State of the industry
November 20, 2008 By: Darren Constantino, North Coast Media, Brian Richesson, Pit & Quarry Editorial Staff Pit & QuarryThe year staggered to its conclusion straining beneath the weight of a sluggish economy, disappointing third-quarter reports from publicly traded producers, and speculation that production volume for the year just might be lower than expected.
Sound familiar? Actually, this was the lead-in to our 2002 State of the Industry report, but the words ring true again in 2008. As we went to press, the extent of the financial meltdown was not yet known, and the stock market was on a roller coaster ride.
Given the state of the economy and the continued slump in building, the year ahead promises to be rough sledding. Look for a continuing move toward green initiatives in 2009, which could signal an increase in the use of recycled aggregates. Also, the year will mark the debut of the AGG1 Aggregates Forum & Expo, the National Stone, Sand & Gravel Association’s all-in-one convention and trade show in March.
On the schedule for later in the year is reauthorization of the federal highway/transit investment law — the Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for Users (SAFETEA-LU), which expires at the end of September.
As 2008 winds down, there are many negative signs for the economy. Vulcan Materials Co.’s third quarter net income dropped 57 percent in year-over-year reporting in the wake of a weakening construction industry. Don James, Vulcan’s chairman and CEO, said, “Looking ahead, we believe that federal government initiatives to stabilize and stimulate the U.S. economy should begin to have some positive impact. The U.S. Congress, strongly encouraged by many state and local governments and other important stakeholders, is now evaluating a new economic stimulus package that includes increased spending for highways and infrastructure.
“The benefits of economic stimulus packages that include infrastructure funding are two-fold,” James said. “In the short-term, they create jobs and help sustain our economy and in the long-term they enhance our nation’s economic productivity by improving our aging infrastructure and reducing congestion. Key Vulcan-served states such as California have begun to address aging infrastructure with increased construction spending.”
Stephen P. Zelnak Jr., chairman and CEO of Martin Marietta Materials, said, “We are beginning to develop our preliminary views on 2009 as we complete our regional operating plans and would characterize the upcoming year as a period of stabilization with the first half subject to continued aggregates volume pressure. We currently expect modest price increases, stabilizing aggregates demand and a deflationary cost environment, as it relates to energy costs.”
Construction to continue slide
McGraw-Hill Construction released its 2009 Construction Outlook, which forecasts a drop in overall U.S. construction starts for next year, as the tough funding environment continues, construction projects are deferred and financial stress gradually eases. Against this backdrop, the level of construction starts in 2009 is expected to decline 7 percent, to $515 billion, following a 12 percent decline predicted for 2008.
“The speed and scope of the events in September and October were startling,” said Robert A. Murray, vice president of economic affairs for McGraw-Hill Construction.
“Tighter lending standards are a major constraint for the construction industry. For single-family housing, declines are continuing and showing no sign of an upturn. Home prices are continuing to drop, a 20 percent drop so far this year, and we expect another 10 percent decline through the first half of 2009. Then, things should level off.”
Highlights of the 2009 Construction Outlook include:
• Single-family housing for 2009 will be down 2 percent in dollars, corresponding to a 4 percent drop in the number of units.
• Multifamily housing will retreat 6 percent in dollars and 8 percent in units, after the sharp plunge witnessed during 2008.
• Commercial buildings will drop 12 percent in dollars and 15 percent in square feet, similar to the declines experienced in 2008. Stores and warehouses will continue to lose momentum, the office correction will be steeper, and hotel construction will finally pull back after its lengthy boom.
• Institutional buildings will slip 3 percent in dollars and 6 percent in square feet, as the financial crisis affects funding coming from states and localities.
• Manufacturing buildings will plunge 32 percent in dollars after an exceptional 2008 that was lifted by the start of several massive oil refinery expansion projects.
• Public works construction will fall 5 percent, given flat funding at the federal level combined with restraint by state and local governments.
• Electric utility construction will retreat 30 percent after surging 55 percent to a near record amount in 2008.
