EXP at the Feb 20 Longbow Conference
The tone of Steven Rowley’s presentation was definitely negative, but there were some positive statements.
On the positive side:
1. EXP is probably the only profitable wallboard company in the industry today.
2. The industry as a whole has kept production in line with demand. The cement industry began to react to the current downturn a year ago by reducing imports and operating at reduced capacity utilization. Recently there have been announcements of plant closures throughout the US. Additionally, construction on new capacity has been slowed down or postponed.
3. There are some small parts of the cement economy that will be positively stimulated by the new stimulus package. .... Wind farms require from 350 to 500 cubic yards of concrete to erect each windmill.
4. The wallboard price increases that were implemented in the summer and early fall have returned Eagle’s wallboard operations back to profitability. Wallboard production costs will go down about 5% in 2009 (from $90 to $85/msf).
5. It seems reasonable to expect that housing starts will start to moderately increase in the near future because of a lack of appropriate choices demanded by the buyer. So while the housing market will remain very difficult the new housing market will slowly start to improve.
6. Republic paperboard’s ability to competitively produce and market other grades of liner board when gypsum facing paper demand is down has been very effective at keeping Eagle’s production costs down and its profits up.
------
On the negative side:
1. The current downturn in the US cement demand is far worse than envisioned just six months ago. Cement consumption was down approximately 15% in 2008 and forecasts are for cement demand to decline at least another 15% in 2009.
2. The cost of foreign cement will likely decline approximately 25% in the near term. The influence of foreign cement prices is most acutely felt in locations with deep ocean ports. But, it cascades throughout the industry.This will constrain pricing power.
3. For the past couple of years imports of foreign cement imports had continued to recede in favor of supplementing regional supply demand imbalances with US manufactured cement from neighboring markets. However, as US cement demand continues to drop there is little or no supply adjustment left from the reduction of imports. Some cement kilns in Canada and Mexico were built to supply the US market... they will continue to compete with US kilns even as demand slackens. Further reduction in demand will be painfully taken out of the US manufacturing capacity.
4. Public construction accounts for roughly half of the total US cement consumption. State budget conditions play an important role in the outlook for public construction primarily because the access to federal money is subject to each state’s financial ability to match these funds. With rising unemployment, declining retail sales, and reduced property tax revenues, the outlook for state budgets is not good.
5. The negative trend in the Architectural Billings Index, ABI, paints a very negative picture. Particularly, because of the lengthy lag when the index reflects a positive change in direction to actual construction being put in place. Nonresidential construction activity is closely tied to general economic conditions, therefore when the economy recedes commercial investment typically declines. This coupled with the current high cost of capital and tightening in commercial lending standards suggests that nonresidential construction will decline rapidly. Not only is there a reduction in the backlog of projects, many projects already under construction are being downsized.
6. Although housing affordability has improved significantly, its positive impact is being nullified by increasing unemployment, credit markets unwillingness to lend, and by an unexpectedly large drop in household formation. The currently really scary piece with respect to the housing and mortgage industry is the steep upward velocity of unemployment.
7. The 2009 estimate of 20 BSF wallboard consumption assumes stronger demand from new residence construction in the second half of the year.
8. Market conditions in Eagle’s Austin Texas market have started to deteriorate as the current credit crisis is impacting what was until recently a vibrant Texas economy.
9. Wallboard will be difficult for 2-3 years. Capacity that has come off line can be easily restarted. Pricing power won’t come back until 85% capacity is reached (it is now about 50%). Plant shut downs don’t lead to market exit. As freight costs comes down there will be further shut downs, but it will be supplemented by freight from other plants of the same company and not benefit Eagle.
--------
Other comments of general interest.
1. Burning tires reduces cement production capacity, but is lower cost.
2. Handymax is an older ship generally used for cement transport from Southeast Asia to the US because it is the lowest cost freight.
