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April 2006
by Tom Nelson |
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| What does our future look like? Everyone would like to get a peek at where we will be in five years. Forecasting the aggregates industry has always been a fascinating look at public and private spending in the construction industry that buys aggregates and trends within our own industry that produces them. Both crushed stone and sand and gravel have historical data that go back a hundred years, yet with exciting growth in recent times. Figure 1 traces that history, beginning in 1945, and adds a forecast based on both recent end-use spending and historical trends in aggregates. | |||||||||
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The key end-uses remain largely unchanged: ready-mix concrete, asphaltic concrete, concrete products, roadbeds, railroad ballast, cement, lime, fill, and agricultural uses. These are concentrated in the construction industry and driven by the demand for highways and other public works, housing, and non-residential buildings (commercial, industrial, and institutional buildings). In 2005, the U.S. Census Bureau estimated funding for new construction put-in-place at $1.12 trillion. The important sectors for aggregates include the following:
Highways are funded by federal, state, and local governments from fuel and motor vehicle taxes and general appropriations. These revenues have been growing since the end of the last recession in 2003 and are now strong enough that large projects can be started with assurance that they will have enough funds to be completed. Growth in highway construction spending during the next five years will be driven by the limits of the six-year authorization (the Safe, Accountable, Flexible, Efficient Transportation Equity Act — Legacy for Users) approved by Congress in 2005. The funding levels are shown in Table 1. Other public works construction has seen steady growth in sewer and water projects. Utilities construction, on the other hand, has been declining as large power plants were completed and brought on-stream earlier this decade. Dollars in all construction sectors are subject to inflation in unit labor costs and especially building materials prices. Prices for steel, lumber, cement, gypsum, asphalt shingles, copper wire, PVC pipe, and other building materials increased sharply in 2005. This inflation eats into each dollar of construction so that there is less available in volume or “real” terms for each material. Therefore, tons of aggregates based on constant dollars will grow at a slower rate than nominal dollars. Figure 2 illustrates the consequent forecast for highways and other public works, comparing the next five years with the last five years. Housing saw none of the recession of 2000-2002 and has reached a level of 2 million starts per year. Many observers forecast that rising interest rates would deter this growth much earlier. In fact, mortgage and other long-term rates have stayed relatively low even as short-term rates rose. Widespread forecasts that 2 million starts are unsustainable have thus far proven wrong. Housing continues to offer a better return on investment than stocks. Baby Boomers seek to buy condominiums and second homes, both for investments and for vacations. On the other hand, housing prices have risen very sharply in East and West Coast markets, threatening continued affordability. While housing prices will be growing at a slower rate during the next five years, an actual decrease is not likely. Growth in housing demand from additional households and second homes in the next five years will nearly offset the declines from higher interest rates and home prices so that the current levels can be sustained, as shown in Figure 3. Non-residential building has seen very weak construction patterns in recent years with high vacancy rates and tight restrictions on construction loans to small business. By 2006, much of the excess space has been filled, rents are rising, and lending practices are easing so that non-residential construction is poised for a lively recovery during the next five years, as shown in Figure 4. Offices, hotels, and stores will lead the way as businesses invest more of their profits in structures. Institutional and government buildings, historically more stable, will follow upward. When these sectors are evaluated in terms of aggregates, the result is a growth in short tons from 3.19 billion in 2005 to 3.54 billion by 2010, a growth of 2.1 percent per year, as shown in Figure 5. This is slightly faster than the 1.5 percent per year growth of the last five years, which included a mild recession. This means that five years from now this industry will be producing another 350 million tons per year, which is equivalent to adding another firm to the industry that is larger than any present firm. Table 2 summarizes these forecasts. |
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A forecast of 2.1 percent per year growth throughout the next five years is near the middle of the historical growth rates for aggregates. If all possible five-year periods since the middle 1950s are ranked, the result is shown in Figure 6. This forecast rate is also consistent with the long-term trends in both crushed stone and construction sand and gravel, as was shown in Figure 1. Since 1945, crushed stone production has grown at an average annual rate of 3.0 percent per year and sand and gravel has grown at a 2.1 percent annual rate. Significant disruptions to growth took place during the high inflationary period of the 1970s when slowly growing public funds were seriously eroded by rising material prices, which resulted in distinctly fewer tons of aggregates. If 2005 had not shown signs of renewed inflation, the forecast for the next five years would be at least at the median 2.4 percent annual rate if not higher. Figure 7 looks at a common long-term forecasting basis — population. Tons per person consumption grew from 2.7 in 1945 to 8.7 in 1966 and then stayed close to that level for the next 30 years. Since 1996, faster growth, with only a mild recession, has moved it up to 10.7 by 2005. What is the long-term implication of forecasting on this basis? According to a population-based forecast, an increase in aggregates consumption of 2.1 percent would be more than double the increase in population growth. Whichever measure is used, aggregates consumption appears to be poised for healthy growth during the next five years. |
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Reprinted from Aggregates Manager Magazine |
