Strategic Solutions: Construction, Crude Oil, and Natural Gas Outlook
Historically, adhesives and sealants have been growing about one-and-a-half times of the gross domestic product in the U.S.
Coming into 2015, the U.S. adhesives industry looks to continue its recent trend of lower-than-normal volume growth. Historically, adhesives and sealants have been growing about 1½ times of the gross domestic product (GDP) in the U.S. Since 2008, however, that figure has declined to one or even slightly less than one times that of the GDP. Reasons include: new construction representing a lower percentage of the U.S. economy, a slowdown in the substitution of mechanical fasteners to adhesives as the industry matures and, until recently, a lower number of U.S. auto and light truck assemblies.
Housing and Construction
The U.S. housing recovery continues but at a frustratingly slow rate. After reaching a peak of greater than one million new single-family units sold in 2005, homebuilders are struggling to sell even half of that number today (see Figure 1). In 2014, the number looks to have been about the same as 2013, with 430,000 units sold.
Some of the decline in single-family housing is due to an expansion of multi-family units, as the number of renters has been growing. Home ownership rates have declined from a peak of 69% to under 65% presently.
Construction can also be broken down by public vs. private and residential vs. non-residential. In general, non-residential construction makes up about two-thirds of the total value of construction annually. Similarly, private construction makes up about two-thirds of the annual value of construction. Nine years after peaking at $1.2 billion, construction still has not fully recovered (see Figure 2). In 2014, the total value of construction spending looks to have finished at $1 billion.
Crude Oil and Natural Gas
Historically, raw material costs for adhesives formulators are the largest component, representing about 52-60% (vs. 45-49% in the coatings industry) of income, and more than 80% of the cost of goods sold (see Figure 3). Given that a large percentage of raw materials used in making adhesives derive from crude oil and natural gas, the adhesives and sealants industry is sensitive to their movement.
The second half of 2014 saw crude oil prices decline more than 40%, while natural gas prices have fallen by about half as much. It generally takes four to six months for these prices to work their way through the supply chain.
Figure 4 shows the relative change in oil production by region from 2006 through 2013. Why did oil get to its current price level so quickly? It’s a stretch to say that a drastic change in supply or demand over the last few months is the reason prices fell so dramatically. Instead, it’s more likely that market expectations have changed. OPEC has, so far, not cut production in response to the price decline. Instead, the lower prices are expected to force many of the smaller U.S.-based shale producers out of business. Many are highly leveraged and have made capital expenditure decisions based on the expectation that prices would be higher than they are now.
As forecasters continue downward revisions to the average price per barrel, the futures market indicates lower prices for crude oil and natural gas for at least the next two or three years. If prices do stabilize at current levels, consumer spending may increase due to lower prices at the pump. In fact, most estimates predict that the drop in prices could add an extra 1% to the U.S. GDP in 2015. I hope that proves to be the case
Any views or opinions expressed in this column are those of the author and do not represent those of ASI, its staff, Editorial Advisory Board or BNP Media.