IN 2014, CONGRESS WAS NO HELP IN ADDRESSING OUR TRANSPORTATION FUNDING CRISIS, HOWEVER THERE ARE ENCOURAGING SIGNS THAT 2015 WILL BE A GOOD YEAR FOR AGGREGATES PRODUCERS.
By Mark S. Kuhar and Josephine Smith
What can you say about 2014? It was a year when MAP-21 expired, and aggregates producers, state DOTs and transportation advocates waited with anticipation to see what Congress would come up with as a replacement.
The answer was not unexpected. A big fat nothing.
One of the worst Congresses in recent memory kicked the can down the road and stuck its collective head in the sand rather than do the heavy lifting of making sure our transportation infrastructure programs and Highway Trust Fund are adequately funded for the near future. But that doesn’t mean the year was a bust. As we kick off 2015, we are still playing the waiting game, but here is the state of the industry, and an outlook/forecast for the year.
Aggregates Production
An estimated 683 million metric tons (Mt) of total construction aggregates was produced and shipped for consumption in the United States in the third quarter of 2014, an increase of 9 percent compared with that of the third quarter of 2013. The estimated production for consumption in the first 9 months of 2014 was 1.64 billion metric tons (Gt), an increase of 8 percent compared with that of the same period of 2013, according to U.S. Geological Survey (USGS) Crushed Stone Commodity Specialist Jason Willett.
| U.S. AGGREGATES PRODUCTION | |||
| Year | Crushed Stone | Sand & Gravel | Aggregates |
| 2014* | 1,268 Gt | 912,060 Mt | 2,180 Gt |
| 2013 | 1,180 Gt | 847,000 Mt | 2,027 Gt |
| 2012 | 1,170 Gt | 845,000 Mt | 2,015 Gt |
| 2011 | 1,160 Gt | 810,000 Mt | 1,970 Gt |
| 2010 | 1,160 Gt | 805,000 Mt | 1,965 Gt |
| 2009 | 1,160 Gt | 838,000 Mt | 1,998 Gt |
| Gt = Billion Metric Tons | |||
| Mt = Million Metric Tons | |||
| * = Estimated Final Production by Rock Products | |||
An estimated 393 Mt of crushed stone was produced and shipped for consumption in the United States in the third quarter of 2014, an increase of 9 percent compared with that of the third quarter of 2013. The estimated production for consumption in the first 9 months of 2014 was 955 Mt, an increase of 8 percent compared with that of the same period of 2013.
The estimated U.S. output of construction sand and gravel produced and shipped for consumption in the third quarter of 2014 was 290 Mt, an increase of 8 percent compared with that of the third quarter of 2013. The estimated production for consumption in the first 9 months of 2014 was 683 Mt, an increase of 8 percent compared with that of the same period of 2013.
Portland (including blended) cement consumption increased by 9.0 percent in the third quarter of 2014 compared with that of the third quarter of 2013. Consumption in the first 9 months of 2014 increased by 7.8 percent compared with that of the same period of 2013. This information is obtained from the USGS monthly survey of U.S. cement producers.
The estimated production-for-consumption of crushed stone in the third quarter of 2014 increased in all nine geographic divisions compared with that sold or used in the third quarter of 2013. The largest increases in percentages were recorded in the East North Central and the Mountain divisions. Production-for-consumption increased in 37 of the 46 states that were estimated.
The five leading states, in descending order of production-for-consumption, were Texas, Pennsylvania, Ohio, Illinois and Missouri. Their combined total production-for-consumption was 140 Mt, an increase of 17 percent and represented 36 percent of the U.S. total.
The estimated production-for-consumption of construction sand and gravel in the third quarter of 2014 increased in seven of the nine geographic divisions compared with that sold or used in the third quarter of 2013. The decreases in percentages were recorded in the New England and the West South Central divisions.
Production-for-consumption increased in 33 of the 45 states that were estimated. The five leading states, in descending order of production-for-consumption, were California, Texas, Minnesota, Michigan and Washington. Their combined total production-for-consumption was 108 Mt, an increase of 10 percent and represented 37 percent of the U.S. total.
