December 2001

Marketing

Market Watch--Construction Projects Back on Track, Despite Setbacks

Tipping the Scales of Risks Versus Opportunities

Sustainability Reporting in the Aggregate Industry

Market Watch

Construction Projects Back on Track, Despite Setbacks

By Chris Sullivan

Judging by the news reports, someone might believe that construction activity across the United States is suddenly on hold. Yet, research by AggMan shows that almost all projects—all but a handful of airport expansions and urban high-rises—are still moving forward.

While the tragic events of Sept. 11, 2001, scarred the psyche of American construction, they also steeled the resolve of many owners and developers. The renovation of the Pentagon resumed almost immediately, with Hensel Phelps Construction Co. of Chantilly, Va., leading the job. In New York City, even as local investment bank Morgan Stanley hinted that its large office project might be on hold, Bank of America’s Chief Executive Officer Ken Lewis said that the Charlotte, N.C.-based company would build a high-rise there “over the next several years.” Manhattan, he explained, “is the financial capital of the world now and it will continue to be.”

Local real estate developers agree that New York City needs new offices: the terrorist attacks reduced Manhattan space by 3.6 percent, says CoStar Group Inc., a Bethesda, Md., research firm. Yet, projects in New Jersey and other nearby areas are likely to absorb new office demand. Major new office developments and renovations underway include a $90 million, 300,000-sq.-ft. complex in Queens to be built by Berwyn, Pa.-based LCor Inc., and in Jersey City, N.J., projects are under construction by such developers as Hartz Mountain Industries, The Lefrak Organization, Mack-Cali Realty Corp. and SJP Properties.

Contractors and engineers have noted that any new U.S. office towers are likely to emphasize robust security systems and “structural hardening”. Airport construction is already affected by this new mindset: many current jobs have seen sequencing changes and even delays for design revisions, such as more lobby space near checkpoints and new security stations at gate entrances.

Airports needs shift

While some airports revise expansion plans due to concerns about bond financing and passenger facility charges, the federal government’s bailout of the aviation industry immediately injects $3 billion for new security measures—while keeping intact the national trust fund that pays for airport construction.

In fact, most major projects are still moving forward. Earlier this month, Southwest Florida International Airport in Fort Myers pre-advertised its new $290 million midfield terminal. Hartsfield International, Atlanta, plans to continue its 10-year, $5.4 billion expansion and new runway, although plans for a new terminal and rental car facility may be delayed. Similarly, the $2.2 billion expansion of Houston’s George Bush Intercontinental and the $1.2 billion midfield terminal for Detroit Metropolitan are proceeding, and Federal Express is banking on its new $300 million hub facility at the Piedmont (N.C.) Triad, which could include $136 million in related airport improvements.

Other airports have cautioned they may phase their projects. Detroit’s planned $325 million renovation is one, as are Miami International’s $1.3 billion new concourse and $4.1 billion of expansions, lighting upgrades and widening of corridors.

More publicity, unfortunately, has gone to the few airports where large projects are in doubt: Salt Lake City, Los Angeles, San Jose and Chicago’s O’Hare. Yet, only two have taken concrete steps: Minneapolis-St. Paul shut down a retail project and Phoenix’s Sky Harbor stopped signing new contracts.

The cities

Like the airport work, questions are swirling around major urban projects—especially hotels, which are bracing for a travel industry recession. Yet, developers in Boston say they are proceeding with such noteworthy projects as Boston’s $1.2 billion Fan Pier, which includes a Hyatt hotel, and a hotel/residential complex at the Prudential Center.

Other Boston projects that are in doubt had financing problems before the World Trade Center and Pentagon attacks, like Starwood’s 1,120-room flagship hotel for the new waterfront convention center and Sawyer Enterprises’ 390-room Loews Hotel. Even the hotel slowdown was expected: last summer, consultant PricewaterhouseCoopers predicted that 6 percent of hotel projects scheduled for 2003 completion would be shelved.

But in Boston as elsewhere, the trend toward more downtown high-rise apartment and condominium continues. The towers will continue altering the skylines of all major cities, especially Los Angeles, Chicago and San Francisco.

