The Road Ahead Holds Much Promise for the Nation’s Aggregates Producers.
By Mark S. Kuhar and Josephine Smith
This year’s Outlook/Forecast is punctuated by the election of Donald Trump as president of the United States. The question everyone is asking is: what exactly does this mean for infrastructure investment and aggregates industry growth?
Late in the presidential campaign, Trump introduced what he called “a bold, visionary plan for a cost-effective system of roads, bridges, tunnels, airports, railroads, ports and waterways, and pipelines in the proud tradition of President Dwight D. Eisenhower, who championed the interstate highway system.”
Trump’s plan, drafted by economic advisors Peter Navarro and Wilbur Ross, would finance up to $1 trillion in spending over a decade. The plan would rely heavily on private funding, with the government encouraging investment through a tax credit that would raise the return to investors and lower the cost of borrowing to states and municipalities that would oversee the projects. Tax credits would cost the government some money, but taxes collected from the workers and companies participating in such projects would offset the costs, according to Navarro and Ross.
Then there is “The Wall.” Trump has said his proposed wall on the U.S.-Mexico border could cost up to $12 billion, but a Washington Post study estimated the wall would cost as much as $25 billion. It would be made of precast concrete and reach up to 50 ft. high. It is estimated that it would take 339 million cu. ft. of concrete to build.
Bottom line is $1 trillion in infrastructure investment and 339 million cu. ft. of concrete translates into a lot of aggregate. Could either or both of these proposals actually come to fruition? Some experts and analysts believe it is wishful thinking. However, even at lower levels of investment, the aggregates industry could be in for a golden era over the next decade.
There are certain to be bumps in the road ahead. The Trump team’s approach to financing infrastructure has many detractors who argue that it’s really a tax-cut plan for utility-industry and construction-sector investors, and a massive corporate welfare plan for contractors that would not result in adequate investment in areas where it is truly needed.
Dan Holler, spokesman for the conservative group Heritage Action for America, questioned the job-creation claims for such plans. “Conservatives do not view infrastructure spending as an economic stimulus, and congressional Republicans rightly rejected that approach in 2009,” said Holler, whose group is the political arm of The Heritage Foundation.
Trump’s proposal also drew flak from the Competitive Enterprise Institute, a conservative group that his transition team has turned to for advice on his environmental policies. “There is little evidence that these public works projects promote long-run economic growth,” CEI fellow Marc Scribner wrote.
But the aggregates and construction industries are forging ahead and making big plans. “The National Stone, Sand and Gravel Association (NSSGA) is looking forward to working with President Donald Trump and members of Congress to turn campaign promises into real policy,” said Michael W. Johnson, NSSGA president and CEO. “Trump has continually stated his intention to invest up to $1 trillion in our country’s infrastructure and rebuild America’s roads, bridges and highways. He also promised to issue a temporary moratorium on new regulations that are not compelled by Congress and eliminate existing ones like EPA’s controversial Waters of the United States rule. Most importantly, we are very proud of the thousands of people from the aggregates industry who participated in our Vote Aggregates campaign. This is a great sign that our members are working to ensure that the aggregates industry’s voice will be heard in this and future elections so that lawmakers understand the value of our operations.”
“President-elect Trump will have a ‘can do’ industry as his partner in rebuilding and expanding the nation’s transportation infrastructure to make it again second to none,” said American Road & Transportation Builders Association (ARTBA) President and CEO Pete Ruane. “Give us the proper resources and the new jobs and innovative solutions will take off. Republicans in Congress should heed the call of their party’s leader and make urgently-needed improvements of national infrastructure networks a top priority in early 2017.
“Despite a highly partisan political environment, Republicans and Democrats have routinely worked in a bipartisan manner to support infrastructure legislation,” Ruane said. “All sides should view a long-term infrastructure package as an opportunity for the two parties to come together and make meaningful progress for the American people.”
The Public is On-Board
The general public appears to be on-board with rebuilding our roads and bridges. Preliminary Nov. 8 election results show voters in 22 states approved ballot measures that will provide $201 billion in funding extensions and new revenue for state and local transportation projects.
According to an analysis by ARTBA’s Transportation Investment Advocacy Center, 69 percent of the 280 transportation funding ballot measures up for vote across the nation were approved, with results still pending for seven local areas.
California will see the biggest impact. Voters in the state approved 15 of 26 transportation ballot measures worth $133 billion, including a 1 cent sales tax in Los Angeles that will provide $120 billion over 40 years for local road, bridge and transit projects. The California measures had to muster at least a two-thirds “super majority” vote to pass – 10 of the measures that failed received more than 50 percent of the vote, but did not reach that threshold. California voters also rejected a statewide measure that would have required any public infrastructure bond over $2 billion to go on the ballot for voter approval.