The estimated production-for-consumption of construction aggregates in the third quarter of 2014 increased in all nine geographic divisions compared with that sold or used in the third quarter of 2013. The largest increases in percentages were recorded in the East North Central, East South Central and the Mountain divisions.
Production-for-consumption increased in 32 of the 43 states that were estimated. The five leading states, in descending order of production-for-consumption, were Texas, Ohio, California, Pennsylvania and Michigan. Their combined total production-for-consumption was 208 Mt, an increase of 15 percent and represented 30 percent of the U.S. total.
Cement Forecast
Despite a late start to the construction season and weaker than expected housing start numbers, a recently released report from the Portland Cement Association (PCA) shows that cement consumption in the United States will meet 2014 forecast expectations.
The newest PCA forecast remains essentially unchanged since the September 2014 report. “The United States’ cement market is expected to grow 8.2 percent in 2014, followed by similar rates of growth in 2015 and 2016,” said PCA Chief Economist and Group Vice President Edward Sullivan. “However, minor adjustments have been made regarding the construction sub-sectors. Housing starts, for example, have been trimmed slightly compared to forecasts released earlier in 2014.”
While single-family housing starts are not reaching projected levels, the report indicates a new emphasis on multifamily starts. Demographic trends and the still strict mortgage standards are pushing more potential homebuyers into rental units.
Additionally, the oil price environment has changed significantly since the summer and these new impacts have been integrated into the forecast projections for the paving sector.
Going forward, Sullivan noted that the underlying economic fundamentals are strengthening and are reflected in the labor market. Sustained gains in monthly job creation, stronger state and local tax receipts, more favorable return on investments for commercial building and stronger household formation can lead to stronger construction spending in 2015.
Publicly Traded Companies
A reliable annual barometer of aggregates industry health and wellness are the quarterly reports of the publicly traded aggregates companies.
According to Tom Hill, president and CEO of Vulcan Materials Co., “Growth in private end markets continues to drive increased construction activity and demand for our products. Leading indicators, such as housing starts, nonresidential contract awards and employment levels, continue to show favorable above-average growth trends in Vulcan-served markets, and Vulcan markets continue to grow faster than U.S. markets as a whole. Importantly, we continue to convert these higher volumes into higher unit margins by operating efficiently at the plant level. This strong execution has resulted in a 19 percent increase in our trailing twelve-month unit profitability, as measured by Aggregates segment gross profit per ton, from what are already industry-leading profitability levels. This improved unit profitability, coupled with above-average demand growth, positions us well for significant future earnings growth.”
Based on these market trends, the company expects the following:
- Strong full year aggregates volume growth near the top end of guidance range of between 7 and 9 percent, assuming normal weather patterns in the fourth quarter.
- Full year pricing growth at the low end of guidance range of between 3 and 5 percent, with positive impact from current pricing actions benefiting price growth in 2015.
- Non-aggregates gross profit to be $40 million to $45 million for the full year 2014, compared to $14 million in 2013.
- Full year 2014 selling, administrative and general (SAG) expenses in line with the prior year, excluding business development-related expenses
- Capital spending for 2014 to be approximately $240 million to support the increased level of shipments and to further improve production costs and operating efficiencies.
Hill concluded, “Our business continues to improve. Our employees remain focused on increasing unit profitability, delivering expected incremental earnings, and improving our valuable aggregates franchise. Our confidence in the prospects for a sustained multi-year recovery in aggregates demand continues to grow. Our markets are recovering from trough levels of demand and are outpacing the rest of the U.S. We are excited about our future as the leading aggregates supplier in the U.S. We remain focused on further improving the profitability of our existing businesses, strategically expanding our unmatched asset base to serve the needs of our customers, and continuing our disciplined management of capital.”
Martin Marietta Materials said it is encouraged by positive trends in its business and markets, notably:
- Nonresidential construction is expected to increase in both the heavy industrial and commercial sectors. The commercial building sector is expected to benefit from improved market fundamentals, such as higher occupancies and rents, strengthened property values and increased real estate lending.
- Shale development and related follow-on public and private construction activities in our primary markets are anticipated to remain strong.
