2014 State of the Industry

By |  December 4, 2013

The industry is optimistic heading into the new year, and efforts are underway to lobby for an improved highway bill.

Although the divide between the nation’s infrastructure needs and the funds available continues to widen, the overall economy is continuing to improve, and aggregate producers in many parts of North America continue to see an increase in business.


Photo courtesy Istockphoto/sacherjj

Efforts are underway to lobby for a new highway bill, and, while the political climate in Washington hasn’t changed, the president’s administration and Congress are more aware than ever about the need to properly fund U.S. transportation infrastructure improvements.

The National Stone, Sand & Gravel Association (NSSGA) is optimistic about the future of its organization following the hire of Mike Johnson, the association’s new president and CEO. Johnson stepped in for Gus Edwards, who spent 17 years with the group and honorably served NSSGA as president and CEO for nearly a year.

Other big news that emerged in 2013 was the launch of the Pit & Quarry Hall of Fame, which will induct its second class March 3, 2014, before the start of ConExpo-Con/Agg in Las Vegas. ConExpo-Con/Agg is expected to be the biggest it’s ever been, with 2,400 exhibitors and more than 130,000 attendees expected over the five-day trade show.

What else can we expect in 2014? McGraw-Hill Construction, part of The McGraw-Hill Companies, released its 2014 Dodge Construction Outlook, in which it predicts total U.S. construction starts for 2014 to rise 9 percent to $555.3 billion, slightly higher than the 5 percent increase to $508 billion estimated for 2013.

“We see 2014 as another year of measured expansion for the construction industry,” said Robert Murray, McGraw Hill Construction’s vice president of economic affairs. “Against the backdrop of elevated uncertainty and federal spending cutbacks, the construction industry should still benefit from several positive factors going into 2014.

“Job growth, while sluggish, is still taking place,” Murray added. “Interest rates remain very low by historical standards, and in the near term the Federal Reserve is likely to take the necessary steps to keep them low. The bank-lending environment is showing improvement in terms of both lending standards and the volume of loans. And the improving fiscal posture of states and localities will help to offset some of the negative impact from decreased federal funding.”

Based on research of specific construction market sectors, McGraw Hill Construction’s 2014 Dodge Construction Outlook details the forecast as follows:
■ Single-family housing will grow 26 percent in dollars, corresponding to a 24 percent increase in units to 785,000 (McGraw Hill Construction basis). The positives for single-family housing are numerous – the pace of foreclosures has eased, home prices are rising and mortgage rates remain near recent lows. Careful bank-lending practices toward issuing mortgages will continue to restrain the demand for housing, though.
■ Multifamily housing will rise 11 percent in dollars and 9 percent in units. While growth continues, the percentage gains will be smaller than the previous four years, reflecting a maturing multifamily market. The real estate finance community still favors investments in this structure type. In the near term, this should lead to more high-rise residential buildings in major cities.
■ Commercial building will increase 17 percent, a slightly faster pace than the 15 percent gain estimated for 2013. Warehouses and hotels will continue to lead the way, while stores and office buildings pick up the pace. The positives for commercial building are improving market fundamentals and more bank lending for commercial development. Next year’s activity in dollar terms will still be 28 percent below the 2007 peak.

“The 2014 picture bears some similarity to what’s taking place during 2013, with single-family housing providing much of the upward push; multifamily housing showing a slower yet still healthy rate of growth after four years of expansion; and commercial building gradually ascending from low levels,” Murray said. “One change that’s expected for 2014 is that institutional building will no longer be pulling down nonresidential building and total construction.”

Construction outlook
FMI, a provider of management consulting and investment banking to the engineering and construction industry, also offered a forecast upon releasing its third quarter 2013 Construction Outlook. FMI revised its overall 2013 forecast for U.S. construction put in place down 3 percent from 2012 to 6 percent for 2013. The revised figure for total construction put in place for 2013 is $909.6 billion, but FMI expects growth to return to 7 percent in 2014 and reach $977.1 billion.

