Spend Matters welcomes this guest post from Charlie McCarren, an economist with IHS.
Escalation rates for cement and ready-mix concrete nationally have been moderate, but regionally, price increases within the Gulf Coast have risen much quicker. According to the Bureau of Labor Statistics, ready-mix concrete prices in the South, a region dominated by Gulf Coast states, are rising at almost one- and-a-half times the national rate. In July, ready-mix concrete was up 5.6% year-over-year (y/y) in the South. This reflects trends seen in other regional construction material prices, including construction sand and gravel. With supply constraints unlikely to dissipate in the near-term, escalation rates in the Gulf are expected to continue outpacing the national average.
Although nationally, cement and concrete markets appear well supplied, pockets of tightness are developing, particularly in and around the Gulf Coast. Year-to-date, cement shipments in Texas, Oklahoma and Arkansas are up 7.8% y/y. However, clinker production throughout the region has barely responded, rising only 3.6% y/y. Similar trends are emerging in the East South Central, a region that includes Louisiana and Mississippi. Production in these states has actually declined compared to 2013 even though shipments are on the rise.
Unfortunately, the cement and concrete industry is still struggling to overcome the fallout from the Great Recession. Following a collapse in construction activity in 2008 and 2009, cement production capacity throughout the Gulf fell by nearly a fifth as plants were shuttered. Bringing new capacity back online is going to take time, and utilization rates will remain elevated. Utilization rates in Texas and other Gulf states remain among the highest in the nation; capacity utilization in southern Texas is well north of 90% thus far in 2014.
Rising input costs, particularly for aggregate, have also played an important role in sustaining price increases. The BLS estimates that sand, gravel and crushed stone prices were up 4.5% y/y in July. Concrete ingredients as a whole, which includes limestone, sandstone and other crushed stones, have seen prices advance 5.0% y/y.
Overall, the cement and ready-mix industries remain in a fragile state. In most markets, they’re keeping up with demand, which remains subpar. However, in the Gulf Coast, producers are struggling to keep pace with the swelling tide in demand. Although IHS expects a supply response to eventually relieve some of the pressure, it would not be unreasonable to expect Gulf Coast prices to continue escalating in the high single digits over the next year, almost twice the national average.