Domestic Tile Market Faces Challenges in Construction Levels, Imports
While overall consumption of ceramic tile continues to increase, the average unit value for ceramic tile has been on a continuous decline due to lower duty rates on imports and increased competition between suppliers. In 1997, the average price per square foot was $1.12; by 2000, the average price had dropped to $1. However, the lower pricing appears to be helping to stimulate demand among consumers—approximately 1.8 square feet of ceramic tile was purchased for every $1,000 in construction and reconstruction/remodeling in 2000. Use of tile in these markets has grown steadily over the past several years, increasing 7.2% from 1996-2000.
Despite the positive trends of the past decade, ceramic tile is largely dependent on the construction market. In general, a boon in construction is good for the tile industry, while a drop signals a slowdown in tile sales. While new construction and reconstruction spending has slowed in some sectors, such as single-family residential, retail, and hotels/motels, other sectors continue to experience growth. In the first quarter of 2001, office construction spending was up 13% over the same period last year. Total hospital and health construction was also up slightly, showing gains of over 6%. However, real investment in the construction sector had dropped by nearly 3%, indicating that the slowdown is likely to continue in the near term.
Lower interest rates for both mortgages and short-term credit, combined with the substantial increase in household wealth between 1995-2000 and the reduced cost of consumer debt service (debt as a percentage of wealth) could help bolster consumer spending and residential construction. However, rising unemployment, the recent decline in stock prices, rising energy costs (both gasoline and utilities) and lower corporate profits are likely to continue to put a damper on consumer confidence, and based on past trends, consumer confidence and employment will have a greater effect on the housing market than mortgage rates.
Over the next few years, several distribution factors are also likely to have a positive effect on the purchase of ceramic tile, including an increased level of advertising and promotion, experience gained by floor covering retailers in marketing and selling ceramic tile, an increased efficiency at manufacturer-owned and operated retail outlets, the emergence of more specialty flooring and home design centers, and increased product offerings and promotion among home centers.
In the commercial sector, the retail market (26-30% of the commercial tile market) is expected to experience near-term weakness based on falling consumer confidence and employment. However, stronger growth is expected to begin in 2003 based on the age of existing stock, replacement needs and overall economic growth. In the office market (19-22% of the commercial tile market), the slowdown in the high-tech industry has pushed vacancy rates up substantially in some areas. However, the longer-term vacancy outlook is positive, indicating that recovery could emerge rapidly, and rental rates remain strong despite the increase in vacancies. This sector will provide a positive effect on ceramic tile demand beginning in 2003. The educational market (13-16% of the commercial tile market) will continue to experience strong near-term demand based on demographics and local requirements. However, growth in the hospitality industry (8-12% of the commercial tile market) is unsustainable; high oil prices have depressed leisure travel, while business cost-cutting has reduced the remaining demand. Growth opportunities are restricted to the trended demand for upscale facilities. Expansion in the health care/institutional market (5-8% of the commercial tile market) is present in some areas, but major commitments depend to a large extent on health care financing reform. In the remaining commercial markets (12-29% of the commercial tile market), large-scale amusement and recreational structures had accounted for a significant amount of nonresidential investment during 1995-2000; however, slower overall growth has reduced the outlook for these projects. Strong demand remains, however, in the replacement/expansion of transportation facilities.