Back to work

Just as at the Pentagon, where Hensel Phelps and Omaha’s HDR Inc. are back on their $145 million renovation job, the rest of the country’s construction industry is back at work. And as the Pentagon’s design-build team updates its master plan to account for the terrorist attack, so do construction teams across the country, by reviewing security plans, hardening building designs—and by anticipating changes and delays.

Chris Sullivan is a contributing editor for AggMan.

Tipping the Scales of Risks Versus Opportunities

Upcoming conferences offer expert opinions on innovations in the aggregate industry

By Bill Welgoss

The aggregate industry is at a crossroads. Like no other time before, it faces a period of profound opportunities matched only by profound risks. And under such circumstances, knowledge is power. That is the premise behind a conference series entitled “Innovations—In the Aggregates, Concrete and Asphalt Industries,” to be held Jan. 21-22 in Philadelphia and Feb. 4-5 in Atlanta. The series is the brainchild of Aggregate Research Industries, Inc. (ARI) of Richmond, Va., and presents a cross-section of opinions from experts with a strong vested interest in the aggregate industry.

ARI itself is a relatively new type of private consulting entity in the aggregate industry and bases its success on attracting forward-thinking aggregate companies. Considering that a lot companies “do just fine, thank you” in the status quo, the premise of its success is a risk.

By all indications, however, the status quo is going to change. And the experts assembled in this article and conference series hold strong opinions about just how the industry is changing and what you can do about it to turn risks into opportunities.

Barry Hudson
Operations and Research Manager, ARI

As the economy enters a mild recession, the ability to demonstrate added value in your product will become more important. It will allow for a higher selling price or, at least, allow for the ability to hold current prices when others around you are reducing sales price to maintain market share.

As the construction landscape changes and more privatization of road building and other construction projects becomes the norm, the requirement for aggregates and other construction materials to meet prescriptive-type specifications should dissipate. With the advent of the performance-based specifications, the use of what have been considered “marginal” aggregates under current regimes will become permissible. This will allow aggregate producers to focus on delivering aggregates that are best suited for the end user. In a lot of cases, aggregates that will be desirable for concrete and asphalt in a true performance-based construction project will allow the use of larger coarse aggregate sizes, as well as the now troublesome fines fractions.

To allow the use of these materials however, will require a higher degree of attention paid to the aspects of quality—both in quality control and quality assurance. With a higher level of consistency through better quality management, the use of the entire size fraction of aggregates produced in the quarry is achievable. This has obvious benefits for the aggregate industry, as all of the aggregate resource becomes usable and can sell for a fair value.

Of particular interest is the production and use of manufactured sands. Environmental and transportation issues are driving the development of hard rock sands to replace natural sands. By employing the correct process, controlling and measuring that process, we can take the existing quarry fines problem—or the industry's “ugly sister” if you would like, and transform these materials into a “Cinderella”—i.e. a high value product.

For this to happen, the industry will need to embrace performance-based specifications and take quality issues seriously. Neither of these two things are new innovations, they really are just common sense.

Mitch Crenshaw
Technical Support Manager, ARI

As we all know, “leaving money on the table” in the sales process is unhealthy for business. The same holds true in the manufacture of product. Understanding how the quality of products affects their cost-of-use will be key to maximizing these profits.

The answers reside within the sample data. We generate more sample data than ever before, but do we know what the numbers mean? What are the numbers telling us about the production processes, the quality of intermediate products and their contribution to the final product? The ability to determine the costs of production, the costs of use and the predictability of the manufacturing process will require producers to analyze sample data that represents the entire manufacturing process, not just for “quality assurance”. Recognizing the variables that affect consistency and understanding how much of the variation in consistency is “normal” will be necessary to produce a more consistent final product.

Segregation, we all know, is one of the major factors affecting the consistency of producing the final product. Producing more consistent ingredients will reduce the cost-of-production and their cost-of-use. This, in turn, will improve the predictability of producing final products, reducing their cost-of-production and maximizing profits.

