Hurricane Impacts on the Building Materials Industry

The Impact of Hurricane Katrina

Hurricane Katrina's devastating impact on the Gulf Coast region of the United States could have a profound impact on the entire building materials industry. The industry has yet to fully recover from supply shocks in cement in 2004. But hurricane Katrina could cause far more supply disruptions for the building materials industry. First, the industry could witnesses shortages in lumber, plywood, cement, piping, and glass products.

Hurricane Katrina funds will be directed towards construction, engineering, and building materials firm.

Hurricane Damage is a Boon to the Building Materials Industry

Building material shortages will keep building costs elevated throughout the United States because of the sheer size of the damage to commercial and residential structures in Louisiana, Texas, and Mississippi. This will have a ripple effect in the West Midwest, south, and eastern regions of the United States which will cause home construction to skyrocket and thus keep home prices relatively elevated for some time to come. This is a similar effect in the spring of 2004, when there was a shortage of Portland cement on the U.S. market. This caused supply disruptions that rippled throughout the United States.

U.S. Gross Domestic Product will experience a boost due to rebuilding activities in the Gulf Coast region. Gross Metro Product within the Gulf Coast region will experience the greatest increase due to the massive rebuilding effort. The private rebuilding effort will be partially paid for through insurance and low rate federal government loans and grants. The cost of capital will be low due to the federal governments sponsorship of low cost loans. The short term drop in net domestic product will apparently be offset by significant construction activities that could last through the year 2007.

There are certain issues that could forestall the rebuilding efforts. Material and labor are in short supply. This could delay many commercial and residential rebuilding efforts. Many residents migrated to different states and there is no apparent likelihood they will return at any time. In addition, lumber prices , cement, drywall, and roof shingles are in short supply nationwide due to the vibrant housing market and last years Florida hurricances.

A possibility that could occur would be the higher interest rate environment could slow down home construction nationwide. But the Gulf Region could pickup the slack from the fall off since building construction is virtually federally mandated and interest -rate insensitive due to low cost loans. The building materials industry would benefit with either scenario.

The building materials industry may actually benefit from the reduced volume of product on the market. The shortage of product on the market in all building material sectors will be a boon to those companies. The limited supply of product on the market will mean higher prices. Thus, the limited supply of current product on the market will skyrocket. But the higher prices will likely offset and absorb the reduced volume shipped in the market.

The real losers will by be the home building industry and prospective new home buyers.

The building materials industry has continued to benefit from strong residential construction activity. Home construction rose 2/10ths of 1 percent in May 2005 which was the fifth increase in six months. Thus, new home sales are running at a record annual pace.

The strength in housing is unsustainable based on two fronts. A rising interest rate environment which will diminish prospects of both first time home buyers and speculators. Second, rising unemployment will play a factor in home construction activity. U.S. unemployment is currently about 5.1% as of September 2005 which is a rise 2/10ths of 1 percent. This was primarily due to the hurricane Katrina catastrophe which experienced higher than normal unemployment claims in the southeast. Third, the supply of new homes on the market has been rising. In April 2005, the supply of new homes rose 15.2 % year-over-year which is a strong indication that higher interest rates are having an impact on home building construction. In addition, home construction permits declined 4.6% as of May 2005.

Higher Interest Rates

Higher building material prices coupled with rising interest rates could be a recipe for disaster to come. The Federal Reserve Bank raised the discount rate another 0.25 basis points to 3.75%. If the fed tightens too much, it very well could shock the construction market. First, you have higher prices due to a shortage of materials on the market which will cause new home construction to rise. Second, the cost of money is rising with a quarter of 1 percent rise in the discount fee. This could shock the housing market in which the full effect will not fully known until early spring 2006.

The average benchmark rate on a 30-year fixed mortgage is about 5.98% as of October 2005. This is a rise of over 30 basis points since June 25, 2005.

To get a price quote on a detailed industry profile, contact ED Futures at dtia@don-iannone.com or by phone at: 440.449.0753.