Home builders looking for price concessions from materials suppliers amid slowing home sales may find some relief among lumber and wallboard suppliers, but they better not count on deriving savings from producers of concrete and its components.
That was the strong message a half dozen aggregate, cement, and ready-mix concrete manufacturers stated at a construction materials industry conference sponsored by the New York Society of Securities Analysts in late September. In fact, some suggested builders should expect price increases in the coming year as well.
As slowing volumes and imploding price power compress home builders' gross margins, executives from these companies have been promising to get some of the lost margins back from materials and other suppliers. However, they're going to have to find the money from somewhere other than concrete producers.
“This is not necessarily an environment where every [building suppliers'] stock will be affected [by the housing downturn], says Jack Kasprzak, managing director of equity research for BB&T Capital Markets. “Modest volume declines do not send these companies into a price-cutting frenzy. … There has only been one price decline in cement in 30 years.”
DEMAND SHIFTS There are a couple of reasons why concrete suppliers say they can keep their prices up. First, even as the demand for concrete decreases with slower home sales, it is expected to increase in other segments, including commercial construction and public construction projects, such as roads.
States—with budgets buoyed by extra cash flowing in as a result of strong economies, as well as increased tax dollars derived from appreciated home values—are intent on improving road infrastructure. Plus, in the summer of 2005, Congress approved funding for a number of long-awaited, massive highway projects. And California voters are scheduled to vote in November on a proposal to vastly improve its highways.
“We will maintain market share [and] maintain price,” says David Clarke, CEO of Rinker Group, an Australian-based supplier of construction materials that's primary U.S. market is Florida. “And I can't see any reason we can't get a price increase in Florida.”
As an example of how nonresidential construction is likely to make up for losses from home building, Clarke points to Rinker's participation in the construction of the $7.5 billion MGM Project CityCenter in Las Vegas. Rinker also is working on the $2 billion reconstruction of Interstate-4 in Florida, and the $350 million construction of the Sheraton Downtown in Phoenix.
The second reason prices aren't likely to fall, suppliers say, is because the components of their product are relatively scarce and getting scarcer. In Florida, for instance, locally produced aggregate is becoming rare. And the United States has been relying on imports for a good portion of their cement supply. Martin Marietta Materials CEO Steve Zelnak says his company is well-positioned in scarce aggregate, “I couldn't screw it up at this point if I tried.”
Some suppliers say they are expecting to send price-increase notices to builders at the beginning of the year. Already, John D. Baker II, CEO and president of Florida Rock Industries, says his company has successfully received price increases since the market has slowed. (See “Rock Solid,” next page.)