- Residential construction should continue to grow, driven by historically low levels of construction activity over the previous several years together with low mortgage rates, significant lot absorption, higher multi-family rental rates and rising housing prices. Total annual housing starts are anticipated to exceed one million units for the first time since 2007.
- For the public sector, authorized highway funding from MAP-21 should increase slightly compared with 2013. Additionally, state initiatives to finance infrastructure projects are expected to grow and continue to play an expanded role in public-sector activity.
Based on these trends and expectations, the company anticipates the following for 2014:
- Heritage aggregates end-use markets compared to 2013 levels are reaffirmed as follows:
- Infrastructure shipments to increase slightly.
- Nonresidential shipments to increase in the high-single digits.
- Residential shipments to experience double-digit growth.
- ChemRock/Rail shipments to increase in the mid-to-high single digits.
- Heritage aggregates product line shipments to increase by 6 to 8 percent compared with 2013 levels.
- Heritage aggregates product line pricing to increase by 3 to 5 percent for the year compared with 2013.
- Heritage aggregates product line direct production cost per ton to remain relatively flat.
- Heritage aggregates-related downstream product lines to generate between $375 million and $385 million of net sales and $35 million to $40 million of gross profit.
- Heritage SG&A expenses as a percentage of net sales to decline compared with 2013, driven in part by $7.9 million of nonrecurring costs related primarily to the 2013 completion of the Company’s information systems upgrade, as well as, lower pension costs.
- Net sales for the Specialty Products segment to be between $225 million and $235 million, generating $85 million to $90 million of gross profit.
- Interest expense to approximate $65 million.
- Estimated effective income tax rate to approximate 39 percent.
- Capital expenditures to approximate $220 million to $230 million, which includes TXI operations as well as an increase in heritage operations.
- Operating results from TXI locations are expected to essentially breakeven to earnings per diluted share, excluding nonrecurring costs and corporate overhead allocation.
The company has started framing a preliminary 2015 outlook for its aggregates end-use markets based on its internal observations in conjunction with McGraw Hill Construction’s economic forecast. The acquired TXI aggregates-related businesses will contribute significant incremental growth in 2015, driven in part by the realization of a full year of operations. The company currently expects the following:
- Infrastructure market to increase mid-single digits.
- Nonresidential market to increase in the high single digits.
- Residential market to experience a double-digit increase.
- ChemRock/Rail market to remain relatively flat.
“We see positive signs in our markets, which should allow us to strengthen our balance sheet and increase our financial flexibility,” said Ward Nye, chairman, president and CEO of Martin Marietta Materials. “As a larger and stronger company, we remain focused on operating in a disciplined manner and creating additional shareholder value.”
Construction Spending
The U.S. Census Bureau of the Department of Commerce announced that construction spending during October 2014 was estimated at a seasonally adjusted annual rate of $971.0 billion, 1.1 percent (±1.8 percent) above the revised September estimate of $960.3 billion.
The October figure is 3.3 percent (±2.0 percent) above the October 2013 estimate of $939.9 billion.
During the first 10 months of this year, construction spending amounted to $800.6 billion, 5.8 percent (±1.3 percent) above the $756.5 billion for the same period in 2013.
In October, the estimated seasonally adjusted annual rate of public construction spending was $278.6 billion, 2.3 percent (±3.1 percent) above the revised September estimate of $272.3 billion. Educational construction was at a seasonally adjusted annual rate of $64.5 billion, 2.2 percent (±3.8 percent) above the revised September estimate of $63.1 billion.
Highway construction was at a seasonally adjusted annual rate of $82.0 billion, 1.1 percent (±7.6 percent) above the revised September estimate of $81.1 billion.
- Spending on private construction was at a seasonally adjusted annual rate of $692.4 billion, 0.6 percent (±0.8 percent) above the revised September estimate of $688.0 billion.
- Residential construction was at a seasonally adjusted annual rate of $353.8 billion in October, 1.3 percent (±1.3 percent) above the revised September estimate of $349.1 billion.
- Nonresidential construction was at a seasonally adjusted annual rate of $338.6 billion in October, 0.1 percent (±0.8 percent) below the revised September estimate of $338.9 billion.
