By Jennifer Lee
February, 2006
When U.S. construction spending rose 1%, ahead of the 0.2% increase Wall
Street forecasters were predicting late last year, it raised some
eyebrows. Towards the end of 2005, it was clear that construction was
continuing to pull ahead. Despite the recent 5% decline in new home
sales, sources say that retailers will remain strong amidst the
fluctuations. In China also, a rise in construction projects have taken
off particularly in large urban centers such as Beijing, where
preparations for the Olympics have cast a spotlight on many parts of the
city.
International Barrier Technology Inc. (OTCBB: IBTGF), KB Home
(NYSE: KBH), Beazer Homes (NYSE: BZH) and Puda Coal Inc. (OTCBB: PUDC)
offer market insights for 2006.
In light of this recent activity, this year many analysts are left
speculating about just where they see housing developments moving. With
statements being made by those in authority, such as new Federal Reserve
Chairman Ben Bernanke who states that, “A leveling out or a modest
softening of housing activity seems more likely than a sharp
contraction," it has become difficult to predict where this could all be
headed. There are certainly a host of critics who are saying that what
lies ahead, may not be as exciting as what we saw in 2005.
The Commerce Department recently reported that “building activity was up
14.5 percent last month compared with December, pushing construction to
a seasonally adjusted annual rate of 2.276 million units.” Yet analysts
are claiming there is an expected decline ahead over last year’s
results.
Amidst this uncertainty, he furthers that the industry appears to be
exceeding expectations as of January and that as an economic indicator,
“permits, considered a good indication of future activity, rose as well
in January to an annual rate of 2.217 million units. Applications for
building permits had been down 4.1 percent in December.”
Certainly keeping a watchful eye on increasing numbers of building
permits would be a good indicator of how trends are shaping up with
housing developments and projects. But further to this, a look at some
of the natural disasters the country has faced over the past two years,
also offers a good insight with respect to boosts to the construction
industry.
In an article recently featured on news portal Buildings.com, it
appeared that “according to Construction Outlook 2006: over the past two
years, the construction industry has dealt with a sharp increase in
building-material costs - a situation that isn’t helped by the upward
pressure on prices following the 2005 hurricanes.”
Certainly the costs associated with picking up the pieces after
Hurricane Katrina, are not going to be easy on the pocketbook. In a
piece recently featured in the Guardian Newspaper, Hugh Kaufman, senior
policy analyst related to emergency response at the Environmental
Protection Agency said, “New Orleans may need one of the largest public
building programs ever seen in the US at a cost of $80-100bn -
approximately the same as the yearly cost of the war in Iraq.”
With a significant price tag associated with rebuilding after a natural
disaster, many are looking at the policy dealing with the rebuild and
the factors that must then be taken into consideration.
In a paper entitled, “Rethinking Then Rebuilding New Orleans,” published
at the National Academies at the University of Dallas at Texas, Richard
E. Sparks states, “planners should look to science to guide the
rebuilding, and scientists now advise that the most sensible strategy is
to work with the forces of nature rather than trying to overpower them.”
Michael Huddy, Director and President of
International Barrier
Technology Inc. (“Barrier”) (OTCBB: IBTGF; TSXV: IBH) offers comment
on the existing housing industry in the U.S. stating that, “there’s a
whole range of opinions as they relate to housing and construction and
there is a crossover from new construction, as well as sales of existing
homes. It’s a nervous population at the moment and this will have an
impact on construction as well as sales of homes. However with
demographic shifts, such as the baby boomer generation nearing
retirement, they want to move into more low maintenance housing in
warmer climates and we will see an impact on sales of existing homes, as
well as the purchase of new construction, in certain regions.”
Addressing current speculation that the housing market is in for a
slight decline, Huddy expressed that overall, “starts are going to
plateau, but at a healthy rate in the industry.” Considering how well
things have been moving, he considers this period to be a time where
many in the industry can “catch their breath,” and that the plateau
isn’t a discouraging sign.
In their annual report for 2005,
KB Home (NYSE: KBH) asserts
that, “Although the homebuilding business can be cyclical, it has not
experienced a downturn in many years. Some have speculated that the
prices of new homes, and the stocks prices of companies like ours that
build new homes, are inflated and may decline if the demand for new
homes weakens. A decline in the prices for new homes would have an
adverse effect on our homebuilding business.” KB Home also recently
entered into a licensing and co-marketing agreement with Martha Stewart
Living Omnimedia under which the company’s annual report concludes, ”we
plan to launch ‘KB Home’s Twin Lakes: New Homes Created with Martha
Stewart’ in March 2006.”
