Volume 38, Issue 12, December 2003

Looking Ahead

Construction Forecast Mixed, Generally Favorable for Long-
term Growth

by Brigid O'Leary

Yhe future of any industry is hard to predict and forecasts for the future can be as uncertain and as diverse as predictions for the weather. Such was the case at the National Press Club in Washington, D.C., on October 15 when Reed Construction Data held its annual North American Construction Forecast conference. Speakers had the long term in mind, discussing what each thought was in store for the construction industry over the next two years.

On the Bright Side
Predictions ranged from almost no change to a 3.5- to 4-percent increase in industry growth in the early part of 2004. Overall, though, feelings about the future remained optimistic, with the consensus more or less seeing a small growth in 2004 with 2005 being the boom year. The focus of the forecasted construction, it is anticipated, may be less on the residential side and more on the non-residential side.

Industry-Specific Perspective 

What’s the glass industry see for 2004? We asked individuals representing the following industry perspectives for their forecasts: the glass manufacturer, the fabricator, the aluminum products manufacturer, the glazing 
contractor, the distributor and the glass retailer. Tell us your 2004 expectations by e-mailing echilcoat@glass.com.

The Float Glass Manufacturer:Mark Orcutt, PPG Industries
In 2004, what do you see happening in the world?
The long-awaited economic recovery in the United States finally appears to be taking root. As that trend builds momentum into the new year, we expect homebuilding and auto sales to remain strong, and to continue to be aided by low interest rates. We believe that this combination will result in steady demand for flat glass products in 2004. 

… in the glass industry?
Price stability has characterized the glass market in recent years. We expect this trend to continue. Inventories are low, but production capacities are large enough to accommodate any increases in anticipated demand. 

… for your company?
Rising fuel prices will continue to present cost-containment challenges in 2004. PPG will work to offset those cost pressures by enhancing our manufacturing efficiencies and reducing our costs. At the same time, we plan to deliver more value to our customers through the development of new products, and by introducing more innovative customer-centric programs like our Certified Fabricator Program (CFP) and Certified Commercial Window Fabricator (CCWF) Program. 

As far as individual markets are concerned, our projections indicate that commercial construction offers the greatest potential for short-term growth, as more people return to work and investments in office construction rebounds. PPG is well positioned to capitalize on renewed commercial construction, as our products will be increasingly specified by architects and building owners responding to new, environmentally progressive building codes. Glass demand for residential, automotive and appliances markets, which have resisted economic downturns in past years, will continue at current high levels.

Portland Cement Association chief economist Edward Sullivan is predicting that spending will remain constant during the upcoming year, but at a high level, and figures in an assumption of growth in the United States in 2005. Sullivan believes 
rising interest rates will restrain the residential building trend that has been the recent leader in the industry. 

Non-Residential Construction
Several took part in a panel discussion that focused on major projects and trends, in which they examined areas they see continuing to grow in the non-residential construction segment. 

Gordon Mills, chairperson and chief executive officer for Durrant says he sees more opportunity in 2004 than in 2003. The strongest growth areas he sees are criminal justice, community colleges and healthcare. Mills said business area transformations being seen include integration of design and delivery where there is a close collaboration of all parties involved in the building project to aid in the transfer of 
knowledge.

The Contract Glazier:Joni Juba, Juba Aluminum Products

In 2004, what do you see happening in the world?
The first thought that comes to mind is the turmoil and unrest in the Middle East and our attempt to nurture a new, fledgling government with conditions probably not stabilizing for several years. The vast differences in ideology will continue to cause aggression and bitterness toward the United States and its allies. That being said, the 2005 presidential election will prove to be one of passionate agendas offering a better way to deal with Iraq and national security. Economically, I believe things will continue to improve as the American economy improves. The European economy in particular should begin to loosen and grow over the next 12 to 18 months. Asia is largely viewed as the next great economic frontier, and in terms of the number of potential customers, that is probably accurate. But, if China does not allow its currency to float with the market, the United States may be forced to impose additional tariffs on Chinese goods.

… in the glass industry?
Next year should be a more productive and profitable year for the commercial construction industry. I remain optimistic as I see our own business opportunities increasing. From the perspective of a commercial glazing subcontractor, I continue to see our responsibilities on projects more closely mirror those of general contractors, especially in the task of overall project management. 

… for your company?
Last year and this year have been very challenging. In the past 18 months we have been motivated to reassess our position in the marketplace and make necessary adjustments as necessary in order to remain competitive in the industry. Our current project backlog for the upcoming year is encouraging, and 2004 should be a prosperous year overall. Despite the tough economic climate, we believe that together with our talented employees and lasting commitment to our customers, our company will move forward and continue to lead in the glass and glazing industry. 