“Today’s data shows that construction growth remains volatile,” said Ken Simonson, Associated General Contractors of America chief economist. “While overall construction spending jumped by more than one percent in October, the gain followed two months of stagnation. Public construction was the fastest-growing segment for the month but the slowest growing over the past year and for the first 10 months of 2014 combined. Conversely, private nonresidential construction inched down from September to October but has risen at double-digit rates – 11 percent – for the combined January through October period. And private residential construction continues to grow very modestly, with multifamily construction taking the lead on an annual basis.”
Single-family home construction gained 1.8 percent for the month and 13.2 percent over 12 months, and multifamily increased 1.0 percent from the September level and jumped 27.2 percent from a year earlier. The largest private nonresidential type, power construction-which includes oil and gas fields and pipelines as well as electric power-slumped 1.9 percent in October but rose 0.3 percent from the prior year.
“For 2014 as a whole and 2015, private nonresidential spending and multifamily spending should be the strongest segments, followed by single-family construction, with very limited prospects for public construction,” association officials said.
The spending increases come as many firms report growing labor shortages. They urged elected and appointed officials to act on a series of measures the association has identified that will help expand the supply of qualified construction workers. “We need to make sure there are enough workers available to meet growing demand for construction,” said Stephen E. Sandherr, the association’s chief executive officer.
“The outlook for 2015 remains upbeat,” said Associated Builders and Contractor Chief Economist Anirban Basu. “The economy has gained momentum over the past six to seven months and that is consistent with more aggressive construction starts and spending during the year to come. Even as the economy has gained momentum, the Federal Reserve has remained extraordinarily accommodative due in part to benign inflation readings. Low interest rates combined with solid economic momentum likely mean expansion for the nonresidential construction industry during the year ahead.”
Construction Starts
At a seasonally adjusted annual rate of $677.8 billion, new construction starts in November climbed 13 percent from the previous month, according to Dodge Data & Analytics (formerly McGraw Hill Construction). Nonresidential building had a particularly strong month, lifted by the start of several unusually large projects, including two massive manufacturing plants and an airport terminal redevelopment. The nonbuilding construction sector also contributed to the latest month’s surge, boosted by a liquefied natural gas facility.
Meanwhile, residential building retreated in November, as multifamily housing settled back from its brisk pace in October. Highway and bridge construction dropped 7 percent.
“After the sluggish activity witnessed at the outset of 2014, new construction starts have generally strengthened, showing an up-and-down pattern around a rising trend, with November coming in especially strong,” stated Robert A. Murray, chief economist for Dodge Data & Analytics. “While residential building has decelerated in 2014, due to the pause by single family housing, the nonresidential building sector has assumed the leading role in keeping the construction expansion going. Part of this year’s strength for nonresidential building comes from a surge of manufacturing plant projects, featuring more energy-related production facilities as well as activity from other industrial sectors. The commercial side of nonresidential building is continuing its moderate growth path, supported by further improvement in market fundamentals and greater investor interest. And, the institutional side of nonresidential building has finally turned the corner after five years of decline, aided by the improved financing climate and the passage of numerous construction bond measures in recent years.”
Nonresidential building in November soared 32 percent to $256.7 billion (annual rate). A substantial boost came from a 253 percent increase for the manufacturing plant category, maintaining the often-volatile behavior that’s been present this year.
The Dodge Momentum Index increased in November, climbing to 125.0 (2000=100) for the month, up 0.6 percent from October’s reading of 124.3 according to Dodge Data & Analytics. The Momentum Index is a monthly measure of the first (or initial) report for nonresidential building projects in planning, which have been shown to lead construction spending for nonresidential buildings by a full year.
After retreating from July through September, the Momentum Index has now registered gains for two consecutive months, indicating that the nonresidential building market continues to trend upward even with the occasional setback. The Momentum Index is now 14 percent above the same month a year ago, and is at its highest level since early 2009.
