Strategy

Hurricane Katrina: After The Storm

America's most expensive natural disaster ever leaves mass destructionâ??and a huge job of reconstruction.

You only have to look at the images of destruction wrought by Hurricane Katrina to realize this was no ordinary tropical storm. The streets of New Orleans have been flooded with putrid and contaminated water, forcing tens of thousands of residents to flee. Devastating winds levelled thousands of homes and businesses there and in Biloxi, Miss., and set adrift offshore oil-and-gas rigs in the Gulf of Mexico. Katrina's economic impact, too, will be anything but typical, and Canadians could be feeling her wrath far into the future.

Katrina is already the most expensive hurricane in U.S. history. Estimates of damage and economic disruption are as high as US$100 billion–and that figure could double once you include disaster relief payments the U.S. government will have to shell out to displaced people. That is significantly more than the $26.5 billion in damage caused by Hurricane Andrew when it ripped through southern Florida in 1992. And it is more than double the estimated US$83 billion in economic devastation caused by the Sept. 11 terrorist attacks in New York four years ago.

The Florida and New York events were localized, with damage that could be repaired relatively easily when compared to the massive flooding caused by Katrina. Not only has the storm destroyed large areas of both Louisiana and Mississippi, it has made the vital Gulf Coast shipping routes all but impassable and also shuttered huge oil-and-gas distribution centres in the region.

While the economic fallout from Katrina will be felt most acutely by those whose homes and businesses were wiped out, Canadians are already starting to feel residual pain. Anyone looking to drive a car, build or renovate a home, heat that home or buy certain goods at the store is going to be paying more–at least in the short run. “This is no ordinary hurricane,” says Avery Shenfeld, an economist at Toronto-based CIBC World Markets. “This is like Hurricane Andrew happening the same week as an Iranian oil embargo.”

Oil-and-gas prices have been the first to increase as production and distribution worth about 1.36 million barrels of crude oil a day were taken off-line in the United States. But it's not just fuel prices going through the roof. Construction material costs are already starting to rise as the United States prepares for what will be one of the largest reconstruction efforts in recent memory. It will be weeks or even months before the streets of New Orleans are drained and any serious rebuilding can begin. Just days after the hurricane hit, however, prices for lumber were escalating, says Patricia Mohr, vice-president and commodity market specialist at Toronto-based Scotiabank. Spurred by the already-booming U.S. housing sector and anticipation of Katrina-related reconstruction, prices jumped US$42 to US$328 per thousand board feet; and the cost of oriented strand board, used to make roofs and floors, rose US$62 to US$325 per thousand feet. The area hardest hit by Katrina is a major lumber producer, and the storm damaged as many as 12 lumber mills and destroyed stockpiles of wood stored in the Gulf Coast region.

Those soaring lumber prices are bad news for Canadians or Americans looking to build a new home in the coming months, but good news for Canada's struggling forestry industry, which continues to be ravaged by U.S. tariffs on softwood lumber. Still, even the Americans' voracious appetite for lumber is unlikely to break the logjam in that long-standing trade dispute, according to Michael Alexander, a partner in KPMG Canada's forestry practice. “There are reports that the trade groups in the U.S. that want to continue the softwood tariffs would support a removal of the tariffs only on lumber that Canada wanted to donate as part of a relief effort,” he says.

Despite the massive amount of construction that will take place over the next few months, there are enough tradesmen and building materials in the region to do the work, says Margaret Whelan, a housing industry analyst with New York-based UBS Securities. Therefore, the rebuilding will likely not create any long-term distortion of the national home building or building materials industries.

She may be right. Not all building materials are experiencing the cost increases seen in the lumber markets. Cement prices in Canada and the United States will likely not rise, despite a U.S. shortage of the material that will only grow worse as a result of post-hurricane rebuilding efforts, says François Lacroix, president of the Ottawa-based Cement Association of Canada. Canada currently exports to the United States about one-third of the 13 million tons of cement produced here annually. Cement, however, is continuously competing for market share with steel (in the construction of new buildings) and asphalt (in the construction of roads). “If we raise the price, we will only lose market share,” says Lacroix.

Not only will building a house be more expensive, so, too, will borrowing money to buy a new home. The Bank of Canada increased interest rates by 25 basis points on Sept. 7, the first rate hike since October 2004, even though many had hoped that the recent spike in oil-and-gas prices would convince the central bank to keep rates low. The impact of the hurricane on Canadian consumers should only be temporary, the bank said in a statement, but warned Canadians to expect “a temporary spike in consumer prices reflecting higher prices for gasoline and heating fuels.”

Rising construction, oil and gasoline costs may be the most immediate impact of Hurricane Katrina, but the full extent of its economic destruction has yet to be seen. Though Canadian consumers may not like paying more at the fuel pumps while the United States repairs the oil-and-gas infrastructure damaged by the storm, those higher prices are adding to Canada's rising energy export revenues. Still, such benefits will diminish should energy prices remain high, warns BMO Nesbitt Burns economist Sherry Cooper. “The major risk is that the latest spike in energy prices becomes the proverbial straw that breaks the consumers' backs, causing a slowdown in total consumer spending.” And there's no quick relief from that kind of disaster.