My favorite band, letterbox, pleads "don't blame it on the government." In this instance, I must protest.
Cement and concrete (yeah, there's a difference) costs are skyrocketing throughout much of the United States, with people in certain areas, such as Colorado, already seeing the potential for shortages. Inflation, too much demand, not enough supply, and it's not like you can just toss up a cement plant to backfill the capacity.
In the past when there have been cement shortages, the U.S. has generally imported from China, the world's largest producer. But China is in a bit of a speculative boom of its own, with an estimated 1 million construction workers in gainful employ at the moment in Beijing alone. No cement coming from there. Well, where else can one get cement?
Mexico. Ah, yes, Mexico, and its dominant cement manufacturer, Cemex (NYSE:CX). Cemex is the third-largest cement-producing company in the world after French company Lafarge (NYSE:LR) and Switzerland-based Holcim (OTC BB: HCMLF). Cemex is also the second-largest American producer having bought Houston-based Southdown in the last few years. In fact, Cemex is already importing, but much less from Mexico than you might think, even though it has supply available.
Why?
In 1990 the U.S. government smacked the Mexican cement industry with punitive tariffs, accusing the companies of dumping cement into the U.S., selling it for less than it costs them to produce. Since that time, the Mexican cement companies, including Cemex and Grupo Cementos de Chihuahua (OTC BB: GCWOF) have paid more than $500 million in duties on cement they've exported to the U.S. Let me rephrase that: Since 1990 we have paid $500 million in duties on cement imported from Mexico. Does anyone think these costs weren't passed on to the end user? Guess again. These duties make everything that has used cement, in particular cement that came from Mexico, more expensive to produce.
Regardless of what the industry environment was like in 1990, it seems much more unlikely that Mexican companies are trying to dump today. Particularly for Cemex this would make absolutely no sense since it has enormous financial stakes in operations north of the border -- that would be akin to muddying a market that is utterly important for the company.
(P.S. Along with cement and oil, we also are seeing spiking prices in timber and wood products, as well as steel. Still think there's no inflation? Can you think of too many capital projects where these types of materials are not required? A Houston-area contractor noted that lumber to build a house that might have cost $50,000 last year now can run $70,000 or more.)
We have an essential product in high demand with spiking prices, along with the potential for shortages -- a disaster. We also have a lower-cost provider with supply waiting to pour into the market, which would alleviate supply issues and bring overall prices down. We have a decade-old punitive tariff that seems to have very little bearing on today's market. Do we really think that Cemex is dumping? Have you seen its margins? Please. This supply problem is fixable, and cheaper more plentiful cement is beneficial for the overall economy.
It's also a pretty good reason why I'm still so happy with my ownership in Cemex. For more coverage on this basic industry, please check out Rich Smith's excellent piece from last week.
Bill Mann owns shares of Cemex. He really does blame it on the government. Cemex was Bill's selection in Stocks 2003, as well as 2003's Stocks for Dad . Cemex also pays a fat dividend. For information on other companies with similar structural soundness (sorry), consider a free trial to Mathew Emmert's Income Investor .