Voters in Illinois and New Jersey passed transportation tax “lockbox” measures to prohibit state lawmakers from diverting transportation user fee revenue to non-transportation uses. Maine approved a statewide transportation bond issue for $100 million and Rhode Island voters approved $70 million in bonds for port investment.
In Washington state, voters approved a 25-year, $54 billion revenue package that would support expanding Sound Transit light rail and bus routes. The package included a bond issue and adjustments in property, sales and motor vehicle taxes.
In Missouri, a statewide initiative to increase the state’s cigarette tax to raise an estimated $100 million annually for transportation investments failed. Voters in Georgia approved local sales tax increases that would raise nearly $4 billion for road and transit projects in the metropolitan Atlanta area.
Earlier last year, voters approved 76 of 81 transportation funding measures – or 93 percent – of initiatives on primary ballots.
Overall, voters approved 74 percent of transportation ballot initiatives in 2016. This is in line with the 10-year average rate of 74 percent. In the last two presidential elections, voters approved 77 percent (2012) and 76 percent (2008) of transportation funding measures.
Also working in favor of a special emphasis on infrastructure investment over the next four years is the selection of former Labor Secretary Elaine Chao to head the Transportation Department. Chao is a former U.S. deputy transportation secretary who was formerly on the board of Vulcan Materials Co.
Chao, the wife of Republican Senate Majority Leader Mitch McConnell, served as labor secretary under President George W. Bush and was the first Asian-American woman to hold a Cabinet position. She will face a number of big decisions at the agency that overseas the nation’s vehicles, airplanes, railroads, pipelines, ports and highways – including how to proceed on the use of self-driving cars on U.S. roads; the use of unmanned aerial vehicles or drones; and whether U.S. fuel efficiency standards should be revised. Chao may also take the lead role in Trump’s plans to rebuild U.S. infrastructure.
“NSSGA has enjoyed a solid working relationship with Secretary Chao going back to when she was deputy secretary at DOT as well as during her time leading the Department of Labor, which has MSHA under its purview,” NSSGA’s Johnson stated. “We congratulate her on being nominated to lead the Transportation Department and look forward to working with her to implement president-elect Trump’s $1 trillion infrastructure plan.
While the future looks bright, the aggregates industry seems to be treading water at the moment. An estimated 687 million metric tons (Mt) of total construction aggregates was produced and shipped for consumption in the United States in the third quarter of 2016, a slight decrease compared with that of the third quarter of 2015. The estimated production for consumption in the first nine months of 2016 was 1.78 billion metric tons (Gt), an increase of 5 percent compared with that of the same period of 2015, according to Jason Willett, crushed stone commodity specialist for the U.S. Geological Survey (USGS.)
An estimated 397 Mt of crushed stone was produced and shipped for consumption in the United States in the third quarter of 2016, a decrease of 3 percent compared with that of the third quarter of 2015. The estimated production for consumption in the first nine months of 2016 was 1.05 billion Gt, an increase of 6 percent compared with that of the same period of 2015.
The estimated U.S. output of construction sand and gravel produced and shipped for consumption in the third quarter of 2016 was 290 Mt, which was virtually unchanged compared with that of the third quarter of 2015. The estimated production for consumption in the first nine months of 2016 was 732 Mt, an increase of 4 percent compared with that of the same period of 2015.
The estimated production for consumption of construction aggregates in the third quarter of 2016 decreased in six of the nine geographic divisions compared with that sold or used in the third quarter of 2015. Production for consumption decreased in 22 of the 43 states for which estimates were made.
The five leading states were, in descending order of production for consumption, Texas, California, Michigan, Pennsylvania and Ohio. Their combined total production for consumption was 197 Mt, a decrease of 5 percent compared with that of the same period of 2015 and represented 29 percent of the U.S. total.
The estimated production for consumption of crushed stone in the third quarter of 2016 decreased in six of the nine geographic divisions compared with that sold or used in the third quarter of 2015. Production for consumption of crushed stone decreased in 24 of the 46 states for which estimates were made.
The third quarter decreases were in line with what publicly traded aggregates producers reported. Vulcan Materials Co. announced that total revenues decreased $30 million, or 3 percent, to $1,008 million. Gross profit increased $13 million, or 4 percent, to $304 million. The company said its third-quarter results reflect continued strong earnings growth and margin expansion despite lower shipment levels.
