Domino effect

Cement shortage, rising costs, booming economy paint uncertain picture

By Angelle Bergeron

Continual growth in China and India and the United States' increasing dependence on foreign imports will make getting cement difficult this summer.

As America becomes increasingly dependent on foreign imports (a record 20% of overall use) and overtaxed domestic manufacturers struggle to keep up with increasing demand, "if" cement is available may be as common a question as "when."

"I think everyone is in denial because they didn't experience it last year," said Joe Roche, vice president of sales and marketing of Lafarge North America in New Orleans. The ready-mix supplier serves a 15-parish area in south Louisiana. "It's like Chicken Little saying the sky is falling and when everyone gets lax the big one comes. Nothing has happened yet for anyone to feel."

The evidence points to rising cost and decreased availability in proportions never before experienced by the industry, said Ed Sullivan, chief economist with the Portland Cement Association of Skokie, Ill. The worldwide economy has been "blindsided" by the exponential growth in China and India, Sullivan said.

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"We used to describe the global economic players as Europe, the United States and Japan, but we're experiencing a new economic order," he added. "The huge magnitude of their populations can exert tremendous demand on overall world resources. Not just cement, steel and oil prices but on everything."

The healthy American construction industry over the past few years has made the United States increasingly dependent upon cement imports, Sullivan said.

"Imports increased from about 23 million tons annually in 2003 to 32 million tons in 2004," he added. "We will bring in at least that level in 2005."

In the past, when domestic demands swelled, America looked to the easy, readily available supply of foreign cement as well as the availability of ships to deliver that supply, Sullivan said.

"Our strategy was based on two assumptions that broke down," he said.

In the latter part of 2003, U.S. demand for foreign cement swelled because of a good economy and boon in construction, primarily residential, Sullivan said. The nation's increased dependence upon imported cement coincided with China and India's demand.

The competition for resources was compounded because the United States exports virtually nothing to India and China, so there was nothing to haul on the return trip. A bulky, messy material to ship, cement is typically not a desirable product to handle and costs more in shipping than it is worth, Sullivan added.

"Although freight rates increased by 240% at about the same time that the bulk in demand increased, it is my feeling that the problem was not cost but a tightness in ship availability," Sullivan said.

Meanwhile, cement producers on the home front were running full steam and depleting their supplies.

"Typically, producers carry about 19 days' supply, but in 2004 it was below seven," Sullivan said. "That is the lowest level in terms of days' supply in the industry's history."

As a result, some contractors began to feel the pinch.

Last year, Cypress General Contractors of Westlake waited three months for supplier Holcim US Inc. to deliver cement before the contractor finally got what it needed to complete the civil portion of the four-laning of U. S. Highway 171 north of Lake Charles.

Cypress, who was subcontractor to R.E. Heidt Construction Co. of Westlake, placed about 7,500 tons of soft cement on the job.

"We did about 40% of the project with Holcim, but as we got a larger section of the project ready, they basically said they couldn't get us any," said Gavin Abshire, project manager for Cypress. "They would give us a load or two and then sometimes we couldn't get any."

Finally, Cypress was able to open an account with another supplier, Southwest Louisiana Cement, Angelle Corp., which was able to supply what the contractor needed to complete the job.

"We were able to get as much cement as we could take, but I saw a 36% increase in the cost," Abshire said.

The New Orleans market didn't feel the crunch as much as other areas, said Lafarge's Roche.

"We were put on allocation, but we never dipped into the allocation," he added. "It got extremely close, but what happened with us is that our volume was off about 20% in 2004 from 2003."

This year, with the expansion of the east-west runway at Louis Armstrong International Airport on the horizon, Lafarge expects to exceed its 2004 volume. In anticipation of the crunch, Lafarge stopped making Saturday deliveries in April.

"The cement terminals aren't open on Saturdays, so you didn't want to open up on Monday with empty silos," Roche said. He added that New Orleans will be hit harder this year because the city relies so heavily on imports.

Craig Duos, executive director of the Concrete & Aggregates Association of Louisiana in Baton Rouge, agreed that shortages are likely, particularly in Gulf Coast areas that rely heavily on imports.

"Many domestic suppliers are beefing up their plants, but it takes time from conception to final product," Duos added. "From the conversations I've had with cement companies at this point, I know there will be some executive decisions made to handle the shortages."

Perception is a big part of the problem, said Vance Pool, national resource director for the National Ready Mix Concrete Association.

"I've been around concrete for a long time and as an industry we are sometimes our own worst enemy," he added. "Concrete is pretty much ordered the day before it is bought. What other material can you get like that? The ready mix industry has been doing that for so long that people call the same day for 10 loads and we as an industry have been responsive to that."

Relying on the last minute, abundant availability of concrete may be a thing of the past. During the steel shortage, it wasn't uncommon for contractors to order steel as much as eight weeks in advance, Pool said.

"If we ordered concrete eight weeks in advance, we'd never have a problem."

Still, contractors in the field say that if a supplier makes a promise they expect delivery.

"I don't care if there is a 300% increase in cost because we will put the cost of materials into the job," Abshire said. "The price of the product is irrelevant. It's the supply of it. If they are going to quote a project, suppliers need to step up to the plate and do what they said they would do."

Clint Cheaney, general manager of TXI in Shreveport, one of the largest ready-mix suppliers in north Louisiana, said, "No one will do without product, but they might not get it at the exact time they want it." Cheaney said spot shortages are likely.

"I expect there will be times we will run out of product this year, but it's not a crisis that will last forever," he added. Even though TXI produces some of its own cement, the Shreveport division has also tried to purchase some product on the open market, but the supply just hasn't been there.

Holcim US Inc. plans to increase imports this year, said Tom Chizmadia, vice president of communications and public affairs.

"It's safe to say the availability of imports will still be impacted by Asian consumption," Chizmadia added. "While we're likely to see allocation and shortages in various areas, particularly during peak construction season, our whole focus is getting product to customers and fulfilling the commitments we have."

Due to the ongoing reconstruction in the aftermath of Hurricane Ivan and the extended construction season, the Southeast will likely feel the squeeze, Chizmadia said.

"It's clearly going to be impact by demand," he said. "If you have a year where demand exceeds domestic production, capacity will affect those regions. To the extent that occurs, it's very likely we'll have an allocation situation."

The numbers indicate that the nation's dependence on foreign imports of cement is expected to increase 17% this year and another 7 % in 2006.

"The domestic market as a whole can support growth by about 3.5% for 2005 and about 3% for 2006, so it's almost all going to come from increased imports," Sullivan said.

Ready-mix producers and contractors can also expect increased maintenance costs at many of the domestic plants, Sullivan said.

"A lot of these (domestic) plants are old and have been stretched to capacity," he added.

Lafarge's Roche agrees that without pausing for routine maintenance, the bustling cement manufacturers are overdue for breakdowns.

"If you have a hiccup with one of these mills, it's likely to have a domino effect," he said. Still, since no one in the industry has experienced any serious pain to date, everyone is being "cautiously optimistic," he added.