Additionally, Ian McCarthy, CEO of
Beazer Homes (NYSE: BZH)
announced in a company conference on January 19th, 2006 that, “While
we’re seeing a moderation in the overall housing market from the
explosive growth of the last several years, we continue to believe there
are significant opportunities for us to obtain market share gains in the
near term and we continue to be very optimistic about the long term
fundamentals of the home building industry.” Beazer Homes announced
revenues had increased by 21.3%, in their first quarter report this
year.
China’s Construction Market:
On the other side of the world, China’s construction industry is booming
for different reasons. According to International Enterprise Singapore,
a publication of the Singapore government, the Chinese construction
industry as one of the world's largest, has “a total output value of
US$151 billion. Internal estimates indicate China's construction output
will increase to about US$700 billion by 2015, overtaking the US
construction market to become world's No 1.” If this helps to put things
in perspective, China’s emerging markets are beginning to point ahead at
becoming the global leader.
Additionally, a press release issued by the U.S. Commercial Service
states that in Beijing, “The ‘Olympic factor’ refers to the impetus
generated by 134.86 billion yuan (US$16.65 billion) in direct investment
for hosting the Games,” said Wei Xiaozhen, a division director of the
Beijing Municipal Bureau of Statistics. The city's 2006 economic
development report states that, “Based on projects listed in the Games'
action plan, 79% of the funds will be channeled into post and
telecommunications, infrastructure facilities and improvement of the
living environment.”
It was further established that, “funding will give a shot in the arm to
at least 50 industrial and business segments related to the Games, it
says. Construction of Olympic venues and related facilities will
translate into 430,000 extra jobs in the sector in five years, the
report says. But employment will shrink significantly when construction
of projects draw to an end.”
China’s steel industry, closely linked in with large scale developments,
especially those associated with major events such as the Olympics, is
seeing an impact. Steel, often said to be a measure of the industrial
economy, should have a lot to offer in terms of presenting an indication
of where’s China’s industrial economy is resting at present. The
country’s steel prices have been forecasted “between $500 and $550 a
ton,” according to a Troy, Michigan based Roland Berger Strategy
Consultants.
Justin Davis, vice president of Keating Investments, North American
representatives of
Puda Coal Inc. (OTC BB: PUDC), offered that between China’s
steel and construction industry, “The two are inextricably linked. The
demand and consumption of steel is heavily dependant on the construction
boom.” When talking about the history of steel production in the
country, Davis related China’s GDP growth rate to steel and coal over
the past decade and commented with respect to GDP growth that, “within
the last three years, it has been explosive.” Puda Coal does not mine
coal directly, but cleans the highest grade raw coal through a
value-added process for use in steel manufacturing; the demand for
Puda’s high grade cleaned coal is directly related to the demand for
steel.
Considering how closely steel is tied to coal, the chain of production
and benefits bear a close relationship and a look at where steel could
be headed over the near term is worth consideration. Sources at Industry
Week have gathered information, “that demand for steel in construction
is expected to remain high in 2006.”
In additional news, the
China National Building Material Group (CNBM),
one of China’s largest providers of construction products, could also be
listing its shares on the Hong Kong stock exchange this quarter. This
news has been reported by an official at the company, who did not wish
to be identified. According to the Company’s website, last year “import
and export volume was 4500 million Yuan, increased by 56% and profit
increased by 25%.”
If all of this lies ahead for China, a closer look at the country’s
ability to make these resources accessible, up to the speed of market
demands, could become a viable indicator of China’s potential to become
an even stronger global player. Overall, the construction industry in
both parts of the world will remain closely linked to a variety of
factors such as resource price fluctuations and increasing demand, which
can change considerably from year to year.
Jennifer Lee
Jennifer Lee has a degree in English Literature from the University of
British Columbia. She holds a publishing certificate from Simon Fraser
University and has worked at both Vancouver and Western Living
magazines, where she began her career as an editorial intern. She has
worked as an editor in countries such as Zimbabwe and South Africa,
producing books, newsletters and editing various quarterly magazines on
a variety of international development related topics. In South Africa,
she worked to help produce a bi-weekly newsletter for the Institute for
Security Studies on crime and corruption headlines which appeared in all
national and provincial papers. Prior to working in southern Africa, she
wrote articles for DMR Consulting Group, on mergers and acquisitions
taking place in the market during 2001. She now produces a quarterly
publication at the University of British Columbia.
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