The two largest manufacturing projects entered as November starts were a $2.5 billion lithium ion battery factory for Tesla Motors in Reno, Nev., and a $1.3 billion nitrogen urea plant in Enid, Okla. Other large manufacturing plant projects were a $375 million upgrade to a paper products mill in Brewton, Ala., and a $360 million propane dehydrogenation plant in Mont Belvieu, Texas. If the manufacturing plant category is excluded, nonresidential building in November would have still shown a moderate gain, rising 10 percent.
The commercial building group in November grew 7 percent, resuming its upward track after easing back in the previous two months. Hotel construction posted a 15 percent November gain, featuring the start of the $265 million Mohegan Hotel in Uncasville, Conn., as well as a $126 million hotel in Chicago.
Office construction advanced 7 percent, lifted by the start of the $254 million Partners HealthCare headquarters in Somerville, Mass., and the $245 million Joint Operations Center for the U.S. Army at Ft. Meade, Md. Both stores and warehouses lost momentum in November, slipping 5 percent and 7 percent, respectively.
The institutional building group in November increased 12 percent, aided by a healthy gain for transportation terminal work, up 221 percent. The transportation terminal category reflected the start of the $1.6 billion airport terminal redevelopment program in Salt Lake City.
Healthcare facilities reported a 13 percent gain in November, and included groundbreaking for such projects as the $312 million Emory Hospital Patient Tower in Atlanta and the $276 million Cleveland Clinic Cancer Center in Cleveland.
Also showing growth was the public buildings category, improving 12 percent. On the negative side, educational facilities slipped 6 percent in November, although the latest month included the $327 million expansion of the Campus Crossroads project at the University of Notre Dame in South Bend, Ind., involving three buildings for classrooms, research and student activities. Weaker activity was also registered by churches, down 18 percent; and amusement-related facilities, down 36 percent.
Nonbuilding construction, at $182.6 billion (annual rate), advanced 22 percent in November. The electric power and gas plant category provided most of the lift, jumping 363 percent, which reflected the $3.6 billion Dominion Cove Point LNG Liquefaction Project in Maryland being entered as a November start.
Also supporting this category’s strong November volume was a $571 million natural gas-fired power plant in Virginia and a $280 million natural gas processing facility in North Dakota. The public works group in November retreated 8 percent, pulling back after an 8 percent gain in October. Along with the drop in highway and bridge construction, sewer construction plunged 58 percent.
On the plus side was a 31 percent increase for water supply construction, helped by a $150 million water pipeline and reservoir project in Texas, plus gains of 29 percent and 3 percent for river/harbor development and miscellaneous public works, respectively.
Residential building in November fell 6 percent to $238.5 billion (annual rate). Multifamily housing retreated after its strong October performance, sliding 21 percent.
Despite the decline, there were still a substantial number of large multifamily projects that reached groundbreaking in November, including 11 projects valued at $100 million or more. These were led by a $290 million residential tower in Miami, plus two apartment towers in Chicago valued at $280 million and $217 million, respectively.
Single-family housing in November edged up a slight 1 percent, essentially holding steady with the flat activity that’s been present since the end of last year. Murray noted, “While there are signs that the banking sector is beginning to improve access to home mortgages, as shown by lending survey results, there has yet to be a discernible positive impact on single family homebuilding.”
Housing Production
Following an upwardly revised rate last month, housing starts in November slipped 1.6 percent to a seasonally adjusted annual rate of 1.028 million units, according to newly released figures from the U.S. Department of Housing and Urban Development and the U.S. Census Bureau. Three-month moving averages for total and single-family production were at their highest levels since the Great Recession.
“These numbers are in line with our latest surveys, which show that single-family builders are confident that the market is gradually recovering,” said Kevin Kelly, chairman of the National Association of Home Builders (NAHB) and a home builder and developer from Wilmington, Del.
“Over the course of the year, the number of houses under construction has been on an upward trajectory, signaling that housing is moving forward,” said NAHB Chief Economist David Crowe. “With strong demand, affordable home prices and favorable interest rates, we should see housing production continue to grow into 2015.”
Single-family housing starts were down 5.4 percent to a seasonally adjusted annual rate of 677,000 units in November, while multifamily production rose 6.7 percent to 351,000 units.