The Portland Cement Association (PCA) said the weak economy and tight credit conditions, coupled with severe job losses and the resulting decline in state government revenues, will translate into significant weakness for the construction industry through 2010, leading the group to again adjust its cement consumption forecast.
The latest PCA forecast of cement, concrete and construction predicts a 12.8 percent decline in cement consumption in 2008, followed by 11.9 percent and 2.1 percent declines in 2009 and 2010, respectively.
The PCA report cites the continued drop in residential starts and the erosion of the strong fundamentals supporting nonresidential construction as major factors leading to reduced cement consumption. The weak economy also has affected the public construction sector.
Vulcan Materials Co.
Vulcan Materials Co. announced results for the third quarter and nine months ended Sept. 30, 2008. Commenting for the company, James, Vulcan’s chairman and CEO, stated, “In a period of financial and economic turmoil that is unprecedented in its nature if not its severity, we continued to achieve solid results in key areas of the business that further position us for an outstanding future when the economic recovery begins.”
James said, “The external factors affecting our industry are well known: turmoil in the financial markets severely constraining the availability of credit and weakening construction activity that was already soft; costs for petroleum-based products such as diesel fuel and liquid asphalt soaring to record levels thus burdening production costs for our products; and hurricanes and severe rains affecting construction activity in the Central Gulf Coast, Texas, Florida, the upper Midwest and the Mid-Atlantic.”
According to James, the company is addressing these challenges by aggressively managing costs and by pricing its products to reflect their high value. He said, “We are highly focused on preserving our profitability during this period of weak demand while improving our earnings leverage.
“We continued during the third quarter to reduce operating hours, streamline our work force, decrease operating costs and improve production efficiencies in the face of a sharp decline in demand for our products. Because of these actions, the cash earnings generated on each ton of aggregates sold are higher this year than in the prior year’s third quarter or year-to-date and are more than 40 percent higher than at the peak of demand in 2005.”
Vulcan outlook
Commenting on the company’s outlook for the remainder of 2008, James stated, “The lack of liquidity in the credit markets and the volatility in the financial markets have weakened construction demand and created a great deal of uncertainty in projecting demand for our products. Residential construction has continued to weaken, although from a lower base, with a prolonged downturn now appearing likely.
“Leading indicators such as contract awards weakened in the third quarter and point towards reduced nonresidential and highway construction activity in the fourth quarter and into 2009. In some Vulcan-served markets, large industrial projects are, to some extent, mitigating the effects of slowing demand from commercial and office construction.”
James said, “We will continue to operate the business consistent with the reduced levels of demand with an emphasis on cost control and productivity improvement. In the fourth quarter, we expect higher selling prices for our products to help offset the earnings effects of lower volumes. The average price paid for diesel fuel declined every month in the third quarter on a sequential basis and we expect prices to decline further in the fourth quarter.”
Martin Marietta Materials Inc.
Martin Marietta Materials Inc. announced results for the third quarter and nine months ended Sept. 30, 2008. Zelnak, chairman and CEO of Martin Marietta Materials, stated, “We are very pleased with our third-quarter results as they highlight our ability to adapt our business to successfully address the most challenging economic times in the corporation’s history.
“Aggregates volumes declined for the 10th consecutive quarter, diesel fuel and natural gas costs escalated 47 percent during the quarter, and adverse weather conditions in the wake of Tropical Storm Fay and Hurricanes Gustav, Hannah and Ike had a negative impact on operations not only in the Gulf Coast region, but also in the Southeast and Central United States as the storm systems moved inland. Nevertheless, our management team and employees again balanced the productive capacity of our operations to market demand and aggressively addressed controllable costs.”
Zelnak said, “We continued to achieve sustainable pricing growth within all groups of the aggregates business with heritage aggregates pricing up 8 percent for the quarter. With the exception of Iowa and Arkansas, the difficult economic environment caused aggregates volumes to fall in all of our states with the overall volume in the heritage aggregates business declining 13 percent.
