Cement Shortage Puts Crunch on Contractors

Tue June 15, 2004 - National Edition
Pete Sigmund

An unexpected shortage of cement has stunned the construction industry in many states, delaying some projects.

The shortage crept up in the fourth quarter of 2003 and has hit the Southeast, Southwest, and New York/New England regions of the United States since March. It is being blamed on a strong increase in demand from record construction spending, and on limited availability of ships for importing cement because many ships are now feeding China’s rapidly growing economy.

Because cement is a primary ingredient for making concrete, the shortfall could impact many more homebuilding and highway or bridge projects.

“The shortage is being felt from southern New England and New York, especially New York City, all the way down the East Coast as far west as the Mississippi,” said Ed Sullivan, vice president and chief economist of the Portland Cement Association (PCA) in Skokie, IL. “It has also hit Nevada, California, Minnesota, Iowa and Nebraska. At least 23 states, representing approximately 48 percent of total U.S. demand, are now experiencing a shortfall.

“The crunch includes every state east of the Mississippi except Maine, Vermont, New Hampshire, New Jersey, Delaware, Ohio and Indiana. And it’s very likely that areas without shortages will feel the pinch in a month or two. This phenomenon is pretty broad and will more than likely spread before there’s a potential for improvement. It conceivably could hit the entire country.”

A June 8 “Flash Report” from PCA, however, said that a recent survey by the association indicates that 27 other states “report ample supplies of cement.” Whether these will feel the pinch remains to be seen.

Ken Simonson, chief economist of the Associated General Contractors of America (AGC) in Washington, D.C., said that “The cement shortage is the hottest issue these days, more so than steel lately.

“I started hearing about a month ago that cement supplies were critically short in the Southwest Gulf Coast of Florida,” Simonson said. “Since then I’ve been hearing of similar situations all over Florida and in the Washington, D.C., area where one of the suppliers has gone from six days to four days a week. Contractors in Louisiana, Texas and parts of California have also reported very short supplies.”

Bob Burleson, president of the Florida Transportation Builders Association in Tallahassee, FL, told Construction Equipment Guide (CEG) the cement crisis “is probably as serious as anything we’ve had to deal with, materials-wise, since I’ve been around the construction industry, and that’s over 30 years. It’s probably just about on a par now with the steel shortage of the early 1980s when they were allocating steel to us.”

Delaying Housing Starts

“The states which are hurting the most are those with the most residential construction,” Ryan Puckett, PCA’s media director, told CEG. PCA’s economist Sullivan pointed out that 50 percent of Florida’s cement demand, for instance, comes from the residential sector, which is expanding quickly because of low interest rates.

“The residential sector is leading the demand charge,” Sullivan said.

Michael Carliner, economist of the National Association of Home Builders (NAHB) in Washington, D.C., told CEG the shortfalls are heavily concentrated in Florida, which he said is “particularly hard-hit because it imports about 40 percent of its cement, compared with about 20 percent for the rest of the United States, while its consumption of homes has risen faster than other states.”

“Homebuilders who thought they would get things tomorrow are saying they now have to wait a month,” Carliner said. “It’s serious. The situation hasn’t hit prices as much as supply. It’s not like wood products, which you can always get if you are willing to pay for them. Concrete is now often only available in limited quantities compared with last year.”

AGC’s Simonson pointed out, “Housing in Florida uses cement as a hurricane-proofing building material. There’s been extremely strong housing activity in Florida and elsewhere, where construction activity is going gangbusters. We also understand that a very-important cement-making plant in Miami had an unexpected shutdown.”

Simonson said that the Northeast generally hasn’t been as hard-hit. “The region doesn’t yet have that full combination of ingredients, what they like to call the perfect storm.”

Impacting Road Projects

Highway projects account for at least 30 percent of the demand for Portland cement, according to PCA’s Sullivan. Some of these projects are suffering, too.

“On-going road projects are being slowed down, and that impact is being felt all across Florida,” said Burleson. “Our state is also allowing flexible start times for [road] contractors. If you have a project and can’t pour any concrete, you might be able to hold off until cement is available or you can stockpile some of your allocations until more is available to pour from.

“Every contractor and every supplier has a different kind of issue depending upon what he has to do and what he has to pour. Everyone is trying the best they can to make the best of a very bad situation. We all just recognize it’s something we must deal with and work through.

“You have a project ready to switch traffic as soon as you can pour a little curb so they can get down some asphalt, and they can’t pour the curb because they can’t get 20 yards of concrete. We’ve got stories like that all over the place. I think it’s different in Florida than other parts of the country, but I think it’s probably safe to say that whatever problems we’ve got will eventually extend all over the country —or our problem will be solved. One or the other will happen.”

Supply Shortfalls

Often, supply issues are even more serious than surging demand.

“If builders have to wait to get things delivered, that becomes a bigger expense than just having to pay for it,” Carliner said.

And Simonson observed, “The underlying cause, the real issue, is that the whole economy is tied to just-in-time, keeping inventories low, so, when everybody steps on the gas at once to do more building with concrete, no one has sufficient capacity to handle the surge in demand.”

Said Burleson, “The good news is we have plenty of work and everybody is busy. The bad news is that we could be a lot busier and be doing a lot more work if we had the cement to do it with.”