Regionally in November, combined housing production increased in the Northeast, Midwest and West, with respective gains of 8.7 percent, 14.4 percent and 28.1 percent. Total production dropped in the South by 19.5 percent.
Issuance of building permits registered a 5.2 percent loss to a seasonally adjusted annual rate of 1.035 million units in November. Multifamily permits dropped 11 percent to 396,000 units while single-family permits slipped 1.2 percent to 639,000 units.
Regionally, the Northeast posted an overall permit gain of 27.4 percent. The Midwest, South and West registered respective losses of 7.3 percent, 10 percent and 5.6 percent.
Transportation Construction
The U.S. transportation construction market will grow 3.1 percent from $185.9 billion in 2014 to $191.7 billion in 2015, according to a forecast released December 3, 2014, by American Road & Transportation Builders Association (ARTBA) Chief Economist Dr. Alison Premo Black. This is slightly above anticipated growth in the overall economy – U.S. Gross Domestic Product is expected to grow between 2.6 and 3 percent, according to the U.S. Federal Reserve.
The ARTBA forecast for the largest segment of this market – highway, street and related work – is tempered by two key factors: uncertainty over long-term federal funding, which represents 52 percent of state department of transportation (DOT) capital outlays; and still recovering state and local budgets.
Outside of construction, state and local governments are expected to spend an additional $38.5 billion for maintenance work; $13.2 billion for in-house and consultant planning and design services; and $7 billion for right-of-way purchases as part of their highway and bridge programs.
The construction market for highways, streets and related work, private driveways and commercial parking lots will grow to $64.9 billion, up 2.1 percent from $63.5 billion in 2014.
- This includes 1.2 percent growth in highway, street and related work, from $51.8 billion in 2014 to $52.4 billion in 2015. To put this market in perspective, the amount of work completed in 2009 was $67.3 billion.
- The market is expected to be uneven across the country, with highway investment up in 24 states, down in 19 states and Washington, D.C., and within a plus/minus 5 percent in seven states.
- Approval of over $17 billion for transportation investment through legislative and ballot measures in 2014 will help support the market in the coming years.State legislatures approved 14 measures in 2014 to increase investment, while voters approved 79 percent of the ballot measures.
- The public private partnerships (P3s) market will also support new growth in 2015, with four states awarding their first P3 projects (Colorado, North Carolina, Ohio and Pennsylvania) earlier this year.
- Contractors will have an additional $30-$40 billion in business opportunities from private highway and bridge work that is completed as part of housing developments and larger commercial structures, separate from parking lots and driveways.
Record growth is expected to continue in the bridge and tunnel construction market, increasing from $30.8 billion in 2014 to $31.3 billion in 2015.
- The national market is being driven by activity in 10 states, which account for over 57 percent of the market: New York, California, Texas, Pennslyvania, New Jersey, Washington, Illinois, Ohio, Massachusetts and Virginia.
- Bridge construction has grown from 19.6 percent of all highway and bridge work in 2000 to 37.3 percent in 2014. ARTBA says that the share of bridge work will continue growing in the next five years.
ARTBA is forecasting that light rail, subway and railroad construction will increase from $18.3 billion in 2014 to $20.9 billion in 2015.
- Subway and light rail work will increase from $7.1 billion to $8.3 billion.
- Heavy rail investment, largely by Class 1 freight railroads, will increase from $11.2 billion in 2014 to $12.6 billion in 2015.
- The increase in demand for freight transportation and multimodal connections will help spur investment in heavy railroads. This is, in part, being driven by the expansion of the Panama Canal and increased shipments of energy-related goods.
- Based on recent contract awards, states with upcoming projects include: California, Colorado, Florida, Illinois, New York and Washington.
The total value of airport runway and terminal construction will grow from $12.5 billion in 2014 to $13.1 billion in 2015, according to ARTBA.
- Growth in the U.S. economy, enplanements and air freight traffic will support increased investment in this sector over the next five years.
- States with significant market activity include California, Colorado, Florida, Georgia, Illinois, New York, Texas and Virginia.
The ports and waterway construction market will increase slightly to $2.8 billion in 2015, up from $2.7 billion in 2014.
- Continued investments from ports on the East and West Coasts, in anticipation of the expansion of the Panama Canal in 2015, will help spur continued investment.
