3 Tips for Sustaining Growth in the New Normal
By Ryan Mossman, vice president and general manager of FuelQuest’s Fuel Service
After a delay due to the 16-day federal government shutdown, total construction numbers for October arrived and were strong. Total construction in 2013 was higher year-over-year by 7.1 percent according to the Commerce Department’s report.
Expect continued growth for 2014 as mortgage rates are anticipated to stay low through the foreseeable future and the economy is expected to maintain its slow and steady climb. Peaking in 2006 at $1,167 billion and hitting bottom in 2011 at $788 billion, total construction rose steadily through 2013 with a forecast of $916.1 billion for the end of the year.
With three years of sustained growth, it is exciting to imagine this as the start of a boom. The verdict, unfortunately, is out as many factors can impact this rise in construction, including impending changes in Federal Reserve policies, fluid macro economic conditions and more. Many of these factors are outside the control of business owners and corporate executives.
There are factors, though, that businesses can control and require attention whether an impending boom happens or not. One such factor is volatile wholesale fuel prices.
Diesel prices are highly volatile with price swings significant enough to impact aggregate profit margins. Prior to 2004, diesel price moves of 3 cents or more happened 4.8 percent of the time; five cents or more 1.4 percent of the time; and 10 cents or more just 0.2 percent of the time.
Since 2004, those numbers have increased significantly and now stand at 44.5 percent, 21.6 percent and 3.6 percent, respectively. Regional differences are no less dramatic. On October 23, 2013, diesel prices in the Pacific Northwest dropped by more than 18 cents per gallon within a single day while New York only experienced a 6-cents-per-gallon drop.
It is clear that volatile diesel prices are a permanent fixture – a condition that we at FuelQuest call the “new normal” — and the aggregates industry is not immune to its impact. As Martin Marietta Materials confirms in its 2012 annual report, diesel represents the largest portion of energy costs within aggregates.
Understandably, companies are eager for strategies that comport with this new normal in order to mitigate the negative impact of market volatility and high fuel costs.
Although it may seem daunting, the new normal can actually prove an asset to aggregates companies. With more than 10.5 percent of fuel sold in the U.S. flowing through fuel management automation software and services as well as customers like Carmeuse and Dyno Nobel, FuelQuest has developed a unique and leading-edge perspective on how companies can tackle the new normal.
The following are some specific examples of how to do just that:
1. Create a Balanced Supply Portfolio
- A volatile fuel market presents opportunities for gain, but to capitalize on them, operational best practices demand a healthy mix of both contracted and spot supply. Although locales can vary, a good rule of thumb is 80 percent contracted and 20 percent spot.
- Even with contracted supply, optionality across contracts is also important. Secondary and tertiary supply options ensure security of supply while varying payment terms (e.g., same day, prior day) based on different indices (e.g., PLATTS, OPIS) allow fuel managers to capture value from price movements.
- It is tempting to rely heavily on fixed price contracts in the face of volatile fuel prices. Although these can lend an air of predictability in fuel spend, they negate opportunities to take advantage of profitable price swings and tend to cause higher overall fuel costs.
2. Adopt just-in-time fuel management best practices.
- With a balanced supply portfolio and similar optionality in carriers, decision-making complexity increases, which can lead to replenishment issues such as run-outs or retains. Fuel management automation is the optimal solution to increased complexity as it makes the jobs of fuel managers easier when faced with literally hundreds of supply choices for just one load of fuel. Effective automation highlights the three best choices to meet corporate and operational objectives.
- Value is also destroyed when carrying excessive days supply, which needlessly tie up working capital. Just-in-time management lowers working safety stock levels and avoids keep-full conditions freeing cash flow. It also allows fuel managers to load shift safely enabling them to take advantage of intra-day buying opportunities that rely on inventory transparency and demand forecast accuracy.
3. Measure and review fuel management operations.
- Operational improvement starts with a baseline of existing processes and performance. Third-party fuel management expertise from logistics companies such as FuelQuest can help establish this baseline and uncover areas of operational gain. Fuel managers can also measure progress across any areas in which they implement improvements. More importantly, they can set a plan that tackles the areas of greatest return on investment and positively impact the corporate bottom line sooner rather than later.
After years of decline, construction is growing again in the United States. During this same period, diesel prices have soared and experienced price swings that are larger and more frequent than in the past. Fuel surcharges, alternative fuels, and other measures help mitigate the impact of the new normal in today’s fuel market.
Fuel management best practices can have a greater impact and are proven not only to drive down fuel costs, but also provide an edge in a competitive aggregates market.
Is the aggregates industry entering a boom period? Maybe it is, and maybe it’s not. Regardless of the answer, the right fuel management actions can lead to boom times within a fuel buyer’s business.
About FuelQuest: Founded in 1999, FuelQuest provides on-demand fuel management, tax automation and compliance solutions for suppliers, distributors, buyers and traders of fuel. FuelQuest’s fuel management solutions deliver operational and financial value to over 650 customers and help manage the complexities, regulation and market volatility of more than 22 billion gallons of gasoline and diesel fuel annually. fuelquest.com