Capacity Investment under Demand Uncertainty: The Role of Imports in the U.S. Cement Industry

Abstract

Demand uncertainty is thought to influence irreversible capacity decisions. Suppose that local demand can be sourced from domestic (rigid) production or from (flexible) imports. This paper shows that the optimal domestic capacity is either increasing or decreasing with demand uncertainty, depending on the relative level of the costs of domestic production and imports. We test this relationship with data from the U.S. cement industry, in which the difference in marginal cost between domestic production and imports varies across local U.S. markets because cement is costly to transport over land. Industry data for 1999 to 2010 are consistent with the predictions of the model. The introduction of two technologies to the production set-one rigid and one flexible-is crucial to understanding the relationship between capacity choice and uncertainty in this industry because there is no relationship between these two variables in aggregated U.S. data. Our analysis reveals that the relationship is negative in coastal districts, and significantly more positive in landlocked districts.

Committed emissions from existing energy infrastructure jeopardize 1.5 °C climate target

“…We adopt sector-dependent method, and apply straight-line and geometric models for different infrastructure, as shown in Table S6 . Data on capital costs used to estimate the asset value was collected from previous literature 12 , 21 , 23 – 25 , 58 , 59 and various reports 60 – 64 . Wherever possible, we use interannual and national average capital costs for different combustion/production technology and equipment.…”

The Relationship of Cement Consumption and Economic Growth: An Updated Approach

“…Considering other researches concerning GDP as the primarily inflator to the cement consumption we mention the works by Dougherty (1973), Woodward andDuffy (2011), Hussain (2012), Meunier et al (2015), Cao et al (2016), Raventos and Zolezzi (2016), Chao et al (2017), andBildirici (2020). They claimed that GDP can be a source in determining cement consumption.…”

“…A major part of concretes more than 80% consists of cement. Meunier et al (2015) acknowledged that the cycle demand and supply for cement is uncertain. Domestic capacity and the need for import are hard to be modeled based on his research in the US, therefore it concluded and suggested to keep build more cement plants to anticipate surprise demands.…”

Carbon Leakage: The Impact of Asymmetric Regulation on Carbon‐Emitting Production

“…Meunier et al. (2016) focus on the uncertainty of demand. Based on an empirical study on the US cement industry, they show that the impacts of demand uncertainty on the optimal domestic production capacity are non‐monotonic and depend on the relative costs between domestic production and imports.…”

“…In Ding et al (2007) that consider a producer with production and sales in two regions, the producer hedges against the uncertainty emerging from the exchange rate by investing in capacity and/or buying financial options on the exchange rate. Meunier et al (2016) focus on the uncertainty of demand. Based on an empirical study on the US cement industry, they show that the impacts of demand uncertainty on the optimal domestic production capacity are non-monotonic and depend on the relative costs between domestic production and imports.…”