Eugene Martineau
President and CEO, U.S. Concrete

I believe the entire materials supply industry will continue to consolidate over the next five years. At the end of that time, we are going to see much larger combinations of companies in every aspect of the business. We can look at the cement industry and see a similar process. It is an industry that is 85 percent owned by multi-national companies that are world class players in the construction materials supply industry. If you look at other countries, you’ll see the same trend.

Consolidation will accelerate over time the research and development that should have been going on all along. From the concrete industry standpoint, we have a valuable product that is totally misunderstood, under-appreciated and undervalued. We have a superior product that has not have been marketed and sold very well. Over time, consolidation will help to focus companies on improving the image of concrete.

Also, we think the formation of the RMC Research Foundation, in Washington, D.C., of which I’m a member of the board of trustees and in charge of the program committee, will be generating, we think, more than $1 million a year for doing research and educational projects. The foundation is a not-for-profit 5013-C venture separate from, but closely affiliated with, the National Ready Mixed Concrete Association. So, the industry—including producers and materials and equipment suppliers—has so far contributed $12.5 million to the endowment for the foundation. Our goal is $15 million. This, too, should accelerate the research and development projects within the concrete industry.

Jerry German
Aggregate Geologist, Georgia DOT

One trend that we here at the Georgia DOT believe will have a profound effect on how aggregate producers do business is the initiative to develop performance-based tests for aggregate products. We have done some preliminary work on the development of performance-based tests and believe that, for certain aggregate products, this method of evaluating performance is superior to the current methods of trying to evaluate individual characteristics. Some current aggregate tests and specifications impose arbitrary restraints on the use of some types of aggregates. (For instance, just because certain producer’s concrete sand cannot meet gradation specifications does not mean that suitable concrete cannot be made using that particular sand.) We believe that the use of performance-based testing will allow the use of a wider range of aggregate products.

Mark Krause

Director, Terex Aggregates

To make a quality fines product, we have many things to consider. We look not only at the gradation of the material but also the shape, or angularity, of the material, the plasticity of the product and the consistency of the output. Producing all these at one time can be quite a challenge. At the same time, we hear different “myths” as to which crusher is best suited to create this difficult product. Let me start by saying that anyone who recommends a “solution” without first understanding your material type, entire product specifications, history of the operation, future operational needs and even the aptitude of your operators can be discounted very quickly. As you might expect, the possible solutions we might pick are filled with trade-offs and compromises. Let’s look at a couple of newer innovations that should enter into your decision-making process

New Cone Crushers—Changes in stroke, speed, chamber configuration and even alloys of castings have resulted in many successful applications of cones for the purpose of making specification fines. Cones, the first choice of many due to the favorable wear characteristics, can fit the application once filled by the gyradisc. The granule size of the feed material, moisture content and final product gradation will determine how successful the cone might be. Actual reduction ratio will help to determine how effective the cone crusher will really be.

New VSI Technology—Two areas of concern have surrounded the VSI. First is the wear cost. Second is the consistency of the output gradation. Forward strides in the ceramic and carbide technology have helped to answer many of these questions. The technology improvements have resulted in significantly (up to 10 times) longer wear life and much greater consistency in outputs has brought a new acceptance of the VSI for spec fines production.

Bottom line is that technology continues to improve. Knowledge levels continue to improve. The final answer is that it is still site specific and support related. Understanding how your material will react and who will be around to “tweak” the output will determine how successful each installation will be.

Ron Collins
President, Pavement Technology Inc. (PTI)

With the advent of Superpave, the hot mix asphalt and aggregate industries are required to improve longstanding conventional sampling and testing methods and provide a quality product that is profitable to their operations. With this in mind, hot mix asphalt (HMA) producers and aggregate producers are looking for ways to sample and test their products in a consistent method that will help them eliminate product that is produced out of specification.

Today, there is a solution that is revolutionizing the industry. The automatic belt sampler (ABS) and the automatic gradation unit (AGU) are being used at aggregate and asphalt plants.

