2016/17 State of the Industry

If numbers are any indication, the North American aggregate industry continues to show positive growth, with increases in production and encouraging stock performance from most publicly traded producers. The historic election last month may or may not have an impact on the industry. Both presidential candidates were citing the need for increased infrastructure spending, as were many on both sides of the aisle in Congress. It is clear to nearly everyone in the U.S. government that America’s decaying infrastructure needs to be addressed.

News from 2016 included the unveiling of much new technology for aggregate producers at MINExpo International. The variety of new equipment offerings promise more-efficient production and increased safety for workers. This includes connected-mine technologies, which seemed to be a recurrent theme at the show, and which allow producers to integrate data from all site assets and use that information to increase efficiencies.

At the upcoming ConExpo-Con/Agg, scheduled for early March in Las Vegas, producers will see even more cutting-edge technologies on display.

In 2016, production numbers were up: An estimated 646 million metric tons of total construction aggregate were produced and shipped for consumption in the United States in the second quarter of 2016.

The U.S. Geological Survey says this is a 6 percent increase compared with the second quarter of 2015.

Global market

According to a report, “Global Market Study on Construction Aggregates: Industry Analysis and Forecast 2016-2024,” published by Persistence Market Research, the consumption of construction aggregate is estimated to reach 43.3 billion metric tons by the end of 2016, valued at $350 billion.

In addition, the market is anticipated to witness a 6.3 percent year-over-year growth in 2016 and the consumption is projected to reach 69.2 billion metric tons at the end of 2024 in terms of volume.

Rising infrastructure and renovation projects are major drivers in the global market, generating major demand for construction aggregate. Advanced commercial construction, residential construction, tourism and manufacturer preferences for recycled aggregate and manufactured sand are also expected to fuel demand. However, depleting natural resources, pollution, transportation and technological challenges remain obstacles the global market must overcome.

China is the dominating region with a 26.7 percent share in the global market in 2015, followed by North and Central America.

Silica sand

Silica sand demand in North America is forecast to expand 5.1 percent per year through 2020 to 82.8 million metric tons. This will represent a somewhat slower pace than that recorded during the 2010-2015 period. Low oil and gas prices into the near term will depress the number of new wells drilled through 2020, limiting opportunities for frac sand suppliers.

Nevertheless, increasing intensity of use per well will fuel positive growth in silica sand consumption, making it the fastest growing market in North America into the long term. These and other trends are presented in “World Industrial Silica Sand,” a new study from The Freedonia Group.

Demand for industrial sand in building product applications will also record healthy advances through 2020, fueled by a rebound in bituminous roofing demand as the U.S. construction industry continues to recover from the effects of the Great Recession. According to analyst Zoe Biller, “Gains in the chemicals and flat glass markets will both increase at a steady pace.”

Less robust increases will be recorded in the container glass market, dampened by glass’ declining share of the packaging market, as well as by the widespread use of recycled glass (cullet) in glass container manufacture. The worst performance is expected in other, smaller applications. This will be due to the declining use of sand as a blasting abrasive because of the health concerns associated with worker exposure to silica dust.

In 2015, silica sand production in North America accounted for 28 percent of world output, making it the second largest regional supplier after the Asia/Pacific region. Most trade is intraregional, with silica sand moving from the United States to Canada and Mexico.

Construction outlook

Dodge Data & Analytics released its “2017 Dodge Construction Outlook,” which predicts that total U.S. construction starts for 2017 will advance 5 percent to $713 billion, following gains of 11 percent in 2015 and an estimated 1 percent in 2016.

“The U.S. construction industry has witnessed signs of deceleration in 2016, following several years of steady growth,” says Robert Murray, chief economist for Dodge Data & Analytics.

“Total construction starts during the first half of this year lagged behind what was reported in 2015, raising some concern that the current construction expansion may have run its course. However, the early 2016 shortfall reflected the comparison to unusually elevated activity during the first half of 2015, lifted by 13 large projects valued each at $1 billion or more, such as a $9 billion liquefied natural gas export terminal in Texas and a $2.5 billion office tower in New York City.

“As 2016 has proceeded, the year-to-date shortfall has grown smaller, easing concern that the construction industry may be in the early stage of cyclical decline. Instead, the construction industry has now entered a more mature phase of its expansion, one that is characterized by slower rates of growth than what took place during the 2012-2015 period, but still growth.

“Since the construction start statistics will lead the pattern of construction spending, this means that construction spending can be expected to see moderate gains through 2017 and beyond.”

“On balance, there are a number of positive factors, which suggest the construction expansion has room to proceed,” Murray adds. “The U.S. economy in 2017 is anticipated to see moderate job growth, market fundamentals for commercial real estate should remain generally healthy, and more funding support is coming from state and local bond measures.

