- Cement prices are climbing as U.S. construction picks up and a mix of factors -- industry structure, strict environmental rules on factories and limited imports -- keep a lid on cement capacity.
Demand for cement comes primarily from construction of homes, office buildings, highways and infrastructure. Drilling of oil and gas wells also creates a portion of demand. Cement is the gray powder made from limestone and clay in industrial processing plants called kilns.
Cement producers also generally quarry and refine aggregates -- sand, gravel, and crushed stone. Mixing cement with crushed stone and water makes concrete, the stuff of skyscrapers and backyard porches.
Cement makers build factories close to their main markets. Moving cement by truck is so costly that it rarely travels more than 250 miles by road. Aggregate suppliers generally stick to a range of around 50 miles.
Cement production is largely concentrated in Texas, California, Pennsylvania, Missouri, Michigan, and Alabama. Prices for cement varies from $85 to $100 per ton, depending on the local market, says Trey Grooms, analyst at Stephens.
Prices have posted high single-digit increases in Texas, despite a slowdown in oil production, mainly thanks to spending on public infrastructure. An upswing in construction is boosting other local markets.
"Texas is pretty well sold out, we've seen some rapid price increases there over the last year and a half, and even with the tough weather prices seem to be holding up," said Grooms. "Some price increases in other markets are getting traction. It's a regional business. At the other end of the spectrum, you're in the 65% to 70% capacity utilization range in California. Denver's been sold out, that market has been strong. The Midwest is probably closer to 80% range and parts of the South are in the 80% to 85% range."
Mergers Drive Industry Benefits
IBD's building-construction group ranked No. 44 on Friday out of 197 industries. An improved outlook for residential and commercial construction has pushed up group EPS estimates. Aggregates pricing has accelerated nationwide, according to a Goldman Sachs report.
Martin Marietta Materials (MLM), which acquired Texas Industries in 2014 in a deal valued near $3 billion, is looking at 2015 EPS growth of 45%, analysts estimate, followed by estimates for a 42% gain in 2016. Its earnings rose 41% in 2014.
Vulcan Materials' (VMC) current-year EPS is expected to rise 120% as it continues to rebound from three years of losses through 2012.
Eagle Materials (EXP) estimates project a 27% gain, down from 37% in 2014 but still healthy. Earnings growth for the thinly-tradedU.S. Concrete (USCR) is projected at 28%, before a 4% decline in 2016.
"Last fall and into the beginning of this year pretty much all the companies revised their numbers up, with industry checks suggesting pricing was getting stronger on cement and aggregates," said Grooms. "Recently, some markets have been hard hit by weather and there may be some revision to Q2. But the underlying demand is still very good and there may be some pent-up demand."
Martin Marietta's purchase of Texas Industries has been positive for the industry, says Todd Vencil, analyst at Sterne Agee CRT. Martin Marietta is much more aggressive on pricing than was Texas Industries. In Q1, Martin Marietta reported an 18% price increase for its West group, primarily driven by Texas Industries facilities.
Martin Marietta in 2012 tried to acquire Vulcan Materials, leading to a legal dispute. Analysts do not expect merger talks to rekindle.
While Martin Marietta, Vulcan Materials, Eagle Materials, andSummit Materials (SUM) are regional players, global cement players have a big U.S. presence. They include Lafarge of France and Switzerland's Holcim as well as Mexico'sCemex (CX), Ireland'sCRH (CRH), Italy's Buzzi Unicem, and Germany's Heidelberg.
Lafarge and Holcim have been grappling with merger negotiations for more than a year. Lafarge reported $12.8 billion in 2014 revenue, while Holcim hovered just below the $20 billion mark. (For comparison, both Martin Marietta and Vulcan's 2014 revenues were a bit more than $2.9 billion.) Holcim has the bigger U.S. presence of the two and, in 2009, opened a huge cement plant off the Mississippi River in St. Genevieve, Mo.
Divestitures required by regulators in order to approve the combination will shift some U.S. assets. Summit agreed to buy Lafarge's Davenport, Iowa, cement plant in a $450 million deal.
"It's a good deal for Summit," said Vencil.
Summit, whose biggest investor is Blackstone group, went public in March. The Denver-based operation has been on an acquisition spree since 2010, rolling up aggregate, ready-mix concrete and other building materials suppliers.
The proposed Lafarge-Holcim union is also benefiting CRH, which has seen its revenue flatten at just above $24 billion over the past four years. CRH agreed in February to purchase divested operations in Canada, Brazil and the Philippines for about $7.5 billion. In the U.S., CRH operates through Atlanta-based Oldcastle Materials. North America is a bright spot in the global cement market as building momentum weakens in Asia, especially China -- a market that is already oversupplied with cement.
U.S. Anchors Solid Growth
The Portland Cement Association forecasts that worldwide cement consumption will grow 2.2% in 2015, 3.7% in 2016 and 4% in 2017.
The U.S. market is expected to grow 7.5% in 2015 and 7.9% in 2016, says the PCA.
While the U.S. will provide a near-term boost, most global players are still focused on expanding production in emerging markets, where countries like Indonesia and Morocco are expanding public infrastructure and housing. India is a key market for Holcim and others, but price competition is intense. In the Middle East, Lafarge has been set back by political turmoil.
"In terms of the near-term financial performance, the U.S. is absolutely important (to global companies)," Edward Sullivan, the PCA's chief economist, told IBD. "But when you build a plant, you're building it for a minimum of 30 years. If you look at the expansion that has gone on worldwide, it's outside developed countries. The long-term ROIs (return on investment) are in sub-Saharan Africa, emerging Asian-Pacific areas and in South America."
When construction slows, cement demand dries up. The average U.S. factory capacity utilization rate fell to the low '60s after the U.S. housing bust of 2007. Cement consumption peaked at around 121.8 million tons in 2005, says the U.S. Geological Survey, falling to 68.1 million tons in 2010. The aggregates industry saw production volumes peak in 2006 at 3.1 billion tons and trough in 2010 at 2 billion tons, says Grooms.
During the recession, cement makers mothballed some factories and closed others. U.S. cement plants now number at 98, down from 107 several years ago, says Sullivan. Companies may put some idle plants back to work as utilization rates rise, he says.
A hike in cement imports won't come until utilization rates top 90%, Sullivan added.
Imports aren't likely to flood the market and pressure prices, Vencil says, because major cement producers control most marine terminals. During the early 2000s housing boom, imports accounted for 30% of cement consumption as demand boomed.
The PCA has forecast that cement consumption will rise to 93.3 million tons in 2015 and 103.2 million tons in 2016.
Environmental regulations make permits to expand cement plants difficult to obtain. To get them, companies must upgrade to cleaner, more energy efficient technology. Cement plants generally burn coal for energy. Cement plants produce large amounts carbon dioxide, a cause of global warming. Cement kilns must comply with new limits on mercury emissions starting in September.
About five plant expansions are in the works through 2018, including Lafarge factories in Ravena, N.Y., and Joppa, Ill.
Industry capacity may creep, but not jump up, says Sullivan. He estimates that industry capacity could rise to 105 million or 110 million tons, up from 99 million tons, where it has been stable in recent years.
Grooms has a similar view.
"You don't have to get back to prior industry peaks to see capacity constraints get tighter, which will translate into higher pricing," he said. "As we see demand improve, (the) market will get tighter and tighter. Within the next few years, the entire U.S. will likely be in a sold-out scenario, with more pricing increases. This cycle could last several years."