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Hurricane Impact Concrete Impact
October 2005
by Bill Ray 

Overview: Hurricane Katrina followed closely by Rita seem certain to be the worst storms in US history in terms of damage to the economy.  For example, property loss may be ten times larger in property loss than Hurricane Andrew that flattened Miami in 1992.  A major US city has been entirely evacuated and the employment in that city is now essentially zero.   The impact on the national economy is likely to exceed the economic impact of the 9/11 attack.  What are those impacts and what does it mean for our industry?  As it turns out, this coming year will present excellent prospects for those that prepare now.

Oil industry:  Katrina damaged Gulf oil and gas production, and Rita shut it down.  Damage to offshore facilities is still coming in, but it appears that about 15% of production will be lost for a considerable time.  The coastal oil and gas infrastructure has been substantially damaged and 4 refineries will be very slow in coming back.  Make-up refinery capacity and imports will cover the gap, but at increased cost.  In the short run crude oil will be supplied out of the strategic petroleum reserve.  There is no reserve for natural gas and the reduction in supplies will be longer lasting.  Low heating oil inventories and high natural gas prices are likely to sharply affect winter heating bills and the price of diesel.  Retail gasoline prices seem destined to be about $3.00 gal for the next few months falling to about $2.50 by next end.    Crude oil prices will remain high by historical standards, not falling below $50/bbl under the most optimistic outlook due to world trade conditions.  This will slow, but not stop, the economy.  But, the entire petroleum supply situation remains very tight and another major disruption due to war, more weather, whatever, would be very harmful to the economy.
Damage to oil infrastructure will raise oil and natural gas prices.
This will slow but not stop the economy.

Port Activity:  The port of New Orleans and other Gulf ports are the largest in the nation.  These ports are the largest exporter of agricultural commodities.  In addition to oil, they are the largest importer of cement.  The facilities received no major damage and the Mississippi River channel is being cleared.  Houston and Mobile are substantially unaffected and are able to take diverted cargoes.  This is major good news.

Economic Fallout:  We seem likely to be in for about a one-year adjustment period as these impacts ripple through the economy.  For the next two quarters employment will be reduced and consumer spending will go down.  High fuel prices and reduced consumer spending will have immediate impacts in business failures, airline bankruptcies, and have an indirect impact on the ailing US auto makers.  Inflation will likely approach 4%.  The Consumer Confidence Index is down sharply and this forebodes lower holiday spending.  The effect on Federal Reserve monetary policy and interest rates is unclear.  There appears to be a wait and see attitude rather than preemptive moves.  Here is the key; most economists believe that a national economic recovery will follow this two-quarter dislocation.

Port damage is being quickly repaired.


Florida, Georgia, and Texas will benefit immediately from activities displaced from the hurricane zone.  Residential housing starts will be increased more than 200,000 units due to the destruction.  That is a 10% increase nationally, spread over several years.  Housing was otherwise expected to slow because today's housing starts are not sustainable in terms of either demographics or affordability.  The housing price bubble is not expected to burst, although there could be a pull back in some housing markets.

Non-residential and Commercial, Recovery or Relapse? The answer is, recovery.  There are substantial infrastructure repairs in the hurricane affected area.  This will add to a good outlook.  Nonresidential construction is expected to rise again in 2006 and return to approximately the 2000-2001 level.  Non-residential construction had fallen below 80% of this base as recently as last year.  Most producers now have strong order files. A good market is expected next year in:

Building Materials Costs  This is the bad news.  The Federal budget deficit seems certain shoot up next year.  This will further weaken the US dollar, making imported cement and steel more expensive.  Building materials prices in general will be up in response to the reconstruction demands on the economy.

Steel price is about as low as it will get.  The peak was reached at the end of 2004 and prices have been flat to declining since.  Steel price will never return to pre-2004 level because of the weakness of the US dollar, because of energy costs, because the domestic steel industry has consolidated, and because international supply and demand must attract costly new capacity.  In addition, US demand will be high due the infrastructure needs affected by Katrina and the strong non-residential construction market.  Attention concrete industry: this is the time to make major gains in market share compared to steel construction.  Will we do it?

Nonresidential construction should be at record levels in 2006

Cement Price will continue to go up one increase at a time. The PCA has predicted record cement demand.   Shortage will ripple through the entire economy.  For example, imported cement flowing into Gulf Coast ports will not be available to flow up to the Midwest.  The special duty on cement from Mexico shows no sign of going away.  The US has offered to lower the duty a small amount.  The Mexican government has offered to substitute a quota system for the duties; that would be even worse for US cement users.  On the positive side, bulk carriers are expected to be more available next year, making it easier to bring in cement from offshore.  Most producers have an opportunity to reduce the cement factor in the mix through better batch plant controls.  Many more producers can reduce Portland cement usage 20-30% through the use of fly ash, slag cement and the like.  As an industry, I believe we can be effective in breaking the impasse on the Mexican special duty.  Will we do it?

Action steps  In short, the coming year will be one of high demand in non-residential construction, and great opportunity.  This is the time to make preparation for it in your facilities, personnel, and capabilities.

Further Background  This outlook is a compilation of several sources and represents the conventional wisdom.  I relied a good deal on the analysis of GlobaLInshight, an international economic consulting firm.  They do excellent work, and I have confidence in them.  Here is a link to their public Katrina page.

 GlobalInsight  The Impact of Hurricane Katrina
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