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A side effect of the increased interest rates is that the investment community has become concerned about stock market share prices. Many stocks, especially in the high technology sector, have escalated in value over the past several years to very high multiples of earnings. This year has seen a rapid decline in many of those stock prices. This loss in paper wealth has increased the anxiety on the part of short-term traders, in addition to reducing the net worth of many investors. The psychological effect of this drop may be more important to the ceramic tile sector than the actual monetary loss. Consumers, especially those who have much of their net worth in their houses and the stock market, may become conservative in their spending habits because they feel their net worth has declined (rather than experiencing a real drop in income).
There is speculation that the Fed may increase interest rates several more times this year. This affects the housing sector dramatically as it immediately increases mortgage and home equity loan interest rates, thereby slowing the rate of tile sales.
Construction SectorAlong with higher interest rates, the fact that construction of new houses has for some time exceeded the fundamental demand (the need for housing based on population growth alone) for housing is expected to contribute to a 7% (or 4% in dollars) decline in new house construction in the year 2000 from 1999 levels. Other building segments are expected to increase slightly, including public works (6%), manufacturing buildings (9%), income properties (1%), institutional buildings (2%) and electric utilities (10%). This increase is predicted to offset the reduced housing construction, resulting in a net building spending change of zero dollars. However, because ceramic tile use in housing is greater than the other segments, demand for tile is expected to decline accordingly compared to the last several years.
Ceramic Tile MarketCeramic tile sales in the United States have experienced a period of eight years of uninterrupted growth (see Table 1). Sales have increased from 85.1 million square meters in 1991 to 206.9 million square meters in 1999. This is an increase of 143.1% in eight years. The rate of increase has accelerated in the past few years. Approximately 67% of the tile consumed in the U.S. is imported (see Table 2). (Reported sales of tile from U.S. factories have been under-reported by the U.S. Department of Commerce for some years. Therefore, domestic shipments have been increasing faster than previously reported)
Duty rates on ceramic tile imported into the U.S. are declining due to the Geneva GATT Round and the current status of the North American Free Trade Agreement (NAFTA). These lower duty rates will continue to reduce pricing of imported tile in the U.S. and keep a lid on domestic prices, making ceramic tile a very good buy for the U.S. consumer. Ceramic tile prices have actually declined in non-inflation adjusted dollars since the 1950s.
Despite this price drop, ceramic tile has increased its share of construction dollars for the past 10 years, probably because tile is taking market share from other surfacing products (mainly carpets, hardwood floors and sheet goods). Independent studies confirm that tile is a very popular finishing product.
American consumers have increased awareness of the value and aesthetics of ceramic tile. They are using more professional interior designers for their residences and have been exposed to other cultures that consume much more tile. The long life of tile combined with its ease of maintenance is attractive to American households, who increasingly have less time to spend on cleaning and repairs.
Globalization of the industry has been occurring for the past 15 years. Recently, Roca acquired Laufen (which owns U.S. Ceramics), and American Marazzi bought Monarch. American Florim is taking over the TileCera facility, and there have been several other inquiries to the Tile Council of America indicating that other foreign-owned companies are looking to expand into the U.S. There are currently 35 major manufacturers of tile in the United States, with 80 factories employing 10 to 500-plus employees.
Several companies have reported an intention to expand or have already expanded their facilities in the United States, including American Marazzi, Crossville, Metropolitan and Winburn.*
It is generally recognized by the worldwide tile industry that newer, automated and high-volume production facilities are the choice for future factory construction. These factories require a low labor content and can be competitive anywhere in the world if they are close to sources of raw materials and customers. (The recent trend toward higher energy costs has decreased the ability to ship tile effectively for long distances.)
Product TrendsIt is difficult to easily describe the American consumer's taste in tile designs. In the past, trends were clear-cut toward some fashion, such as large tile sizes, earth tones, basic colors, etc. Today, we see popularity in all sizes and styles of tile. Mosaic tiles have become popular once again. Traditional 41/4 x 41/4-in. wall tile is still a mainstay in the U.S., while natural look tiles (those mimicking stones) are also very popular. A recent fad is the demand for "porcelain" tile. This is a misunderstood category, but the consumer wants large sized tiles with low water absorption and color through the body of the tile.
Barriers to Tile SalesConsumption in the U.S. is quite low compared to other developed countries, indicating that there is still an opportunity for growth even if construction slows. However, as shown in Table 1, the U.S. also has a low unemployment rate. Construction jobs, including tile setting, are not highly regarded (despite the relatively high pay). Therefore, one of the industry's greatest challenges is to attract new people into the industry and train them. Assopiastrelle, ASCER, The National Tile Contractors Association, and The Ceramic Tile Distributors Association, along with the Tile Council of America, have made generous donations to begin addressing these areas. Several years ago, The Ceramic Tile Education Foundation (CTEF) was established to educate tile installers, sales people, factory representatives, inspectors, designers, and consumers in the product nuances of our industry. Other such initiatives are ongoing.
Forecasts and TrendsTile sales are expected to grow in the United States despite an anticipated general economic slowdown (see Table 3). While that growth will be at a slower rate than in recent years, the numbers are still impressive-the average growth rate of tile sales is expected to be in the 6%-per-year range through 2004.
New technologies that permit manufacturing of tile from municipal waste are being developed, which will lower product costs and solve a waste disposal problem. This product will undoubtedly appeal to the environmentally conscious consumers. Additionally, the new electronic commerce along with powerful retailers and new methods of distribution will also help increase the use of tile.
Mankind has used ceramic tile for thousands of years. It is ubiquitous and long lasting. And all indications are that tile will remain a best seller in the U.S. for years to come.