While FMI expects residential to continue its growth trend, albeit not at the same rate as 2013, growth in all other markets will slow in 2014. There is no single reason for a drop in other markets, but there are a few factors influencing FMI’s outlook. The first is the continued decline in public construction and expectations of more as the sequestration continues. Second, lenders are still tight with their lending criteria. Consumers are still cautious about increasing their debt load, and that includes their share of public debt with new bond issues for local municipalities.

Interest rates, while still low by historical standards, are creeping up for consumers. Most seem to have absorbed the new tax structures into their budgets, but they are still uncertain about the cost of health care. The boom areas of shale oil exploration are helping tremendously in some regions, but this boom has not flowed over to the rest of the nation.

If U.S. energy prices continue to stay low and exports increase in the coming years, this will help fuel the economy in several ways. But this will take some time, according to FMI. Continued global unrest seems likely. Fortunately for the industry, the outlook is better than it has been for some years.

■ Transportation – Transportation markets for design and construction continued to struggle against the headwinds of reduced funding and poor budgetary conditions this year. Design and construction markets in transportation infrastructure should continue to grow in 2014. The economy should continue to grow, albeit slowly, and state budget conditions should continue to improve. As a result, FMI forecasts construction to increase 8 percent in 2013 and 7 percent in 2014.

■ Highway and street – The passage of MAP-21 ended the string of short-term extensions to SAFETEA-LU, which expired in September 2009. But MAP-21’s passage did little to improve the outlook for the transportation infrastructure market. The new bill maintained funding at 2012 levels and will provide clarity on funding levels through 2014, when Congress could again revert to a short-term approach. While MAP-21 is a step in the right direction, FMI says the federal-funding picture remains bleak overall. States that are in a position to do so are taking action to address their own transportation funding shortfalls. As a group, many are just now recovering from the significant budget shortfalls they faced in the wake of the recession. They’re not in a position to move forward without help.

Vulcan Materials Co.
Vulcan Materials Co., the nation’s largest producer of construction aggregates, announced earnings for the third quarter 2013. Don James, chairman and CEO, stated, “Our third quarter results reflect the continued recovery of our markets and the benefits of the company’s powerful earnings leverage. A 9 percent increase in aggregates volume helped drive a 20 percent increase in aggregates gross profit. In the third quarter, cash gross profit per ton of aggregates increased to $4.83 per ton, our highest quarterly unit profitability in more than four years. As a result, cash gross profit per ton on a trailing 12-month basis now is 26 percent higher than at the prior peak level of shipments, setting the stage for better earnings leverage in this cycle.”

James added, “Pricing continues to benefit from an improving demand outlook and we are realizing price improvements across most of our markets. Demand for our products continues to benefit from recovery in private construction activity, particularly residential construction, in many of our key markets. Growth in residential construction activity, and its traditional follow-on impact on private nonresidential construction, continues to underpin our expectations for future volume growth and earnings improvement.”

Aggregates segment gross profit was $150 million, a $25 million increase from the prior year. This earnings improvement was due to volume growth in virtually all of Vulcan’s markets and broad-based pricing gains. Aggregates shipments increased 9 percent compared to the prior year. On a same store basis, aggregates shipments increased 10 percent. Many markets realized double-digit volume growth, in fact.

Strong private construction demand in Florida led to an increase in shipments of more than 35 percent versus last year’s third quarter. Shipments in Texas also benefited from stronger demand, particularly large industrial projects, increasing nearly 30 percent versus the prior year. Increased private construction activity also benefited aggregates shipments in other markets. Arizona, California, Georgia and North Carolina each increased more than 14 percent. Overall, freight-adjusted aggregates prices increased more than 2 percent compared to the prior year.