- Some states with increased investment in recent years include: California, Florida, Louisiana, Mississippi, New Jersey, Texas, Virginia and Washington.
Construction Materials Forecast
FMI, in a year-end market-assessment report, defines construction materials as aggregates (either crushed stone or sand and gravel), cement, asphalt and ready-mixed concrete. This sector will be impacted by renewed new housing construction and the impact of rising interest rates. A third issue unique to this sector is the 2014 announcement of a merger between the two largest cement producers in the world, Holcim and Lafarge, FMI said.
“The inability of Congress to create viable long-term funding methods for the Highway Trust Fund, combined with continued infrastructure funding malaise in the United States, depresses road construction and hence has a significant impact on many aspects of the construction industry, including heavy civil, and aggregate and asphalt producers,” the report stated.
Housing on the other hand, continues to improve, and in 2014, for the first time in many years, housing starts exceeded the 1 million annualized new construction rate. This has improved the fortunes of many ready-mixed concrete producers. The only dark cloud on the horizon is that of rising interest rates. Ready-mixed concrete producers in the areas where housing starts have rebounded are finally seeing strong market improvements after what has been a bleak five years.
FMI expects new housing construction to begin to level off as inventory levels stabilize in hot markets and as interest rates rise. Even with this leveling, the ready-mixed concrete industry should continue to enjoy improving margins and production volumes as commercial construction, which inevitably follows new housing construction, takes place.
The other bright spot for the ready-mixed concrete industry is the continued increase in the use of concrete as a building material both in commercial and transportation construction. For many years, asphalt was generally the lower-cost paving material for road construction. That has changed over the past few years, and now it is generally accepted that an equal-cost pavement can be made with
either asphalt or concrete.
The last significant trend to watch for in construction materials in 2015 will be an acceleration of industry consolidation. In 2014 the largest merger in the history of the cement industry was announced between Holcim and Lafarge. As the number-one and number-two largest global cement producers, respectively, this merger has strong consequences, including the following:
- Smaller producers will face increased pressure to merge or acquire in order to maintain competitive economies of scale and geographic footprints.
- Downstream vertical integration will continue and potentially accelerate as the opportunities to grow profitability via the large-scale mergers decrease.
- Increased antitrust scrutiny in markets with only one or two major producers will be likely.
“The only real weapon for smaller producers is to outperform from a productivity standpoint, which requires optimization of both their mining and plant operations against their sales level,” said FMI’s William Hill.
In the aggregates-focused markets, the key merger announcement of 2014 was between Martin Marietta and Texas Industries Inc. (TXI). On a domestic scale, this acquisition represents the further consolidation of aggregates production in the United States.
“While anti-trust was not a factor in the Martin Marietta Materials/TXI merger, if Martin and Vulcan decided to again discuss a merger, then anti-trust scrutiny could become a factor in Texas,” Hill said.
FMI sees no immediate end in sight to this continued consolidation, and it is noteworthy that many key markets are now effectively consolidated with few or no independent producers remaining.
In summary, the keys to a successful 2015 for the construction materials industry will depend upon a few factors, namely:
- Infrastructure spending levels being increased.
- Continued positive growth in housing.
- Increased private development construction activity.
If these factors align, 2015 could be the best year the construction materials segment has seen in almost a decade.
Transportation Investment and Job Creation
A first-of-its-kind study conducted by forecasting company IHS Inc. outlines the economic benefits of federal highway and transit investment programs on every sector of the U.S. economy. The report was released during a transportation-media conference call on Dec. 10, 2014.
The IHS report, which was commissioned by the Transportation Construction Coalition (TCC), focuses exclusively on federal investment and examines outcomes on non-construction jobs, household incomes and state and local tax revenues.
Federal transportation spending expands the capital stock of the U.S. economy, drives the production and delivery of goods and services and positively affects business and household incomes.
It also enhances the transportation system’s operational capacity by reducing travel times and costs. This results in greater accessibility for individuals, households and businesses, more efficient delivery of goods and services, improved life styles and standards of living, and safer roadways, according to the study.
