There is much to consider when pondering the future of cement prices, which have increased by up to $40 a ton in some areas since prices started going up last year. You’d think this jump would more than offset the roughly $20 per-ton rate increase for ocean freight at its peak, but the Pan-Asian demand for all commodities will continue to pressure cement prices and supplies for years to come. Here’s why.
“Thousands of ships are being built to meet world shipping demand.”
Cement consumption totaled 107.5 million metric tons in the United States in 2003, of which only 84.3 million metric tons was produced domestically. Over the next five years, domestic producers expect to increase production capacity by 17.6 million metric tons. Total domestic production in 2010 will be about 101.3 million metric tons.
With the ready-mix concrete industry consuming about 75% of the cement produced domestically, our industry cannot sustain current production levels, much less any growth, without historically high levels of imported cement.
Since the early 1980s, imported cement has increased significantly as a percentage of total supply, regardless of the economy. In the early 1980s, during a deep recession, only 3% of the total supply of cement was imported. This had grown to 15-16% by late in the decade and jumped to 29% by 2000. In 2004, imported cement hovered around 22-24% of total supply.
If the ready-mix industry produces 500 million yards by 2010, as we forecast, this will require 48.7 million tons of cement in excess of domestic production capacity which should by in place by then. So imported cement will represent a record high 32.4% of total domestic consumption.
Ocean freight rates will play a great role. The current economic growth in China, India, and the overall Pan-Asian economics and their corresponding demand for cement creates concern about the stability of future supplies of the material.
Ships on the Horizon
Still, the problem may not be so acute, at least in the near term. More than 4000 new ocean-going ships are under construction throughout the world to meet ocean freight demand. In fact, so many are under construction, the multinational financial institutions that specialize in ship financing are starting to cast a wary eye on these capacity issues, and are dramatically tightening credit for new ship loan requests.
This “perfect storm” of substantial ocean freight capacity combined with a global recession would change the economics of imported cement an case supplies. Here’s another perfect storm: permitting challenges in the United States could greatly extend or even reduce the projected capacity expansion. And even stronger global economy could add further supply/demand imbalances. Excess ocean freight capacity would not be an issue, because cement imports will be in short supply.
When demand exceeds supply, the price will go up, and many smaller independent producers may find themselves caught in squeeze. Reliable supplies of cement could be at risk for many years, and the independent producers may find themselves at the mercy of their suppliers, who are often integrated and will be taking care of their own needs first, with their biggest customers coming right behind.
Combined with regional aggregate shortages, and prices will rise. At worst, materials shortages may force widespread reduced operating schedules and orders for all but the best customers. Let’s hope it doesn’t happen.
Pierre Villere is President and Managing Partner of Allen-Villere Partners. Contact Pierre Villere at pvillere@allenvillere.com or telephone 985-727-4310.
© 2005 Hanley Wood, LLC. All Rights Reserved. Republication or dissemination of “Concrete’s Ups and Downs” (The Concrete Producer, August 2005) is expressly prohibited without the written permission of Hanley Wood, LLC. Unauthorized use is prohibited. Allen-Villere is publishing “Concrete’s Ups and Downs” under license from Hanley Wood, LLC.