Ready-mix operation may total less than 375 million yards in 2008.
I wrote about the subprime mortgage debacle last year and what it meant for both housing and the broader construction economy. As we close the books on 2008, most in our industry would like to wake up from what has been a bad dream at best, and an outright nightmare for the worst markets.
While I see another tough year in 2009, a few trends seem to be emerging that make me optimistic for our prospects beginning later in 2009.
U.S. Treasury Secretary Henry Paulson
replaced management and infused new capital
into Fannie Mae and Freddie Mac.
Let’s look at what I wrote in September 2007 and at what has happened since:
“Gasoline prices are back up, busting through a record price of $72 and $3-plus a gallon gas prices are everywhere.”
And here we are, rejoicing about oil in the $90s as summer winds down. No single economic indicator has a more significant impact on American and global consumers than the price of a gallon of gasoline. While we’re a long way from the peak of $145 a barrel and the attendant shock to our economy, it clearly brought the global economy to its knees.
Sadly, Detroit’s auto industry became the poster child for the grueling reality of what high oil prices can do. But now the global slowdown is tempering oil prices, the inevitable supplydemand curve is kicking in, and much needed relief is finally working its way through our system. The falling price of oil and other commodities are a positive indicator for a recovery in the construction materials industry.
“…ARM borrowers will be paying higher interest on over $1 trillion in outstanding mortgage debt by the end of next year…the largest part of the problem in the subprime space is ahead of us, not behind us.”
While we predicted that the exotic mortgage debacle would result in a rise in foreclosures, it has been far worse than predicted. The results have been a seismic impact on Wall Street and the financial markets.
But most importantly, the failures of Fannie Mae and Freddie Mac, and the federal government’s intervention to rescue these mortgage institutions is a positive sign. U.S. Treasury Secretary Henry Paulson Jr. has replaced management and the boards at both companies, and provided $200 billion in new capital to cushion the blow of any further credit losses resulting from poor mortgage credit policy.
This much-needed step reassures the mortgage industry, as the free flow of quality credit is a key to the recovery in the ready-mix industry. Much of the bad news in this sector is behind us. And while we have a way to go, the continued actions by the U.S. Federal Reserve are positive.
“Against this financial backdrop in the new housing market, it is becoming harder for us to predict the outcome of 2007, but we could see a year where concrete production falls as much as 10-15% from the record year in 2006.”
Well, the actual numbers bore this out, with concrete production falling from 456.5 million yards in 2006 to 414.6 million yards in 2007. It may fall below 375 million cubic yards this year, and possibly less in 2009.
But again, a combination of falling commodity prices and the Fed’s help in sweeping the subprime debacle behind us means that by this time next year, the future should be bullish.
Pierre G. Villere serves as president and senior managing partner of Allen-Villere Partners, an investment banking firm with a national practice in the construction materials industry that specializes in mergers & acquisitions. He has a career spanning almost five decades, and volunteers his time to educating the industry as a regular columnist in publications and through presentations at numerous industry events. Contact Pierre via email at pvillere@allenvillere.com. Follow him on Twitter – @allenvillere.