…personally? 
Continue to focus on an improved understanding of the changes facing our industry. 
Continue to focus on personal growth by capitalizing on innate strengths; continued participation in educational opportunities via seminars, roundtable discussions, leadership groups; networking with industry groups having proven track records of diversity, productive growth and profitability.

According to Charles Rodenfels, senior vice president of URS, government buildings are receiving a great deal of attention in terms of renovation and improvement of 
infrastructure. 

Gary Haney, a design partner with Skidmore, Owings and Merrill, said his company is focusing more on diversifying. He said last year 27 percent of their volume was financial, corporate mixed-use projects. Airport and transportation jobs accounted for 24 percent; government work, 24 percent; health and science, 13 percent; and education 7 percent, which he expects to double in 2004. 

Another panelist, Clark Davis, vice chairperson, chief executive officer, with HOK said he is seeing speed of design and delivery becoming more important than cost in many of the projects in which his company has been involved. He said they have been active in hospitality business and have also work in retailand have also done work in retail 
and mixed-use commercial business; corporate offices and interiors remain slow.
Michael Schneider, executive vice president with Parsons Brinckerhoff said the three C trends they are facing are commoditization, consolidation and commercialization of the practices in the design, engineering and architecture industry. He said as the position of the design and construction industry is becoming stronger clients are not only looking for one-stop shops, but also ease of shifting the risk or responsibility. 

Other Areas of Hope
Aligned with Sullivan, but for different reasons, is Glenn Mueller, managing director, Real Estate Investment Strategy, Legg Mason Inc. and professor and investment strategist at Johns Hopkins University Real Estate Institute. Mueller believes that 2005 will see a surge in the industry leading back to a 2-percent growth (the long-term average in the field) and he, too, believes the growth is not likely to be the private residential arena. Multifamily housing, he indicated, will remain steady, with the ever-increasing number of college graduates entering the job and rental market and an expected growth of 2.4 million people per year for the next ten years. Despite the steadiness of this market, the growth is expected in other areas besides the residential market.

The Aluminum Products Manufacturer: Tom Harris, Vistawall Architectural Products

In 2004, what do you see happening in the world?
I’m sure everyone has read about the global market, particularly in the areas of consumer goods and technology. We haven’t thought much about it from the perspective of construction products, but it is happening. At Vistawall, we have operations in the Middle East and China, but our main focus is in the United States. Interestingly, we have noticed several competitors from Canada taking particular interest in the U.S. market as well. The Canadian competitors seem to be focused on value-added opportunities that include engineering, fabrication, assembly and glazing, where their lower costs of benefits and the favorable exchange rate give them an advantage. Chinese suppliers are also becoming more prevalent in the areas of aluminum profiles.

… in the glass industry?
Statistics indicate that non-residential construction will have declined approximately 30 percent, from its peak in 2000, by the end of 2003. Office construction will have declined by approximately 50 percent in the same period. It is my belief that the economy has reached the bottom as we begin to hear positive news on that front. However, our industry is not out of the woods yet. First, construction activity will lag general improvement in the economy by six to 12 months. Second, I am concerned about the strength of this recovery and will want to see improvement in manufacturing activity, job creation and capital spending to have real confidence in this recovery. 

With a declining market since 2000, our industry suffers from overcapacity. The result is a very competitive market from the standpoint of price and deliveries. The price concessions that we’ve seen since 2000 have no doubt hurt the profitability of the industry. Should we remain in this soft market, it is likely that some significant changes will occur. 

A bright spot in our industry stems from the emphasis on Leadership in Energy and Environmental Design (LEED™), which was developed by the U.S. Green Building Council. This emphasis creates better prospects for innovation in our industry, and we welcome that.

… for your company?
We achieved a nice level of financial success in 2003 by aggressively approaching each sales opportunity and improving our cost-structure with increased productivity, automation and elimination-of-waste. During 2003, we were able to leverage our brands as we focused the power of the different sales organizations on a 
single project. As a result we secured several projects that involved products from more than one brand. We are positioned for similar success during 2004. 

… personally?
On a personal basis I have several goals. First would be achieving the business objectives of the Vistawall Group. After that I would like to take a little 
more vacation, perhaps play a little more golf and simply enjoy life.

“It is believed that we will achieve about a 2.7-percent demand growth in office space over the remainder of this decade, which is a strong indicator,” Mueller said.

The Fabricator: Ted Hathaway, Oldcastle

In 2004, what do you see happening in the world
Global terrorism will challenge the world order. The threat of supply disruption to oil-producing regions such as the Middle East will create greater volatility in global energy costs. Overall, a sustained recovery of the world’s major economies will be moderated by the increasing frequency and severity of global terrorism. 

… in the glass industry?
The architectural glass industry faces another tough year. The combination of excess glass fabrication capacity and soft commercial construction activity will continue. This imbalance in supply versus demand will challenge profits, and poorly capitalized companies will struggle to survive. Shifting demographics and implementation of stricter building codes should provide selective market opportunities. 

