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A Look Inside Both China And North America's Construction Industries

   By: Jennifer Lee

A Look Inside both China and North America's Construction Industries

KB Home, Beazer Homes, International Barrier Technology and Puda Coal Evaluate Building Sector By Jennifer Lee February, 2006

When U.S. construction spending rose 1%, ahead of the 0.2% increase Wall Street forecasters were predicting late last year, it raised some eyebrows. Towards the end of 2005, it was clear that construction was continuing to pull ahead. Despite the recent 5% decline in new home sales, sources say that retailers will remain strong amidst the fluctuations. In China also, a rise in construction projects have taken off particularly in large urban centers such as Beijing, where preparations for the Olympics have cast a spotlight on many parts of the city. International Barrier Technology Inc. (OTCBB: IBTGF), KB Home (NYSE: KBH), Beazer Homes (NYSE: BZH) and Puda Coal Inc. (OTCBB: PUDC) offer market insights for 2006.

In light of this recent activity, this year many analysts are left speculating about just where they see housing developments moving. With statements being made by those in authority, such as new Federal Reserve Chairman Ben Bernanke who states that, "A leveling out or a modest softening of housing activity seems more likely than a sharp contraction," it has become difficult to predict where this could all be headed. There are certainly a host of critics who are saying that what lies ahead, may not be as exciting as what we saw in 2005.

The Commerce Department recently reported that "building activity was up 14.5 percent last month compared with December, pushing construction to a seasonally adjusted annual rate of 2.276 million units." Yet analysts are claiming there is an expected decline ahead over last year's results.

Amidst this uncertainty, he furthers that the industry appears to be exceeding expectations as of January and that as an economic indicator, "permits, considered a good indication of future activity, rose as well in January to an annual rate of 2.217 million units. Applications for building permits had been down 4.1 percent in December."

Certainly keeping a watchful eye on increasing numbers of building permits would be a good indicator of how trends are shaping up with housing developments and projects. But further to this, a look at some of the natural disasters the country has faced over the past two years, also offers a good insight with respect to boosts to the construction industry.

In an article recently featured on news portal Buildings.com, it appeared that "according to Construction Outlook 2006: over the past two years, the construction industry has dealt with a sharp increase in building-material costs - a situation that isn't helped by the upward pressure on prices following the 2005 hurricanes."

Certainly the costs associated with picking up the pieces after Hurricane Katrina, are not going to be easy on the pocketbook. In a piece recently featured in the Guardian Newspaper, Hugh Kaufman, senior policy analyst related to emergency response at the Environmental Protection Agency said, "New Orleans may need one of the largest public building programs ever seen in the US at a cost of $80-100bn - approximately the same as the yearly cost of the war in Iraq."

With a significant price tag associated with rebuilding after a natural disaster, many are looking at the policy dealing with the rebuild and the factors that must then be taken into consideration.

In a paper entitled, "Rethinking Then Rebuilding New Orleans," published at the National Academies at the University of Dallas at Texas, Richard E. Sparks states, "planners should look to science to guide the rebuilding, and scientists now advise that the most sensible strategy is to work with the forces of nature rather than trying to overpower them."

Michael Huddy, Director and President of International Barrier Technology Inc. ("Barrier") (OTCBB: IBTGF; TSXV: IBH) offers comment on the existing housing industry in the U.S. stating that, "there's a whole range of opinions as they relate to housing and construction and there is a crossover from new construction, as well as sales of existing homes. It's a nervous population at the moment and this will have an impact on construction as well as sales of homes. However with demographic shifts, such as the baby boomer generation nearing retirement, they want to move into more low maintenance housing in warmer climates and we will see an impact on sales of existing homes, as well as the purchase of new construction, in certain regions."

Addressing current speculation that the housing market is in for a slight decline, Huddy expressed that overall, "starts are going to plateau, but at a healthy rate in the industry." Considering how well things have been moving, he considers this period to be a time where many in the industry can "catch their breath," and that the plateau isn't a discouraging sign.

In their annual report for 2005, KB Home (NYSE: KBH) asserts that, "Although the homebuilding business can be cyclical, it has not experienced a downturn in many years. Some have speculated that the prices of new homes, and the stocks prices of companies like ours that build new homes, are inflated and may decline if the demand for new homes weakens. A decline in the prices for new homes would have an adverse effect on our homebuilding business." KB Home also recently entered into a licensing and co-marketing agreement with Martha Stewart Living Omnimedia under which the company's annual report concludes, "we plan to launch 'KB Home's Twin Lakes: New Homes Created with Martha Stewart' in March 2006."