“The strong farm economy, coupled with increased alternative energy construction in Iowa and energy expansion projects in Arkansas, East Texas and Northwest Louisiana, supported volume growth in these areas. Infrastructure and commercial construction demand remains challenging, most notably from the lack of credit availability, which has stalled overall construction activity. Our West Group experienced its first quarterly volume decline of the year, reflecting the impact of the hurricanes as well as weakness in construction activity.”
Martin Marietta outlook
According to Zelnak, “Over the past 45 to 60 days, the lack of available business credit has stalled construction activity and further affected demand for our products. Construction projects under way have had credit effectively pulled, and new projects are subject to increasingly tighter lending standards. The unpredictable state of the economy, energy inflation, credit market uncertainty and lagging construction demand make forecasting increasingly difficult.
“That said, pricing continues to remain positive, even in this challenging climate. Accordingly, we reaffirm our 6 percent to 8 percent range for the rate of heritage aggregates price increases in 2008. However, with the pressure on volumes, we now expect our aggregates shipments to be down 11 percent to 12 percent for the year.”
Zelnak said, “The level of aggregates demand in the corporation’s end-use markets, production levels and the management of production costs will affect the operating leverage of the aggregates business and, therefore, profitability. Production costs in the aggregates business are also sensitive to energy prices, the costs of repair and supply parts and the start-up expenses for large-scale plant projects. The continued rising cost of diesel and other fuels increases production costs, either directly through consumption or indirectly through the higher cost of energy-related consumables, namely steel, explosives, tires and conveyor belts.”
Aggregates production
An estimated 383 million metric tons (Mt) of crushed stone were produced and shipped for consumption in the United States in the second quarter of 2008, a decrease of 14 percent compared with that of the same period of 2007. Second quarter 2008 figures were the latest available from the U.S. Geological Survey (USGS) as of press time. The estimated production for consumption in the first six months of 2008 was 635 Mt, a 15 percent decrease compared with the same period of 2007.
The estimated U.S. output of construction sand and gravel produced and shipped for consumption in the second quarter of 2008 was 275 Mt, a decrease of 18 percent compared with that of the same period of 2007. The estimated production for consumption in the first six months of 2008 was 442 Mt, a 19 percent decrease compared with the same period of 2007.
An estimated 662 Mt of total aggregates were produced and shipped for consumption in the United States in the second quarter of 2008, a decrease of 15 percent compared with that of the same period of 2007. The estimated production for consumption in the first six months of 2008 was 1.09 billion metric tons (Gt), a 16 percent decrease compared with the same period of 2007.
The estimated production-for-consumption of crushed stone in the second quarter of 2008 decreased in seven of the nine geographic divisions when compared with that sold or used in the second quarter of 2007. The largest decreases were recorded in the South Atlantic (27 percent) and the Mountain (27 percent) divisions. Production-for-consumption of crushed stone decreased in 36 of the 47 states that were estimated.
The five leading states, in descending order of production-for-consumption, were Texas, Pennsylvania, Missouri, Florida and Illinois. Their combined total production-for-consumption was 119 Mt and represented 31 percent of the U.S. total.
The estimated production-for-consumption of construction sand and gravel in the second quarter of 2008 decreased from second quarter 2007 levels in all of the nine geographic divisions. The largest decreases in percentages were recorded in the East South Central (32 percent) and the West North Central (31 percent) divisions. Production-for-consumption of construction sand and gravel decreased in 38 of the 46 states that were estimated.
The five leading states, in descending order of production-for-consumption, were California, Texas, Arizona, Colorado and Wisconsin. Their combined total production-for-consumption was 98.6 Mt and represented 35 percent of the U.S. total.
The estimated production-for-consumption of aggregates in the second quarter of 2008 decreased in eight of the nine geographic divisions when compared with that sold or used in the second quarter of 2007. The largest decreases in percentages were recorded in the South Atlantic (27 percent) and the East North Central (23 percent) divisions. The only increase was recorded in the West South Central (4 percent) division.
Production-for-consumption of aggregates decreased in 36 of the 48 states that were estimated. The five leading states, in descending order of production-for-consumption, were Texas, California, Pennsylvania, Florida and Illinois. Their combined total production-for-consumption was 177 Mt and represented 27 percent of the U.S. total.
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