Gypsum production is heavily dependent on construction industries. Approximately 90% of gypsum is used in the manufacture of wallboard for residential and non-residential building applications. A further 5% is used as an additive in cement production.
The steep decline in the residential and non-residential building sectors over the past five years has greatly affected gypsum demand. Consumption of gypsum fell over 50%, from 41.6 million tons in 2006 to 19.4 million tons in 2010 (United States Geological Service). NAHB forecasts only a modest 1.3% increase in housing starts in 2011, then a 15% rise in 2012. Gypsum demand is expected to closely follow the housing starts forecast, remaining relatively flat in 2011 followed by a moderate increase in 2012.
Gypsum prices generally track demand. As the chart below shows, the gypsum price index, (a component of the producer price index), has by and large moved in line with construction spending over the past 20 years.
The chart also shows the long term trend in the gypsum price index. In the period of peak housing production, between mid-2003 and mid-2006, gypsum producers struggled to supply the very high demand for wallboard. Consequently, gypsum prices surged, rising over 75%, to a level well above their long term trend.
With the housing market entering a downturn in 2007, gypsum demand slowed sharply and prices followed, falling 32% over a 20 month period. This returned prices to a level close to their long term trend by early-2008.
With very weak demand from the housing sector, gypsum prices have bounced around within a relatively narrow range since the early-2008 trough. In the past three months, the gypsum price index has trended down, falling 0.6% in July, 1.7% in August and 1.7% in September. Overall the index is down 4.6% relative to September 2010. The current gypsum price level is below the 2008 trough and 15% below the long term price trend level.
Gypsum producers responded to the very weak demand over the past four years by slowing production though reduced shifts, moth-balling production lines and even the closure some of their older production facilities. There is no doubt that they, like home builders and many building materials suppliers, are struggling to remain profitable in the current economic environment.
Recently, several NAHB members have expressed concern about gypsum producers’ stated plans for significant price increases in 2012, some as high as 35%. An increase of this magnitude will raise gypsum prices to a level almost 20% above the long-term trend.
NAHB research indicates that gypsum drywall represent around 4.4% of the construction cost of an average new home, with material input typically represent 30% of the component cost (ie. gypsum drywall material cost around 1.3% of construction cost). If construction costsaccount for 52.9% of the house price, the current median sales price of a new home is $204,400, and points and interest on a loan, broker’s fees and return on equity add a further 16% to the final sales price of a home, then a 35% increase in gypsum drywall prices would increase the cost of new home by around $600. Based on income distribution and the minimum income needed to support the monthly mortgage payment (plus tax and insurance), analysis by NAHB indicates 246,000 U.S. households are priced out of the market for a median-priced new home when the price of the home is increased by $1,000. Thus, with the proposed increase in gypsum drywall prices, up to 143,000 U.S. households are likely to be priced-out of the market for a median-priced new home.
The proposed 35% price increase is out of proportion given the currently weak housing market. With builders’ margins squeezed to the bare minimum, little scope exists for them to absorb increased input costs. Any increase in cost is likely to be passed on to the home buyer, leading to a considerable decrease in the number of households that can afford a median-priced new home. This will weaken housing demand further at a time when new home sales are bouncing around at record lows.
NAHB will continue to monitor gypsum price movements very closely.