Vulcan Materials outlook
James said, “As we look at the projects that could impact our aggregates volumes for the remainder of the year and into 2014, we continue to see a disproportionately greater number of large highway and industrial projects. The timing of shipments to these projects remains difficult to predict. New highway projects, as measured by trailing 12-month contract awards, increased 7 percent versus the prior year’s level – the third consecutive quarter with an increase. The large increase in TIFIA funding contained in last year’s highway bill should also positively impact future demand.

“Year-to-date,” he said, “aggregates volumes are up more than 2 percent and pricing has increased more than 3 percent with virtually all markets realizing price growth versus the prior year. Assuming normal weather patterns, we expect these year-over-year growth trends to continue in the fourth quarter.

James added, “We remain focused on our strategic initiatives to enhance our leading aggregates reserves positions in attractive markets. Year-to-date, we have divested certain assets in lower margin, lower growth markets in the Midwest and have added aggregates reserves and operations in attractive markets in Texas and Georgia. Going forward, we will continue to look for opportunities to further enhance our strategic coast-to-coast footprint.”

Vulcan Materials
■ Net sales of $775 million, up from $687 million in 3Q 2012.
■ Aggregate earnings of $150 million, up from about $125 million in 3Q 2012.
■ Aggregate shipments up 9 percent.

Martin Marietta Materials Inc.
Martin Marietta Materials Inc. announced double-digit increases in revenues and earnings results for the third quarter 2013. Ward Nye, president and CEO, said, “Our performance was driven largely by the ongoing recovery in private-sector construction activity, as well as solid execution of our long-term strategic plans and diligent management of our cost structure.

“I am especially proud of the fact that our company achieved these strong results despite the continued public-sector construction headwinds,” Nye added. “The combination of a 12 percent increase in consolidated net sales over the prior-year quarter and our ongoing focus on controlling costs resulted in a 13 percent increase in earnings per diluted share. These results reflect new third-quarter records for both net sales and earnings from operations in the specialty products business, as well as volume and pricing growth in the aggregates product line.”

“The aggregates business experienced volume and pricing increases from all reportable segments and pricing growth in all product lines,” he continued. “An 8.1 percent increase in aggregates product line shipments led to increased operating leverage. The specialty products business benefited from strong dolomitic lime sales, including the capacity expansion from the recently completed kiln in Ohio, which led to a 13 percent increase in the segment’s net sales.

“We are encouraged by significant improvements in our markets and believe, as do most third-party forecasters, that significant upside potential remains in both the residential and nonresidential construction segments,” Nye continued. “Additionally, our aggregates business will benefit from the current boom in shale gas production, as well as planned follow-on development. We are confident that these trends bode especially well for our business.”

“The nonresidential market, which comprised 30 percent of third-quarter aggregates shipments, increased 19 percent and growth was notable in both commercial construction and the energy sector,” Nye added. “The residential market achieved volume growth of 15 percent and accounted for 13 percent of our quarterly shipments. Housing permits and starts, key indicators for residential construction activity, continue to have strong year-over-year improvement, which should help sustain the recovery in this market.”

Martin Marietta outlook
Nye added, “We are encouraged by various positive trends in our business and markets – especially in private-sector employment and construction. We anticipate volumes in the nonresidential end-use market to increase in the mid-single digits given that the Architecture Billings Index, or ABI, a leading economic indicator for nonresidential construction spending activity, remains at a strong level and has shown consistent growth over the last year.

“Residential construction is experiencing a level of growth not seen since late 2005 with seasonally adjusted starts ahead of any period since 2008,” he continued. “We believe this trend in housing starts will continue and our residential end-use market will experience high single-digit volume growth. By contrast, the weather-related slowdown in aggregates shipments experienced in the first half of the year, coupled with the hesitancy created by the uncertainty of future federal highway funding levels, leads us to expect aggregates shipments to the infrastructure end-use market to be down in the mid-single digits for the full year.

