Global Cement (GC): What were the effects of Covid-19 on the US cement sector in 2020?
Ed Sullivan (ES): The first quarter, when the pandemic was yet to hit the US, was an incredible quarter for the nation’s cement sector, with 10% year-on-year growth compared to the first quarter of 2019. Order books were brimming and times were good. But then Covid-19 hit. In the second quarter of 2020 the pandemic hit the US extremely hard. It battered the economy and forced shutdowns at some cement plants. This gave rise to the sharpest quarteron-quarter drop in economic activity ever seen in the US.
However, this did not affect the cement sector, which was deemed an essential industry, to anything like the same extent. Indeed, by the time the third and fourth quarters had rolled around, 2020 as a whole recorded an overall 1.6% net gain yearon-year in cement consumption compared to 2019, hitting more than 100Mt for the first time in seven years. This, to me, is truly remarkable.
So how and why did this happen? A couple of things we have to realise is that there is a lag between what happens in the economy, which was badly affected in 2020, and actual amount of cement demanded by jobs on the ground. When there is economic disruption, it is not the jobs that were approved 6 - 12 months ago that are delayed, it is those coming in the following 6-12 months, possibly even longer. This allowed the cement sector to at least appear to ‘beat Covid’ in the second half of 2020.
If we look more deeply, two other things also happened. To preserve economic growth, the Federal Reserve stepped in and lowered interest rates, leading to lower mortgage rates. This led to an 8% year-on-year gain in single-family home starts in 2020 compared to a year earlier. Additionally, public infrastructure works at the State level also held up well, in fact the amount of cement demanded by these increased year-on-year by 2%. It was on the non-residential side, i.e. commercial buildings that we saw what we would expect, an 8% decline.
Particularly surprising was the acceleration in demand in the final two months of 2020. Cement production in November 2020 rose by 6.6% year-onyear and in December 2020 the increase was 11.5%. These are ‘head-scratchers’ because at the same time there was a resurgence of Covid-19 infection rates. It is possible that favourable winter weather, which didn’t turn until the start of the new year, raised demand in both of these months, but this effect would not normally be so strong.
GC: What regional trends were seen in 2020?
ES: You can look across the US and see ‘winner’ and ‘loser’ States in terms of cement production in 2020. Central portions of the US, especially more sparsely-populated ones that did not see the extreme Covid-19-related death rates typical of densly-populated coastal areas such as New York, fared better in terms of cement consumption because day-to-day life was less affected by the pandemic.
Another factor that was seen is that energy prices plummeted, leading to lower use of oil well cement in many States, for example in Texas and in North and South Dakota. These factors overlapped across the country, creating a somewhat confusing pattern.
GC: Where do you think 2021 is headed at this point?
ES: For 2021, there is the risk that the economic turbulence experienced in 2020 will filter through to parts of the construction sector that were previously unaffected. We don’t currently think that this will result in a contraction overall in cement demand, but consumption will not grow as quickly as the performance of the overall economy might appear to suggest. When we talk to our members’ sales and marketing representatives in the field, we hear that order books are already starting to wear a little thin.
We currently expect around 1% growth in cement consumption across 2021, although in the Covid-19 era this is an ever-moving target. Even compared to December 2020 things have changed. For example, we are seeing that the vaccination programme in the US, although it is gaining pace, will not support our earlier assumptions of a return to ‘normality’ in the third quarter.
That said, our observation of the trend in November and December 2020, when infection rates were rising alongside higher cement consumption, means that even our assumptions have huge asterisks attached to them at this point. It could be that a slower-than-expected vaccine rollout, a new variant, or other resurgence of the virus could have limited or even zero correlation to cement consumption. It is difficult to be a forecaster right now!
GC: How has the pandemic affected the banking sector. Could there be a Covid crunch?
ES: The economy is still very weak and the Federal Reserve has, as I mentioned earlier, stepped in to steady the ship with a very accommodating reduction in interest rates. This has led to an uptick in housing starts, encouraged new mortgages and led to a 17% rise in home affordability compared to 2018 levels. You can now get a mortgage with a 3% deposit.
