Like all segments of the U.S. residential building materials market, production of rigid PVC fence and decking products is down from last year's level. But they have not declined nearly as much as other PVC building products, such as pipe, siding, and window profiles. Computations based on our Fencing and Decking Business Index show that output is down 5 while vinyl siding and window profiles are off about 8 in 2008. Next year will get off to a sputtering start, but by year's end, residential construction will begin a slow rebound and demand for fence and decking will expand by 8 below the already-low level of 2007. That's down more than 50 in 2008. But the downward spiral in demand for new houses has pulled down home equity values, access to credit, employment levels, and consumer confidence, and this in turn inhibits consumers' appetites for home improvements.
It will take until at least next spring before the situation begins to improve. There is still a huge inventory of unsold houses, and with prices continuing to fall, there is little incentive for buyers to return to the market. Falling prices also make it difficult for banks to get a solid reading on their asset valuations, and this uncertainty impedes their willingness to lend money for mortgages. The only cure for this uncertainty is a few months or quarters when the market stops falling and stabilizes. So manu-facturers of building products will have to hold on until home buyers and lenders become more confident of market conditions.
As if falling demand was not painful enough, suppliers of all types of plastics products have had to contend with rapidly escalating resin and energy prices. The run-up in prices of energy and other commodities has undoubtedly had a negative effect on construction activity, but the good news is that the remedy to this problem appears to have already emerged. Oil prices appear to have hit a peak in mid-2007, and since then the predominant trend has been downward. This is due primarily to declining demand. The hurricane season and continued geopolitical uncertainty will prevent energy (and resins) prices from falling as quickly as we would like, but the trend to reduced consumption will persist. This portends decreasing prices of crude oil and natural gas through 2009 and beyond-and declining resin prices as well.
In summary, the outlook for manufacturers of PVC fence and decking products is for little change in market conditions for the remainder of 2008 and the first few months of 2009. As 2009 progresses, resin and energy prices will gradually decline, but they will likely stay at high enough levels to sustain the drive towards greater efficiency and "green" products. All of this will set the stage for a return to solid growth in demand for all types of rigid PVC building products in 2009, and the fence and decking segment will continue to outperform other product segments.