At an aggregate plant, the ABS and AGU are typically located downstream from the secondary crusher. The ABS secures a sample from a moving conveyor belt and deposits it into the AGU hopper. Aggregate drizzles from the hopper onto the nest of screens while the nest vibrates in a vertical position. When all the material has left the hopper and the vibrators have ramped through the optimum frequency for each screen, the nest of screens rotate horizontally and releases material into the weigh hopper one screen at a time. As each screen is off-loaded, the screens continue to vibrate and dislodge particles from the screen mesh. A test report is printed at the control house where the crusher can be adjusted as needed.

The ABS and AGU can also be located at an asphalt plant. The ABS and AGU are typically located near the main feeder belt. Like the aggregate plant, a representative sample is secured and deposited into the AGU, which produces a gradation report. The gradation report is sent to the control house. The plant operator can then use the test results to make changes to the cold feed bins at the plant. A gradation can be run and a test report can be produced in 10 minutes or less.

With these two products, contractors will be able to improve the quality of the product they produce, obtain real-time quality control results in a short period of time, increase production and meet Superpave specifications. These innovations translate into increased profits and a safer working environment for their associates.

Mike Stanley
Mineral Economist/Geologist, Resource Science, Inc.

I often ask aggregate producers to name the greatest risk facing the industry. Few give the answer I believe to be true: the zoning away of potential aggregate reserves by local planning commissions.

Increasingly, land-use planners are responding to land-use conflicts between mineral industries and alternative land-uses. Often these conflicts result from unmanaged urban growth. When aggregate operations are viewed as non-complementary to urban settings, the land-use planner must decide which alternative derives the highest and best use of society. This is a complex problem in which a diverse stakeholder community plays an active role.

Land-use decisions in the future promise to be further compounded by sustainable development mandates implemented in the United States and Canada as managed growth initiatives and/or protected area strategies.

In light of this, it is essential for the future of many aggregate producers to become integral players at the local level in the community and in the political arena.

Other experts speaking at the Innovations conferences include:

• Sergio Blacutt, president, Trade Metals.
• David Fowler, director, International Center for Aggregates Research.
• Greg Halsted, soil, cement base/roller compacted concrete pavements engineer, Portland Cement Association.
• Bob Heitmann, vice president—marketing and operations, Koch Performance Roads.
• John Hellyer, assistant director of quality management, Luck Stone.• Jon Hill, principal, Omega Business Solutions.
• Don Powell, P.E., technical director, Construction Materials Group, Vulcan Materials Co.
• Valentin V. Tepordei, crushed stone specialist, U.S. Geological Survey.
• Bill Watkins, vice president, U.S. Bancorp/Piper Jaffray.
• Rick Yelton, editor, The Concrete Producer.

Also, the breakfast speaker will be Charlie Luck, president and chief executive officer, Luck Stone Corp.

For registration and details, e-mail conference@aggregateresearch.com or visit www.aggregateresearch.com/conference.

Bill Welgoss is the senior industry editor for AggMan.

Sustainability Reporting in the Aggregate Industry

By Michael C. Stanley and Josef E. Marlow

Editor’s Note: This article is the seventh of a seven-part series on the aggregate industry and land-use issues.

Figure 1. The sustainability triangle represents a balance of the three objectives in resource development.

We are starting to hear more and more about sustainability these days—but what is it really, and how is it measured and reported? The concept of sustainability is not new, the term “sustainable development” has been in use since the mid-1980s. One of the first definitions of the term was presented in a 1987 report from the World Commission on Environment and Development entitled Our Common Future—Development which meets the needs of the present without compromising the ability of future generations to meet their own needs.

Sustainability rests on the three interrelated pillars of economy, environment and society (see Figure 1). In the context of business, sustainability has to do with a firm’s economic, environmental and social performance in the long-term time-frame. Once again, these are not new concepts. Many aggregate companies are currently addressing sustainability issues with programs in corporate citizenship, community relations, environmental stewardship and customer relations. These companies generally report their corporate citizenship and environmental stewardship activities in their annual reports, brochures and websites.

