Spend Matters welcomes this guest post from IHS.
Cement prices shifted in favor of buyers in the fourth quarter, mainly because of seasonal factors. Despite this quarter-over-quarter respite, prices are still expected to grow approximately 7.0% compared with last year. Cement prices have diverged significantly from other building materials throughout the year. As lumber and asphalt prices dipped, cement posted record highs. Looking out to 2016, IHS expects cement price growth to decelerate to approximately 5.0%, as cheaper imports put pressure on prices in the U.S.
Cement prices will post the highest escalation in almost a decade in 2015. After growing approximately 5.0% year-on-year in 2013 and 2014, cement price growth is expected to reach 8.0% y-o-y this year. The last time price growth approached these levels was in 2005 and 2006, when cement prices rose 13.0%. These years also recorded the highest levels of cement shipments and imports into the U.S., indicative of the rising demand at the time.
Ten years and a recession later, cement prices are rising once again. Prices contracted for five years during the recession and remained almost flat when the construction activity bounced back from the recession in 2012. Increasing demand for construction materials coupled with the lower margins during the recession years allowed cement producers to push for higher prices this year. Another reason behind rising cement prices is the re-activation of kilns that were idled during the recession. It is costly for cement producers to reactivate these kilns as they require expensive renovations, compliance with the National Emission Standards for Hazardous Air Pollutants (NESHAP) rules and potentially new permits.
On the supply side, while shipments of U.S.-produced cement are catching up to the levels before the recession, total shipments have not yet reached prerecession levels. Despite the increase, cement imports are still one-third of what they used to be in 2005–2006 and half of what they used to be years before 2005. Similarly, U.S.-produced clinker is getting back to prerecession levels, yet clinker imports are nowhere near what they used to be before the recession started. As U.S. cement production reaches prerecession levels, rising imports should begin to increase the supply and, simultaneously through exchange rate differentials, they should put pressure on prices. Reactivation of idled kilns should still incur costs for producers; therefore, an increase in imports should not translate into a steep price deceleration in 2016.
With the price increases in 2015, the industry might be able to recover some of the losses of recession and cover the expenses for restarting the idled kilns. There is no expectation for prices to revert back to low levels in 2016. As higher and cheaper imports satisfy the demand for cement, we forecast cement price growth to increase by around 5.0% next year.