Winners and Losers in the U.S. Building Materials Market

The National Association of Home Builders (NAHB) records the sentiments of home builders in their Housing Market Index (HMI). A rating of 50 indicates that positive responses and negative responses from builders are about equal. Any rating above 50 implies that builders are comfortable with current market conditions. The September HMI was at a very low 20, down 33% from a year earlier, signifying that builder confidence continues to fall.

The residential construction market is expected to remain depressed until the first quarter of 2009. In contrast, the nonresidential and infrastructure construction segments are continuing to show strength—thus, keeping the construction industry afloat. Consequently, the impact on building materials varies across the board, depending on their importance within the different construction segments. As a result, there are clearly both winners and losers in the building materials market.

Losers

Building materials used predominantly in residential construction face the greatest obstacles, as demand for these materials has plummeted. One material in particular trouble is gypsum wallboard. Both falling demand and overcapacity have caused gypsum prices to tumble to historic lows. Producers increased their capacity during the 2005–06 boom years, but now inventories sit idle. According to the Gypsum Association, total production is projected to decrease 4.5% this year. Prices retreated 6.0% in the second quarter of this year, and the quarterly declines should persist until early 2009, when the housing market begins to revive. Global Insight sees gypsum prices tumbling 12.1% in 2007 and 14.7% in 2008.

Lumber products are also strongly linked to residential construction, and are therefore feeling the homebuilding slump. According to Random Lengths, softwood lumber imports were down 51% in the first half of 2007. Lumber product orders have declined, and producers have responded by scaling back domestic output. Plywood production has fallen 8.5% y/y to meet the weakening demand. The Random Lengths lumber price composite decreased 4.3% in August and was down 2.4% y/y. We expect lumber prices to fall 6.2% during 2007, before recovering slightly in 2008.

Winners

Steel plate prices have remained steady because of the still-healthy nonresidential and infrastructure construction segments. Steel plate is an insignificant input for residential construction, so the weakness there will cause only minimal disruption to demand. Indeed, demand for plate steel is now the strongest for any type of carbon steel on the market, and this should not change anytime soon. Producers are walking a tightrope in terms of prices, though, as $800/ton becomes prohibitive, but prices below $700 spurs buying activity. The spot price was exactly $700/ton in the second quarter, and it should stay within the $700–775/ton range well into the first quarter of 2009.

Supplies of structural steel have been tight recently and, as a result, prices have shown strength. Structural steel, similar to steel plate, is used mostly in the nonresidential and infrastructure construction segments. It is important to note, however, that rising steel prices could affect numerous public infrastructure projects, which are heavily dependent on structural steel and have already faced delays due to escalating costs. After increasing 15.4% in 2006, we expect a 14.3% jump in structural steel prices in 2007. In the second quarter of this year, prices boasted a 12.2% y/y advance—and we expect this trend to continue into 2008.