Reporting on a company’s economic, environmental and social performance is referred to as triple-bottom line accounting, a term coined by John Elkington in a 1997 book entitled Cannibals with Forks. A growing number of companies—large and small, domestic and multinational—are embracing the concept of triple-bottom line accounting. Using the triple-bottom line, a firm is able to show how it creates value in its activities, not simply economic value for its owners, but environmental and social value as well, for all of its stakeholders, including customers, shareholders, suppliers, partners, employees, local communities, governments and the public at-large. The triple-bottom line is an excellent communication tool that firms can use in providing input to comprehensive land-use planning to ensure future access to aggregate resources.

Figure 2. Sustainability programs move companies beyond regulatory compliance and risk management. Firms are now realizing bottom-line benefits that improve linkages between the industry and a broad stakeholder community. This figure was modified after International Institute for Sustainable Development (IISD).

Sustainability reports can be very useful for a company at various levels. For the top management and board of directors, the report is useful for evaluating how a firm’s policies regarding economic, environmental and social issues compare to its actual performance. In a company’s operations, the framework of the reports help provide a means to apply the concepts of sustainability to its products, services and operations (see Figure 2).

Within the aggregate industries, the term sustainability has often been used interchangeably with concepts of environmental performance. As such, reclaimed quarries and plant sites have become icons for an industry seeking to demonstrate a commitment to sustainable development. This is only part of the picture—an industry that complies with environmental laws and regulations drives improvements in environmental performance. Some firms have adopted a more proactive approach, where environmental risk management is introduced to reduce environmental liabilities and to minimize the costs of regulatory compliance. Long-term sustainable development strategies are beyond the envelope of regulatory compliance, translating to new opportunities and improved business results.

The aggregate industry provides excellent examples of sustainability reporting or triple-bottom line accounting. For example, take a look the Environment and Community webpages on the Luck Stone website, or the Vulcan Materials Social Responsibility 2000 report, or the Martin Marietta Materials 2001 Friends & Neighbors publication. And we could name many more companies, large and small, providing the same type of information about their economic, environmental and social activities.

An examination of these reports reveals that every firm reports different information and in various formats. As a result, it is often very difficult to compare the sustainability performance of one firm to another, or to general performance standards, where they exist. What is needed is standardization in form and content, similar to what is done with financial accounting. All firms now adhere to generally accepted accounting principles or GAAP. Before this accounting standardization was completed, it was difficult to compare financial statements.

Figure 3. For the company, sustainable development means adopting business strategies that meet the needs of both the enterprise and its stakeholders. Within this framework, there is a mandate for protecting, sustaining and enhancing human and natural resources that will be needed in the future. This figure was taken from International Institute for Sustainable Development (IISD).

Reporting Guidelines Evolution

During the last decade, various sustainability reporting guidelines have been released, including those by the United Nations Environment Program, the World Business Council for Sustainable Development, the Institute for Social and Ethical Accountability, as well as various accounting firms, associations and governments. All of these guidelines were useful in clarifying what and how to report, but their proliferation did not make comparisons easier because no single reporting standard existed. That situation no longer exists as a result of the efforts of the Global Reporting Initiative (GRI), convened by the Coalition for Environmental Responsible Economies (CERES) and the United Nations Environment Program. In 1997, the GRI began to develop voluntary sustainability reporting guidelines. The guidelines, initially released in March 1999 and updated in June 2000, have been endorsed and employed by many firms, including Ford, AT&T, Proctor & Gamble, Royal Dutch/Shell, Nissan and numerous others, large and small.

GRI Sustainability Reporting Guidelines, June 2000

Officially entitled “Sustainability Reporting Guidelines on Economic, Environmental and Social Performance,” the June 2000 GRI document covers underlying principles and practices, suggested report content and implementation issues. The following discussion is organized along similar lines and draws heavily on the June 2000 guidelines.

The underlying principles and practices are aimed at producing sustainability reports that: 1) provide ease of use, 2) facilitate comparisons with other reports, and 3) can be verified. Six main principles have been identified by the GRI:

• Reporting entity—the entity for which the report is generated should be clearly defined. For example, the entire company, a specific operation or a group of subsidiaries.
• Reporting scope—the scope of activities covered in the report (environmental, social, economic or some subset of these).
• Reporting period—the activities, impacts and events should be reported in the period of their occurrence, for example on an annual basis.
• Going concern—all reporting should be based on an assumption that the company will be in business for the foreseeable future (18 months as suggested).
• Conservatism—a firm should only claim credit for achievements clearly and directly attributable to its activities.
• Materiality—information on impacts, activities and events that are relevant to a firm and its stakeholders should be reported.