On top of this, there are a lot of businesses out there that remain shuttered or, if they are not shuttered, have lost significant sales and may be in financial difficulty. Many have debt obligations to service and, if left unchecked, this could lead to a significant commercial credit crunch. Part of the Covid Relief Bills have staved off some of these risks but they remain in the background.
Additionally, a factor that is shared across the globe, is that the economy needed serious support. We now talk about spending a trillion dollars here and a trillion dollars there, like it’s pocket money. We have seen a massive increase in Federal Debt levels so that nearly 15% of every Federal tax dollar currently goes to servicing debt.
Put together, the potential for a credit crunch is therefore not something that happens immediately in the next 6 - 12 months, but it may hit us once the pandemic is in the rear view mirror. In the longer term interest rates will rise, forcing slower growth. This could come back to haunt us in 2024 - 2025.
GC: What are your medium-term expectations for cement demand in the US?
ES: As I mentioned, we expect around 1% growth in demand in 2021 compared to 2020. Growth will speed up slightly in 2022 and then there will be more significant growth in 2023, when we expect a major Infrastructure Bill to come into play. While we are unsure of the scale of this, we currently have a placeholder of US$260bn to be spent over 10 years. If realised this would require steady and sustained growth in cement consumption.
By 2025 we expect cement consumption to be around 111Mt. Even this would still be down some 16Mt compared to the historical peak of 127Mt seen in 2005. This is what we are confident to advise our members at present.
Questions remain as to whether President Biden will be able to fund such a large Infrastructure Bill, so it may have to be scaled down a little. The Republicans could really hold his feet to the fire if he fails to deliver.
GC: How are imports affecting the US cement sector at present?
ES: Over the past couple of years imports have held at around 16Mt, around 16% of the market. Domestic utilisation rate is hovering around 81% across the country. We will not see either of these levels shift greatly unless we see a large increase in demand, and I certainly don’t think they will change in 2021 or 2022. Typically as utilisation rates increase, imports rise. A rising tide lifts all ships!
GC: What could be the potential impact of a USwide tax, trading scheme or other measures that aim to reduce industrial CO2 emissions?
ES: This is something that could happen in the coming years in the US and, as PCA, we are ready, willing and able to take on the challenge of reducing our emissions, to net zero by 2050. However, in the event of a system that applies only to US-based installations, there is the risk of carbon leakage. This is where the financial penalty of emitting CO2 in a trading scheme leads to lower-cost imports from countries not bound by the scheme, with zero reduction, or even a possible increase, in overall emissions.
At PCA, we are looking at the possible economic fallout from such outcomes. We would advise that what should happen, from the outset, is an adjustment mechanism that applies the same burden to imported cement as domestically-made cement. Then the playing field would be level.
GC: What is your current estimate for US cement consumption over the longer-term?
ES: The main driver of cement consumption in the US is, as elsewhere, its population. For the US, the main driver of population growth is not domestic growth, but immigration. We use population forecasts from the Census Bureau to assess likely future trends, with a current estimate of 150Mt of cement in 2040.
GC: Have the more lenient policies of the incoming Biden Administration affected that estimate?
ES: While the immigration policies are now not as tough as before, they are not expected to alter the pre-existing trajectory of the US population to a great extent, certainly not in the 20 year timeframe. Indeed, they may also be short-lived.
GC: What other trends is PCA watching going forward?
EC: The Covid-19 pandemic sped up several developments that were already in motion, particularly e-retail and working from home. Both trends will affect cement consumption going forward. If there are fewer commuters, the pressure on the roads is lower and the need to expand a particular highway may not be as acute. If bricks-and-mortar retail fails to bounce back from the pandemic, we can expect lower investment in shopping malls and associated facilities. If online meetings replace a trip across the country, the demand on airports will also be lower. We now include these kinds of effects in our forecasts and we are keeping an eye on how we can model these going forward.
Finally to return to CO2, concrete is a material that should see increased use in a carbon-constrained world due to its resilience in the built environment. This will push cement demand back up, in the opposite direction to the factors I mentioned in the first part of this answer. Quite where we end up is an unknown at this point, but it will be very interesting to find out.
GC: Ed Sullivan, thank you for your time.
ES: You are welcome as always!