Where Are the Ships?

The June 8 flash report from PCA said that “The regional cement shortages coincide with the areas in which cement import flows have been most constrained.”

PCA said strong demand has increased the cement industry’s dependence on imports as a vital source of supply. It pointed out that U.S. cement consumption totaled 107.5 million tons in 2003 while domestic production capacity is 85 million tons per year. More than 22.5 million tons were imported.

But the ships aren’t there to bring in the imports.

Carliner and other interviewees said ships are scarce because of demand from China.

“It’s the availability of imports, and particularly of ships to bring in the imports, that is the real issue,” he said, and added, “China is both the largest producer and the largest user of cement in the world. It’s hard to get figures on whether they are importing a lot more cement, but they are definitely tying up ships. One report shows that shipping costs have gone up from $15 a ton a year ago to close to $50 a ton now.”

“The shortage is both a local and a global issue,” said AGC’s Simonson. “Most cement [approximately 80 percent] is produced in the United States, but some regions rely heavily on imports. Florida is one of those. China is an indirect explanation for what is happening. Ships that used to bring cement to U.S. ports from Greece or Thailand or Columbia in many cases have been chartered to carry other commodities to China and other fast-growing economies in East Asia.”

PCA’s Puckett said China itself does not supply large portions of cement to the United States, but “by tying up ships, the Chinese make it more difficult for the United States to import from places like South America and Europe.”

PCA’s economist Sullivan said, “China is emerging so strongly that it’s changing the whole infrastructure of global shipping flow and everything else.”

About Florida, Burleson said flatly, “Ships aren’t available. A lot of the cement produced overseas is going to China. China is using cement, which might otherwise come here. I understand that we get some of our cement from China but we’re not getting what we were because they’re using it.”

Economic Turnaround Increases Demand

Very-strong construction markets have increased demand for concrete, which is used in almost every type of construction. Construction spending reached an all-time high in March 2004, when the seasonally adjusted annual rate reported by the U.S. Department of Commerce reached an all-time high of $944.1 billion.

The 1.5-percent increase, compared with February, exceeded expectations of most economists and came on the heels of an unusually active winter.

PCA’s Web site (www.cement.org) said winter is traditionally a down period when plants can stockpile cement but added, “Instead, there was no letup in demand last winter and little opportunity to prepare a strong inventory for spring when construction activity traditionally increases.”

PCA said the run-up in steel prices also has boosted cement and concrete because it has increased concrete’s competitiveness.

Meanwhile, the Web site said that the industry has confronted “limited availability of transport ships and escalating shipping rates,” adding that “a key element of the limited shipments is the booming Asian economies.”

Costs Rising

Cement costs are rising, but reports vary about how high.

According to one respected industry publication, cement costs averaged approximately $84 a ton on June 1, an increase of only about 1 percent from 2003. Concrete costs averaged approximately $75 per cubic yard.

However, some reports from the field were more pessimistic.

Jim Morrissey III, an executive of JDM Materials Co., a producer of ready-mix concrete in Huntington Valley, PA, told CEG that prices were up approximately 11 percent in his area (See Seeds of Inflation, page 44.)

In Florida, Bob Burleson said, “Prices are going up, but it’s not like the type of price spike which we’ve seen with steel. Nobody likes price increases, but I think anybody would be glad to pay 11 percent more right now if they can just get it [cement]. That’s preferable to crews sitting around with nothing to do.”

When Will It End?

No one can say when the shortage will end, but PCA sources believe it may ease by the fourth quarter of this year.

“We think that if a couple of situations ease, the shortage could possibly be alleviated by the end of the year,” said PCA’s Puckett. “More shipping would have to be available and residential construction would have to slow down, where it would still be at a high level but not ridiculously high. If the Chinese government can help cool down the Chinese economy, they wouldn’t need to import so much and more shipping would hopefully be available.”

PCA’s economist Sullivan said rising interest rates would cool the construction boom and thus alleviate the demand for concrete and cement.

“All indications are that the Federal Reserve will raise rates, perhaps higher than people expect,” he said. “When they do that, mortgage rates will rise. All those states that are enjoying the luxury of strong demand because of the low mortgage rate environment would then have a disproportionate decline in demand. That lays the foundation, at least on the demand side, for some easing in the most stressed-out states.”

Sullivan said the Chinese “are afraid of inflation and devaluation of their currency so they are enacting various policies to try to cool investment demand. There is some evidence, according to my contacts, that there is some easing of ship availability. If we get more imports in, and if interest rates rise, we see the potential that the cement shortage could ease up by the fourth quarter, but no one really knows.”

Sullivan also said cement consumption in March was “unbelievably strong at 125 million tons, actually stronger than construction activity.

“How do you explain the difference?” he asked. “I think part of the reason is that there’s panic buying out there that has accentuated the shortage. If a cement salesman says things will be tight next month, you will buy as much as you can right now.”

Florida’s Burleson generally agreed that the shortage may ease late this year.

“Our shortage is here for a good while … probably through the end of the year. It’s an unusual situation. About the only thing that could help us is a lot of rain and that’s about the worst thing you would want in the construction industry.”