As identified by the GRI, the information reported in a sustainability report should be as useful and relevant as possible, having the following characteristics:

• Relevance—useful for decision making.
• Reliability—without bias and error-free.
• Clarity—easy to understand for a wide spectrum of users.
• Comparability—requires consistency with respect to measurement and presentation of data.
• Timeliness—reported on a regular cycle, usually annually.
• Verifiability—independently verifiable data and information adds credibility to a report.

The GRI guidelines suggest that a sustainability report contain six main sections:

1. CEO Statement—This is most valuable for indicating that a firm is committed to sustainability, provides credibility for the report and demonstrates accountability at the highest level. The CEO statement will usually provide report highlights, establish the firm’s commitment to its economic, environmental and social goals, acknowledge performance, successes and failures, and state upcoming challenges the firm faces in the area of sustainability.
2. Profile of Company—this section provides an overview of the firm and the scope of the report. In addition to standard ownership, location, company size and product/service information, it includes such information as: contact persons, significant changes in the firm in the reporting period and public accessibility of specific sustainability information.
3. Executive summary and key indicators—provides an overview of the report along with tables and charts of key indicators and information.
4. Corporate vision and strategy statement—a presentation of the corporate vision and strategies for achieving its economic, environmental and social performance goals.
5. Policies, organization and management systems—an overview of the firm’s corporate structure and what management systems it has implemented that will allow it to achieve its vision. Regarding policies and organization, this section includes: a) publicly available mission statements, b) charters, codes or voluntary initiatives the firm has adopted regarding economic, environmental and social issues, c) organizational structure and responsibilities, and d) industry association memberships. Information on management systems includes programs and procedures applicable to economic, environmental and social performance, such as employee awareness training, social reporting, environmental risk assessment, supplier selection criteria and quality assurance and control. Perhaps the most important part of this section includes identification of how stakeholders are defined, selected and consulted.
6. Economic, Environmental and Social Performance Indicators—This is the heart of any sustainability report. It is this section that actually presents how a firm is performing with respect to the triple-bottom line. Both qualitative and quantitative indicators are employed along with ancillary information useful for interpretation. For economic performance, important subsections include: profit, intangible assets, investments, wages and benefits, labor productivity, taxes, community development (e.g. charitable contributions), suppliers, and products/services (e.g. economic issues and impacts). Environmental performance indicator subsections include: energy (type and usage), materials, water, emissions/effluents/waste, transport, suppliers, products/services (environmental issues and impacts), land-use/biodiversity and compliance. Social performance subsections include: workplace, human rights, suppliers, and products/services. The GRI guidelines provide examples of many indicators for each of the subsections described above (see Figure 3).

The suggested report content described above might seem overwhelming, especially for smaller-to-medium-sized firms, or companies that have not reported such information in the past. It is important to remember that if you decide that you want to produce a sustainability report for your company, you don’t have to start with a full-blown report. You may want to focus on only one sustainable aspect, the environment, for example. Most firms have some information on their environmental impacts, as a result of required regulatory filings.

Alternatively, you may elect to produce a report containing limited information on economic, environmental and social performance.

After several years of implementation of sustainability programs in resources industries, three trends are emerging:

A) Sustainability adds to a company's competitive advantages;

B) Companies implementing these programs have realized increased market share; and

C) Increased shareholder value has resulted from lower risk, both environmental and political.

Implementation of sustainability concepts by aggregate companies not only adds to the bottom-line, but generates an array of non-economic benefits for both the company and industry. This goodwill translates into an improved relationship of the aggregate industry with its stakeholders.

Josef E. Marlow is president and Michael C. Stanley is mineral economist and vice president with Resource Science, Inc. Resource Science, Inc. is located on the web at www.resourcescience.com.