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Post Katrina Building Material Demand May Rise Slowly

Gypsum Today has said that the destruction caused by Hurricane Katrina will lead to demand for building material products, but no major spikes in sales or earnings for the companies that make the products are expected as the rise in demand is likely to be gradual. Hurricane Katrina, a Category 4 hurricane, slammed southern Louisiana, Mississippi and Alabama.

Although wind typically causes most of the damage in a hurricane, Katrina has caused an enormous amount of water damage. Sections of New Orleans remain underwater due in part to areas of the city being below sea level and breaks in levees.

"If your home has been underwater for multiple days, you know all the drywall on the interior is dead and the home will have to be stripped to the studs," D.A. Davidson & Co. analyst Steven Chercover said. "Even the lumber has got to be dried so substantially that you might be better off starting from scratch."

The initial need following a disaster is typically for oriented strand board to cover holes in walls and other places, BMO Nesbitt Burns analyst Stephen Atkinson said. The need for lumber comes later and more gradually after services such as clean water and electricity are restored, he said. "(Demand) would be muted and not all at once," Atkinson said. "It will be prolonged. I don't see a big surge in demand."

It could be 12 months before demand kicks in for building material products, and there shouldn't be any jumps in the sales or earnings of companies given how gradual the demand should be, Janney Montgomery Scott LCC analyst Lawrence Horan said. Masco Corp. (MAS), which makes products ranging from kitchen and bath cabinets to plumbing products, will benefit from houses needing to be replaced, as well as the work that will occur in the hotel and casino industries, Horan said.

Georgia-Pacific Corp. (GP) should benefit from demand for gypsum wallboard, or drywall, and lumber producers will see some level of incremental demand, D.A. Davidson's Chercover said. Gypsum wallboard was already in tight supply before Katrina hit, so the storm has put more pressure on demand for the product, he said. Insulation has also been in tight supply for at least the last year, and there was talk about cement shortages even before Katrina, Janney Montgomery Scott's Horan said. Labor is also a factor when it comes to demand for building material companies, Chercover said.

Contractors, carpenters, builders and others will be involved in building new homes and repairing Katrina's damage, so that could take away from the pool of labor that would have been used for new homes that were planned before the hurricane hit, he said. "So I think the event is a mild positive because it provides incremental demand, or at least guaranteed demand, in a local, three-state area," Chercover said. "But I haven't been telling people to buy the stocks of Georgia-Pacific and Louisiana-Pacific just because of the hurricane."

One near-term negative from Hurricane Katrina will be that it costs more to move building material products around the country because of higher gasoline prices, Janney Montgomery Scott's Horan said. Gas costs were high before Katrina hit, and the hurricane just makes it worse, he said.

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