.   This can cascade.  The shortage in Southern California has had a ripple effect into Las Vegas, for example.  In many places, demand is up sharply from last year and thus there is real potential to damage this year's business. Shanghai:  China’s ports are congested

Border States getting their cement directly out of Canada have been told that supply is not threatened, but that price will have to go up because of weakening exchange rate of the US dollar.

Typically Type I cement is in short supply and Type III is available. There have been some shortages of white cement. Supply is fragile in many markets because inventories are way down.  The horror stories in the press have usually involved readi-mix or masonry block. 


Shanghai:  China's ports are congested


The good news and the bad news
Clearly the American economy is resurgent, and that is good news indeed   More good news is that we are unlikely to see a price spiral like that which gripped steel prices a few months ago.  Here's why:  The steel price spike was described as the ”perfect storm,” a combination of unexpected and  severe supply bottlenecks, an auction market in scrap, and formula pricing.Ocean Freight rates have more than doubled

The bad news is that cement prices are very likely to go up.

Let's look at the fundamentals. It will take several years:

Due to the shortage, cement price will be driven up by ocean freight rates, energy costs, and the exchange rate of the dollar. 

Ocean Freight rates have more than doubled


Unfair Competition?  Cement from Mexico has $57/ton duty
 

Ocean Freight rates are more than double those that prevailed only two years ago.  There are not enough bottoms to carry international trade.  Bulk carriers are in short supply because of the way that China has demanded bulk raw materials.  It takes about two years to design, build and launch a ship.  These freight rates should attract capital, but we cannot expect early relief from the shortage.

Unfair Competition?  Cement from Mexico has $57/ton duty

Energy  Cement is an energy intensive product.  We are all painfully aware of today's high energy prices so I will spare you the graph.  The conventional wisdom is that oil will fall back perhaps 25% from where it is today, but natural gas and coal will continue to rise.  In short, energy costs will be sharply higher than where they were compared to the period two years ago.


Exchange Rate The key underlying factor that will sustain a price increases is that the dollar is now much weaker compared to foreign currencies, and the US is dependent upon foreign source cement.  The Euro, the Yen, the Pound Sterling, the Canadian dollar, etc. have gained in value making it more expensive in $US to buy cement offshore.  Recent changes in the exchange rate reduce the value of the dollar by about 12%.   What's the outlook?  The    conventional wisdom is that the $US will continue to weaken.

Americans seem addicted to imports -
Negative balance of trade causes weak dollar
 
 

Price Outlook  -  Prices up 17%
Cement is an international commodity.  Precasters can quickly grasp the implications of this because many precast markets are commodities in nature. Price in the market must be high enough to attract that last increment of supply.  That means that the market price will pay the higher freight, pay for increased energy costs, and make the foreign producer whole on the weakening $US exchange rate.Will cement price cross the $100/ton threshold?

Many cement suppliers took a small increase early in 2004 followed by a $5 increase last month.  The ENR index price shown in the graph lags the real world and does not include that last increase.

Another $5 increase has been announced by some suppliers.  I think it will stick; as will several more.  Unless something changes the supply and demand balance, I think the price will likely go to the limit of exchange rate, energy cost, and ocean transport cost.  That is +15% to 20% 


Will cement price cross the $100/ton threshold?  Possibly


What could change this?

  1. Economists at PCA estimate that higher interest rates will reduce residential construction and lower cement demand.  Residential construction probably will head down.  But, the conventional wisdom is that nonresidential construction will surge because of the general economy.  This will compensate and cement demand will continue at today's rate.  Precast producers certainly hope for such a surge.
  2. The special duty on cement from Mexico could be lifted.  The Mexican government has just filed a complaint with the World Trade Organization and the NPCA and several other organizations have taken initiatives to try to remove this barrier.


Practical Ideas
Where does this leave the producer?

I think you should bid work assuming that a +17% increase in cement price is a real possibility.
                                                                                                                                                                                                         Is rail delivery an option for you?
Batching Operations
My experience is that producers have many opportunities to improve their batching and reduce cost.  Here is a checklist that could have a payoff with escalating cement costs. Many producers have $5/yard of savings in the batch plant due to opportunities like those above.  The cost increase from higher cement prices will probably be about $5/yard.

Contract Review

Contract review should not be left to your lawyer.  There are some new business issues here.

Problem or opportunity?
If that's the bad news, is there a silver lining?  Yes, and in fact there are several important ones:

  1. Certainly forewarned is forearmed. We have reviewed a number of steps that can be taken.
  2. There is an opportunity to demonstrate the superiority of precast to masonry and cast in place.   The horror stories in the cement shortage have been in these building systems.
  3. Remember that our greatest strengths are:
This is the time to sell the whole package

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