“Although the global economy in 2017 will remain sluggish, energy prices appear to have stabilized, interest rate hikes will be gradual and few, and the new U.S. president has been elected. For 2017, total construction starts are forecast to rise 5 percent to $713 billion. Gains of 8 percent are expected for both residential building and nonresidential building, while nonbuilding construction slides a further 3 percent.”

The pattern of construction starts by more specific sectors is the following:

◾ Public works construction will improve 6 percent, regaining upward momentum after slipping 3 percent in 2016. Highways and bridges will derive support from the new federal transportation bill, while environmental works should benefit from the expected passage of the Water Resources Development Act. Natural gas and oil pipeline projects are expected to stay close to the volume that has been present in 2016.

◾ Single-family housing will rise 12 percent in dollars, corresponding to a 9 percent increase in units to 795,000 (Dodge basis). Access to home mortgage loans is improving, and some of the caution exercised by potential homebuyers will ease with continued employment growth and low mortgage rates. Older members of the Millennial generation are now moving into the 30- to 35-year-old age bracket, which should begin to lift demand for single-family housing.

◾ Multifamily housing will be flat in dollars and down 2 percent in units to 435,000 (Dodge basis). This project type now appears to have peaked in 2015, lifted in particular by an exceptional amount of activity in the New York metropolitan area, which is now settling back. Continued growth for multifamily housing in other metropolitan areas, along with still generally healthy market fundamentals, will enable the retreat at the national level to stay gradual.

◾ Commercial building will increase 6 percent on top of the 12 percent gain estimated for 2016. Office construction is showing improvement from very low levels, lifted by the start of several signature office towers and broad development efforts in downtown markets. Store construction should show some improvement from a very subdued 2016, and warehouses will register further growth. Hotel construction, while still healthy, will begin to retreat after a strong 2016.

Martin Marietta

Ward Nye, chairman, president and CEO of Martin Marietta, says: “As we look forward to 2017, we note that domestic job growth remains a strong catalyst for construction activity and demand for our products. In fact, during the last three years, the United States added nearly eight million jobs.

“Durable employment growth in the east, where North Carolina, Georgia and Florida each rank in the top 10 states nationally for job gains, continues to support the early stages of a construction-centric phase of recovery in many of these states.

“We anticipate infrastructure activity should grow as the impact of the $305 billion FAST Act, together with increased state department of transportation funding initiatives, begin to meaningfully flow into the construction pipeline. We see solid non-residential demand in our key markets driven, in part, by growth in warehousing, data center and wind farm construction, despite the perception of weakening activity at the macroeconomic level.”

Nye says, “We believe this perception relates to volatility in quarterly construction start data that is better explained by the natural ebb and flow of mega projects moving through the construction cycle. Residential construction in our key markets is expected to continue increasing, driven largely by historically low levels of construction activity over the previous several years, together with low mortgage rates, significant lot absorption and higher multi-family rental rates.”

Nye continues, “Our leadership positions in some of the nation’s most vibrant geographic and demographic markets should allow us to capitalize on a durable construction and infrastructure recovery in 2017 and beyond.

“Driven by expected steady growth in volume and pricing, as well as improved cost dynamics, we believe that the company’s profitability and cash generation outlook is the strongest it has been in years.”

Vulcan Materials

Tom Hill, chairman and CEO of Vulcan Materials, says, “Core profitability in our business continues to strengthen, despite recent volume headwinds in certain markets. So far this year, weather patterns and the timing of large project activity have led to higher month-to-month and state-to-state variability in our shipments, somewhat masking the continuing recovery in demand for construction materials across our footprint.

“However, our unit margins continue to improve. Per-ton gross profit in our Aggregates segment grew by 9 percent in the third quarter despite lower shipments and uneven production schedules.”

Hill adds, “Year-to-date per-ton gross profit has improved by 22 percent. As a result, we remain on track to reach the low end of our 2016 profit plan despite shipments well below beginning-of-year expectations … we expect full year 2016 adjusted EBITDA of $1 billion, a 20 percent increase over the prior year.

“Longer-term project pipelines are healthy, and the foundations for sustained, multi-year volume and pricing growth remain in place.”

Regarding the company’s outlook, Hill says, “The strong fundamentals of our aggregates-focused business and the outstanding improvement in our core profitability have led to strong earnings growth through the first nine months of 2016 despite slower than expected volume growth.

“Unit profitability continues to improve and incremental margins remain strong across our businesses. The core drivers of a continuing recovery in shipments remain firmly in place, with higher levels of publicly funded construction activity just beginning to join the ongoing recovery in private demand. The pricing environment remains favorable.”

Hill concludes, “Daily shipment rates in October have exceeded prior year levels. Construction starts in Vulcan-served markets strengthened in August and September after weakening for several months. Although it is too soon to issue firm guidance, at this point we would expect to see broad-based volume and pricing growth accompanied by continued margin expansion in 2017.”