Representatives from manufacturing and travel organizations participated in the conference call, including Karen Campbell, senior consultant, IHS; Chad Moutray, chief economist, National Association of Manufacturers; Roger Dow, president and CEO, U.S. Travel Association; Pete Ruane, president and CEO, American Road & Transportation Builders Association; and Steve Sandherr, CEO, Associated General Contractors of America.
“The study shows that investment in transportation infrastructure has a positive impact on every major sector of the U.S. economy. These far reaching economic benefits contribute to economic growth by improving the nation’s capital stock, which enables increased economic activity,” said Campbell, who produced the report with Bob Brodesky, a transportation expert and senior manager in the IHS Industry Consulting Group.
IHS used two models to evaluate the macro and micro economic effects of Highway Trust Fund spending. Both showed the availability of funds delivered to state and local governments have far-reaching indirect effects – for every $1 of federal transportation investment returns between $1.80 – $2.00 of additional real goods and services produced in the economy.
Macroeconomic results revealed that current levels of federal spending on highway and mass transit contributes nearly 1 percent to the U.S. production of goods and services. The current level of funding contributes on average 614,000 jobs per year over the 2014-2019 time period and adds an average of $410 to each U.S. household’s real income each year.
In summary, over the 2014 to 2019 time frame:
- Infrastructure spending has an amplified impact on the economy. It leads to overall productivity enhancements and creates jobs.
- Every $1 in federal highway and mass transit investment returns between $1.80 – $2.00 in goods and services produced.
- Current federal transportation spending contributes on average $410 to real income per households each year (which is comparable to a month’s worth of groceries).
- Current federal transportation spending supports an average of 614,000 employees each year in all sectors of the economy. It catalyzes dynamic effects of greater productivity, more efficient delivery of goods and services, and higher wages and salaries.
- For every three construction job created, five jobs are created in other sectors of the economy.
- Current federal transportation spending generates $31 billion in federal personal tax receipts per year and $6 billion in federal corporate tax receipts per year on average. Current federal spending also generates higher revenue for state and local budgets, which are, on average, $21.7 billion higher each year than they would be without the Federal Highway Program.
- Five percent annual increases in federal spending would create between 78,000 and 122,000 new jobs by 2019.
Construction industry employment hit a new five-year high in November as the sector added 20,000 jobs and its unemployment rate fell to 7.5 percent, the lowest rate for November in seven years, according to an analysis by the Associated General Contractors of America. Association officials cautioned, however, that the latest figures include signs that demand for public-sector and non-residential construction may be weakening.
“November was another good month overall for construction workers and businesses,” said Ken Simonson, the association’s chief economist. “Yet the recent declines in public works and nonresidential building construction employment may indicate some underlying weakness in the construction market.”
Construction employment totaled 6,109,000 in November, the highest total since April 2009, with a 12-month gain of 213,000 jobs or 3.6 percent, Simonson noted. Residential building and specialty trade contractors added a combined 16,700 employees since October and 122,800 (5.6 percent) over 12 months. Nonresidential contractors hired a net of 3,600 workers for the month and 90,100 (2.4 percent) since November 2013. However, the heavy and civil engineering construction segment, which includes most forms of public works construction, lost 1,300 jobs in November, while nonresidential building construction lost 2,400 jobs.
The number of workers who said they looked for work in the past month and had last worked in construction fell to 629,000 in November. That was lower than in any November since 2006, when many nonresidential contractors were forced to delay projects because they couldn’t find qualified workers.
Association officials said the overall construction employment gains were welcome news for an industry hard hit during the downturn. But they cautioned that demand appeared to be falling for workers in the nonresidential and public-sector segments of the industry. They urged Congress and the administration to work together to address the nation’s crumbling infrastructure, saying that swift passage of a new highway and transit bill could bring needed stability o the public-sector market.
“While the overall construction industry appears to be recovering, this month’s data is not entirely positive,” said Stephen E. Sandherr, the association’s chief executive officer. “What the data shows us is this industry would be a lot better off, as would the broader economy, if Washington could figure out how to pay for and enact a long-term highway and transit bill, as well as other measures to fix our crumbling infrastructure.”