Martin Marietta Materials Inc. reported that it set new records for consolidated net sales, gross profit and net earnings, even as aggregates product line shipments to the infrastructure market, which comprised 42 percent of quarterly volumes, decreased 7.2 percent. Infrastructure shipments in the third quarter were impacted by significant rainfall and project start-up delays.
The U.S. Census Bureau of the Department of Commerce announced that construction spending during October 2016, the most current month available at press time, was estimated at a seasonally adjusted annual rate of $1,172.6 billion, 0.5 percent (±1.5 percent) above the revised September estimate of $1,166.5 billion. The October figure is 3.4 percent (±1.8 percent) above the October 2015 estimate of $1,134.4 billion.
During the first 10 months of this year, construction spending amounted to $972.2 billion, 4.5 percent (±1.0 percent) above the $930.7 billion for the same period in 2015.
Construction spending was mixed in October as a rebound in residential and public categories outweighed a downturn in most private nonresidential segments, according to an analysis by the Associated General Contractors of America (AGC). Association officials noted, however, that public investments in infrastructure remain down compared to last year while private-sector demand should remain robust amid continued economic growth.
Spending on private construction was at a seasonally adjusted annual rate of $885.9 billion, 0.2 percent (±0.8 percent) below the revised September estimate of $887.4 billion. Residential construction was at a seasonally adjusted annual rate of $466.2 billion in October, 1.6 percent (±1.3 percent) above the revised September estimate of $458.8 billion. Nonresidential construction was at a seasonally adjusted annual rate of $419.6 billion in October, 2.1 percent (±0.8 percent) below the revised September estimate of $428.6 billion.
In October, the estimated seasonally adjusted annual rate of public construction spending was $286.8 billion, 2.8 percent (±2.8 percent) above the revised September estimate of $279.1 billion. Educational construction was at a seasonally adjusted annual rate of $72.2 billion, 4.1 percent (±3.0 percent) above the revised September estimate of $69.4 billion.
Highway construction was at a seasonally adjusted annual rate of $91.5 billion, 1.9 percent (±6.7 percent) above the revised September estimate of $89.8 billion.
While public construction spending jumped from September to October, spending on infrastructure for the first 10 months of the year is generally level with, or lower than, the totals for January-October 2015. Public spending on highway and street construction inched up 0.2 percent year-to-date; other transportation facilities such as transit and airports slid 5.2 percent; sewage and waste disposal slumped 8.7 percent; water supply fell 8.0 percent; and conservation and development declined 5.2 percent.
“It’s encouraging to see a rebound in public construction in recent months, but most infrastructure categories are down substantially over the past year,” said Ken Simonson, AGC’s chief economist. “Meanwhile, private nonresidential construction still appears to have good prospects, assuming the economy continues to expand.”
Private nonresidential construction spending dropped 2.1 percent for the month, but the year-to-date total for most project types rose. The largest private nonresidential segment in October 2016 was power construction (including oil and gas pipelines), which plunged 4.3 percent for the month but is up 7.2 percent year-to-date. The next-largest segment, manufacturing, decreased 2.4 percent for the month and is down 3.1 percent year-to-date. Commercial (retail, warehouse and farm) construction declined by 2.4 percent in October but climbed 9.0 percent year-to-date. Private office construction fell 2.0 percent for the month but soared 28 percent year-to-date.
Private residential construction spending increased by 1.6 percent between September and October and rose 5.7 percent year-to-date. Spending on multifamily residential construction increased by 2.8 percent for the month and 17.8 percent year-to-date, while single-family spending also climbed 2.8 percent for the month and rose 5.1 percent year-to-date.
New construction starts in November decreased 6 percent to a seasonally adjusted annual rate of $638.3 billion, according to Dodge Data & Analytics. Each of the three major construction sectors – nonresidential building, residential building and nonbuilding construction – experienced reduced activity in November. Highway and bridge construction in November dropped 16 percent.
Transportation Construction Forecast
Total transportation construction and related market activity is expected to grow 1.3 percent in 2017, driven largely by increases in highway and bridge private construction activity supporting residential and commercial developments, according to ARTBA’s chief economist Dr. Alison Premo Black.
In 2017, the market is expected to reach $247.8 billion, up from $244.5 billion in 2016, according to Black. This includes public and private investment for highways, bridges, public transit, rail, ports and waterways, airport runways and terminals, as well as private investment for roads, streets, driveways and parking lots in residential and commercial developments and support work by state departments of transportation (DOTs) and local governments for highway and bridge planning and design work, routine maintenance and right of way purchases.