Additionally, Ian McCarthy, CEO of Beazer Homes (NYSE: BZH) announced in a company conference on January 19th, 2006 that, "While we're seeing a moderation in the overall housing market from the explosive growth of the last several years, we continue to believe there are significant opportunities for us to obtain market share gains in the near term and we continue to be very optimistic about the long term fundamentals of the home building industry." Beazer Homes announced revenues had increased by 21.3%, in their first quarter report this year.

China's Construction Market:

On the other side of the world, China's construction industry is booming for different reasons. According to International Enterprise Singapore, a publication of the Singapore government, the Chinese construction industry as one of the world's largest, has "a total output value of US$151 billion. Internal estimates indicate China's construction output will increase to about US$700 billion by 2015, overtaking the US construction market to become world's No 1." If this helps to put things in perspective, China's emerging markets are beginning to point ahead at becoming the global leader.

Additionally, a press release issued by the U.S. Commercial Service states that in Beijing, "The 'Olympic factor' refers to the impetus generated by 134.86 billion yuan (US$16.65 billion) in direct investment for hosting the Games," said Wei Xiaozhen, a division director of the Beijing Municipal Bureau of Statistics. The city's 2006 economic development report states that, "Based on projects listed in the Games' action plan, 79% of the funds will be channeled into post and telecommunications, infrastructure facilities and improvement of the living environment."

It was further established that, "funding will give a shot in the arm to at least 50 industrial and business segments related to the Games, it says. Construction of Olympic venues and related facilities will translate into 430,000 extra jobs in the sector in five years, the report says. But employment will shrink significantly when construction of projects draw to an end."

China's steel industry, closely linked in with large scale developments, especially those associated with major events such as the Olympics, is seeing an impact. Steel, often said to be a measure of the industrial economy, should have a lot to offer in terms of presenting an indication of where's China's industrial economy is resting at present. The country's steel prices have been forecasted "between $500 and $550 a ton," according to a Troy, Michigan based Roland Berger Strategy Consultants.

Justin Davis, vice president of Keating Investments, North American representatives of Puda Coal Inc. (OTC BB: PUDC), offered that between China's steel and construction industry, "The two are inextricably linked. The demand and consumption of steel is heavily dependant on the construction boom." When talking about the history of steel production in the country, Davis related China's GDP growth rate to steel and coal over the past decade and commented with respect to GDP growth that, "within the last three years, it has been explosive." Puda Coal does not mine coal directly, but cleans the highest grade raw coal through a value-added process for use in steel manufacturing; the demand for Puda's high grade cleaned coal is directly related to the demand for steel.

Considering how closely steel is tied to coal, the chain of production and benefits bear a close relationship and a look at where steel could be headed over the near term is worth consideration. Sources at Industry Week have gathered information, "that demand for steel in construction is expected to remain high in 2006." In additional news, the China National Building Material Group (CNBM), one of China's largest providers of construction products, could also be listing its shares on the Hong Kong stock exchange this quarter. This news has been reported by an official at the company, who did not wish to be identified. According to the Company's website, last year "import and export volume was 4500 million Yuan, increased by 56% and profit increased by 25%." If all of this lies ahead for China, a closer look at the country's ability to make these resources accessible, up to the speed of market demands, could become a viable indicator of China's potential to become an even stronger global player. Overall, the construction industry in both parts of the world will remain closely linked to a variety of factors such as resource price fluctuations and increasing demand, which can change considerably from year to year.

Jennifer Lee Jennifer Lee has a degree in English Literature from the University of British Columbia. She holds a publishing certificate from Simon Fraser University and has worked at both Vancouver and Western Living magazines, where she began her career as an editorial intern. She has worked as an editor in countries such as Zimbabwe and South Africa, producing books, newsletters and editing various quarterly magazines on a variety of international development related topics. In South Africa, she worked to help produce a bi-weekly newsletter for the Institute for Security Studies on crime and corruption headlines which appeared in all national and provincial papers. Prior to working in southern Africa, she wrote articles for DMR Consulting Group, on mergers and acquisitions taking place in the market during 2001. She now produces a quarterly publication at the University of British Columbia.

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