… for your company?
We will grow and expand via acquisition and product development. We have been extremely pleased with the addition of Southwest Aluminum Systems, our initial investment in architectural aluminum systems. We plan to invest to build this new platform further. 

Also, we plan to double our capital expenditures in the coming year. Ongoing investment in advanced, CNC equipment and other automation technology is essential to profitably growing our market share. 

Finally, we intend to increase our marketing efforts to build the Oldcastle Glass® brand name and to promote our expanding portfolio of differentiated products such as StormGlass®. 

… personally? 
Improve my golf game. 


Don’t Count Your Chickens
Despite the positive tone of the conference, some were more hesitant than others to be the voice of hope for the future.

One of those voices of reason was Ray Owens, vice president and senior economist for the Federal Reserve Bank. He opined that while economic improvement and the restrictions on new construction are a good start for future growth, it is still a gamble concerning what is to come. The correlation among job availability, commercial real estate and industry growth on which others have placed some hope, Owens countered, may work against the industry—if the growth remains slow it could still limit the possible upswing in demand growth. 

The Retailer: Richard C. Gianforti Sr., Flower City Glass Co.

In 2004, what do you see happening in the world?
I see opportunities for many U.S. companies to export their products. However, we are seeing a lot of U.S. manufacturing going to foreign countries. We have to see what this impact will have on the world economy.

… in the glass industry?
In our industry, I see a lot of the public work that has sustained us for the last three years coming to an end. With the improved economy, we should see an increase in private capital investments.

… for your company? 
We see much of the same pattern continuing in 2004, still working on public work projects with some new private work developing. 

… personally?
I take pleasure in watching the third generation of our company taking over with new energy ideas. My son, Richard Jr. and daughter, Kara, will be faced with new challenges as I am now 61 years old. 

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The Retailer: Don Rechtenwald, Rex Glass

In 2004, what do you see happening in the world?
Nothing but problems. More terror. No peace.

… in the glass industry?
Nothing but opportunity. More security. More technological advancement (such as with self-cleaning glass).

… for your company? 
Our customers are less and less do-it-yourselfers. We see more of a need for our custom installation services.

… personally?
Life is short. Eat, drink and be merry.

“We’re seeing hints of improvement, but not deep-seeded 
improvement in the labor markets,” he said.

Owens also indicated that there is no guarantee that the sudden expansion that followed the recession of the 1990s will be present again this time.

Gene Sperling, former national economic advisor and director of the Economic Council under President Clinton, is also less enthusiastic about very positive predictions for the coming years. As he sees it, the United States’ recovery from the recent recession has been disappointingly mild. To illustrate this point, he expounded upon the fact that between the second quarter of 2002 and the first quarter of 2003, there were three quarters below 1.5-percent growth and that there remains a period of job loss nearly 22 months after the recession. These are, to Sperling, signs of a still unstable and uncertain economy.

“I’m not in the pessimist camp … just cautious,” Sperling said. 

The Distributor: John Stilwell, AFGD

In 2004, what do you see happening in the world?
I’m hoping for world peace, phenomenal profit margins, 100-percent customer satisfaction and more grandchildren. Since my daughter is expecting, I’m betting I’ll get the grandchild first.

Geopolitical pressures will only heighten as the presidential election approaches. I suspect this will have a negative impact on consumer and business confidence. However, the overall economy is improving. In fact, we anticipate a welcomed 5-percent increase in square feet for office construction, which is overdue. 

… in the glass industry?
The glass industry will continue to change, as energy and building codes change and people become more aware of the impact (fiscally and physically) of improved window technologies. We will see more glass used in designs, with increased emphasis on energy efficiency. We will see more high-performance, low-E and laminated products being utilized. 

… for your company? 
Our in-house engineering division continues to upgrade existing equipment. The improvements will optimize yields, shorten lead times and improve quality. We will also invest in new equipment where needed, and provide ongoing training to our operators so that the return on investment is faster and greater than expected.

We are also a substantial fleet operator. We have more than 300 trucks on the road, providing next-day and standard service, with hundreds of unique truck routes. Effective January 4, 2004, changes in the hours-of-service rules under the Federal Motor Carrier Safety Regulations will affect our business significantly. This is a rule that limits the number of hours a driver can work. As a result, trucking industry experts are projecting a 2-percent to 19-percent loss in productivity. These restrictive rule changes will ultimately mean higher trucking costs since more trucks and experienced drivers will be needed to supply glass to our customers. 

… personally?
I look forward to continuing my travel schedule and spending time getting to know our employees and customers even better. I want them to feel, as I do, that AFGD is the best company to work for and partner with in the industry. Working together, 
we can enjoy another prosperous year in the glass business.

USG

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