Black noted that although the December 2015 enactment of the federal Fixing America’s Surface Transportation (FAST) Act law provided stability for public highway investment, the increases that will be realized in the federal program funding levels are modest, just above anticipated growth in inflation and project costs.
Many state DOTs did not obligate their federal funds in time for many projects to get started during the 2016 construction season, she said. Nearly half of the FAST Act funds for FY 2016 – 46 percent – were obligated in the last quarter of the federal fiscal year, between July and September 2016. Twenty percent of the federal funds available to the states were not obligated until September 2016.
Another factor impacting the ARTBA forecast, Black said, is that Congress is expected in December to pass a “continuing resolution” that would hold all FY 2017 federal discretionary spending – including the transportation programs – at the current level until March 31, 2017.
Under this approach, the $900 million increase in highway investment authorized by the FAST Act and included in the House and Senate FY 2017 transportation funding bills would be delayed at least until next spring. Similarly, the $510 million to $670 million public transportation funding increases in the House and Senate transportation measures would also be delayed. The existing funding levels for these and other programs would continue.
Other ARTBA forecast highlights by mode:
Public & Private Highway, Street & Related Construction
- After two years of real growth, the value of public highway, street and related work by state DOTs and local governments fell nearly 2 percent in 2016 and is expected to decline another 1 percent in 2017.
- Recent increases in state gas taxes and user fees, as well as a number of local funding initiatives approved on the Nov. 8, 2016, ballot, should help support some local markets over the next few years. Voters in 24 states approved 267 ballot measures in 2016, which will support $207 billion in highway, bridge, port and transit spending over the next 40 years.
- Public-private partnerships will continue to be important to state and local markets that have revenue streams to support these projects, according to ARTBA. Five major projects came to financial close in 2016, totaling over $3.3 billion in investment. The projects were in Arizona, Washington, Georgia, Texas and Virginia.
- Based on historical data, the private highway, bridge, parking lot and driveway markets will increase from $58.9 billion in 2016 to $62.5 billion in 2017, and will continue to grow over the next five years as overall construction activity increases in those sectors.
Bridges & Tunnels
- The public bridge and tunnel construction market is expected to be down slightly in 2017, to $32.9 billion from a record $33.3 billion in 2016, before resuming real growth in 2018 and beyond.
- The national outlook is being driven by activity in nine states, which accounts for 53 percent of the market: California, Florida, Illinois, New Jersey, New York, Pennsylvania, Texas, North Carolina and Ohio. Recent contract awards are down in many of these states, in part because of some major projects that got underway in 2015.
Railroad, Subway & Light Rail
- Public transit and rail construction is expected to grow from $19.3 billion in 2016 to $20.3 billion in 2017, a 5 percent increase.
- Subway and light rail investment is expected to grow 3.7 percent to $7.7 billion, just below the record level of $7.8 billion in work that was set in 2015.
- The FAST Act provided a boost for public transportation investment. In addition to a dozen major subway and light rail projects underway, there were four new construction starts in 2016, including work in Washington state, Washington, D.C., Texas and California.
Airport Terminals & Runways
- The value of airport construction will grow slightly, increasing from $13.1 billion in 2016 to $13.2 billion in 2017, according to the forecast model.
- Airport terminal and related work is expected to increase from $8.3 billion to $8.4 billion, an increase of 1.5 percent.
- Runway work is forecasted to remain flat at $4.8 billion.
Ports & Waterways
- Port and waterway investment is expected to be $2.1 billion in 2017. Construction activity in 2016 was also $2.1 billion, down from $2.3 billion in 2015.
- If Congress completes final action in 2016 on the Water Resources Development Act, which identifies nearly $9 billion in navigation, flood control and environmental restoration projects that are eligible for Congress to fund, it could help boost the market sector. In its current form, the bill would authorize dredging projects in eight ports to deepen navigation channels.
New Construction Starts in 2017 to Increase 5 Percent
Dodge Data & Analytics released its 2017 Dodge Construction Outlook, a mainstay in construction industry forecasting and business planning. The report 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 pattern of construction starts by 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 was 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).
- Multifamily housing will be flat in dollars and down 2 percent in units to 435,000 (Dodge basis).
- Commercial building will increase 6 percent on top of the 12 percent gain estimated for 2016.
- Institutional building will advance 10 percent, resuming its expansion after pausing in 2015 and 2016.
- Manufacturing plant construction will increase 6 percent, beginning to recover after steep declines in 2015 and 2016.