Eagle Materials Inc (EXP)

[Democritus_of_Abdera]

Who will mothball wallboard capacity next?

It seems likely to me that the major capacity cuts will need to be made by USG. Primarily, because USG is the largest domestic supplier, no other company can have a meaningful difference without totally abandoning the business. And, USG, by far, has the worst EBITA margin in the industry. Thus, I think it will be forced to blink first in a stand-off.

Steve Rowley addressed this question tangentially in the Feb 23 Wells Fargo Presentation...

“The picture is simple to depict. [Wallboard] demand is half what it was at the peak, while capacity remains about the same.”

<Q>: Why do you think the industry has been reluctant to cut capacity, if there is such an over supply? It’s been going on for several years now.
<A – Steven Rowley>: I think the assumption is they believe that home building is going to recover back to levels that we saw two or three years ago. I’m struggling with those assumptions. I think, it should be some time before we build two million homes in the U.S. again.

“...where housing goes, so goes wallboard. If you can forecast housing correctly, you can forecast wallboard consumption.” Current supply west of the Mississippi is 15.5 bsf and demand is 8.7 bsf; east of the Mississippi supply is 21.3 bsf and demand is 9.3 bsf.

Rowley argues that wallboard manufacturers will probably capacity rather than make permanent cuts. The primary reason is that “Tremendous diseconomies are created in continuous process industries like gypsum wallboard, when production lines frequently start and stop during protracted periods of weak demand.”

He also suggests that the capacity cuts will occur on the East Coast. The reasons being that wallboard demand follows housing starts. Overall, the greatest shortfall in projected housing start recovery is on the east coast.