“Cumulatively, dependent on fourth-quarter weather, we anticipate aggregates product line shipments will be flat to slightly up as compared with 2012 levels,” Nye said. “We currently expect aggregates product line pricing will increase 2 to 4 percent for the full year compared with 2012. A variety of factors beyond our direct control may continue to exert pressure on our volumes, and our forecasted pricing increase will not be uniform across the company.”

“We have started framing a preliminary 2014 outlook for our end-use markets and, while the current environment in Washington, D.C., reduces clarity, we have formed an initial view based on our internal observations in conjunction with McGraw Hill Construction’s recent economic forecast. We currently expect shipments to the infrastructure end-use market to increase slightly. We anticipate our nonresidential end-use market to increase in the mid-to-high single digits, led by strength in the commercial component and energy sector. We believe the recent positive trend in housing starts will continue and our residential end-use market will experience double-digit volume growth.”

Martin Marietta Materials
■ Net sales of $600 million, up from $537 million in 3Q 2012
■ Aggregate earnings of $97 million, up from $76 million in 3Q 2012.
■ Aggregate pricing up 2.3 percent.

Economic trends
■ Passage of MAP-21 calls for $37.4 billion for fiscal year 2013 and $37.7 billion for fiscal year 2014 for the federal-aid highway program. It also calls for $750 million for fiscal year 2013 and $1 billion for fiscal year 2014 under the Transportation Infrastructure Finance and Innovation Program (TIFIA loans).
■ State budgets will continue to be strained, and it will be difficult to get larger projects off the ground.
■ According to the American Road & Transportation Builders Association (ARTBA), 24 states and Washington, D.C., have used P3s (public-private partnerships) to build or finance 96 transportation projects valued at $54.3 billion since 1989. Sixty-five percent of those projects have occurred in eight states. Traditionally, P3s have accounted for 2 to 5 percent of annual market activity.
Source: FMI’s third quarter 2013 Construction Outlook

Aggregate production
Preliminary estimates are courtesy of Jason Christopher Willett, USGS.
■ Crushed stone: up 9% Q3 2013 vs. 2012; and up 3% nine months of 2013 vs. 2012.
■ Construction sand and gravel: up 10% Q3 2013 vs. 2012; and up 4% nine months of 2013 vs. 2012.

Future investments
Ward Nye, president and CEO of Martin Marietta Materials, offered his take on current transportation funding levels and potential projects to come: “Federal budget and deficit disputes and the uncertainty over future highway funding levels beyond the September 2014 expiration of [MAP-21] have contributed to the reluctance of many states and municipalities to commit to large-scale projects. Additionally, while awards under the Transportation Infrastructure Finance and Innovation Act (TIFIA) component of MAP-21 have the ability to leverage up to $50 billion in financing for transportation projects of either national or regional significance, they continue to move at a slower pace versus earlier expectations with only two projects being awarded.

While we still expect TIFIA to benefit several of our major markets – namely Texas, North Carolina and Florida – we do not expect any meaningful impact before the second half of 2014, and more notably in 2015.”

“Despite federal-level funding delays and concerns, we are encouraged by states’ recognition of the importance of sustained infrastructure investment,” Nye added. “We have seen year-over-year growth in highway contract awards and construction employment in several of our key states, including Texas, Georgia, Colorado and Virginia. In Georgia, three regions in the southern part of the state began collecting a special-purpose local option sales tax on Jan. 1, 2013. These monies are earmarked for transportation improvements, and we expect the pace of projects funded by this tax to accelerate as we move into 2014.

“Additionally, we anticipate a significant reconstruction effort in Colorado as a result of the recent flooding. We are well positioned to work with the local Colorado communities to repair and/or replace hundreds of miles of washed-out roads and the significant number of destroyed homes, businesses and bridges.”

Kevin Yanik

About the Author:

Kevin Yanik is the editor-in-chief of Pit & Quarry magazine. Yanik can be reached at 216-706-3724 or kyanik@northcoastmedia.net.

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