Is the Sky Falling?
An exclusive Aggregates Manager survey shows that even as the economic crisis came to a head, a sustained slump in residential construction had hit producers.
by Therese Dunphy, Editor-in-Chief
A perfect storm of economic ills hit the aggregates industry hard throughout 2008. What began with a three-year slump in the residential construction market expanded to include a financial credit collapse and deep cuts to state and local infrastructure spending. Add to that mix a year-long recession, a worldwide economic crisis, and a steep surge in unemployment and the result was one of the toughest years in decades for aggregates managers.
The feedback from this year’s survey is the least optimistic reported since Aggregates Managers began conducting its exclusive forecast surveys in 2004. Just under 22 percent, described 2008 business conditions as “poor.” By comparison, 10.5 percent of producers reported such results in 2007 and less than 4 percent of producers opted for the least favorable category from 2004 until 2006. It should be noted that surveys were completed during mid to late September as the financial market crisis became the nation’s top news story.
At the opposite end of the spectrum, 2.3 percent of producers described 2008 results as excellent, a more than 10-percent drop from the 2006 high in this category of 12.9 percent. That number is a fraction of the five-year average of 8.9 percent of respondents who anticipated excellent business results.
Benchmarked against forecasts from respondents to the 2007-08 Aggregates Manager Forecast Survey, this year’s results came in under expectations, but that should come as little surprise. What is noteworthy is that 2008 actual results were much closer to respondent predictions than business results seen in broader markets. For example, 6 percent of 07-08 respondents anticipated an excellent year (a 4-percent overestimate); 20 percent expected a very good year (a 10-percent overestimate); 40 percent predicted a good year (a 10-percent overestimate); 25 percent planned for a fair year (an 11-percent underestimate); and 10 percent braced for a poor year (a 12-percent underestimate).
By primary product, aggregates managers working in sites that only produced sand & gravel were the most likely to report excellent results with 6.3 percent. Producers involved with both crushed stone and sand & gravel were the most likely to report poor results with 23.9 percent in this range.
By region, the North Central region noted the most positive statistics with 16.4 percent of producers categorizing the year as either excellent or very good, while those in the West region noted the most troubling results: a whopping 66.3 percent described the year as either fair or poor, the two lowest categories.
Throughout the coming year, respondents expect essentially more of the same business results: 2.2 percent anticipate an excellent year; 8.0 percent say it will be a very good year; 28.3 percent predict it will be a good year; 41.5 percent believe it will be a fair year; and 20.1 percent say it will be a poor year.
As a general rule, producer optimism tapered with increasing annual production. An aberration to this trend occurred in the 500,001-1 million ton-per-year category where 15 percent of respondents say 2009 will be either an excellent or very good year.
Of the approximately 14 percent of respondents who anticipate an increase in production during 2009, 6.7 percent expect increases in the 1- to 9-percent range; 40 percent look for tonnage to increase in the 10- to 14-percent range; 6.7 percent estimate increases in the 15- to 19-percent range; 26.7 percent forecast volume upswings in the 20- to 29-percent range; and 20 percent predicted increases in excess of 30 percent.
Conversely, 33 percent of respondents anticipate a decrease in annual production for the coming year. Of those who foretell a production contraction, 15.5 percent estimate a 1- to 9-percent decrease; 25.9 percent anticipate a 10- to 14-percent decline; 10.3 percent predict a 15- to 19-percent drop; 28.4 percent forecast a 20- to 29-percent decline; and 30 percent plan for a decrease of more than 30 percent.
Looking at results from a geographic standpoint, the North Central region once again reported the most optimistic expectations with 12.6 percent predicting an excellent or very good year. Those numbers, however, were outweighed by much higher percentages in the lowest two categories. More than 50 percent of respondents in every region anticipate either a fair or poor year. The South is braced for continued economic challenges with nearly three in four producers reporting fair-to-poor expectations.
Impact on iron
When asked about plans for capital expenditures, aggregates managers described somewhat curtailed investment plans, but remained fairly focused on improving capacity and efficiency. An estimated 2 percent say they plan to sharply increase equipment investments; 8 percent say they plan to increase investments somewhat; 42 percent plan to hold investments at their current levels; 29 percent expect to decrease investments somewhat; and 19 percent project to decrease them sharply.
Filtered through the prior year’s results, this marks a shift of approximately 10 percent of respondents moving from plans to increase investments somewhat in 2008 to decreasing investments sharply in 2009. All other categories remained within a few percentage points of last year’s predictions.
By category, crushing and screening remains the most likely category to continue to draw increased producer investment. Maintenance of both equipments and trucks follows closely as producers try to stretch their investments through uncertain market conditions.
Top problems for producers
Although competition for sales took the top spot among producer concerns during 2007, it posted an 8-point gain in this year’s results. More than 31 percent described it as a major problem, with an additional 48 percent labeling it as a minor problem. Large producers, those producing more than 3 million tons per year, were the most likely to list competition as a challenge; an overwhelming 91 percent say they are competing for sales. When asked how they answered this challenge, responses ranged from improving and/or expanding product lines to seeking new markets to investing in plant and quality control equipment to lower costs and gain operational advantages. One respondent emphasized the importance of persistence as he simply replied, “Bidding, bidding, bidding.”
Although there was a larger increase in the number of producers reporting concerns about aggregates availability and permitting (19 percent in 2008 vs. 16 percent in 2007), the 1-percent increase in the number of producers reporting regulatory compliance problems drew more individual responses. Numerous respondents described regulatory officials as “too heavy handed” and regulatory requirements as “time consuming.”
After peaking at 17 percent in 2006, concerns about retaining workers have held steady at 12 percent. An important difference, however, is that several years ago, most reports in this category dealt with finding enough workers to ensure the desired production. That equation has now flipped with many managers reporting that they are scrambling for enough jobs to keep workers busy. “Our challenge is keeping our workforce fully employed and fully motivated to stay with us,” one producer noted. Managers report using techniques such as open communication, shortened workdays and work weeks, and “one-on-one communication” in an attempt to stave off personnel cuts.
Throughout the last quarter of the year, after surveys were returned, many sites were unable to continue to carry regular payroll and pink slips became more prevalent.
In mid-November, Luck Stone Corp. announced plans to lay off or reassign approximately 17 percent of its work force. “These people have been and will be our greatest asset, and this has been an extremely difficult decision and one made after exhausting all other cost-cutting options,” President and CEO Charlie Luck IV told the Richmond Times Dispatch. “Our company is 85 years old, and the depth and length of this one is unlike anything I’ve seen before. Within our company, we project that 2009 will be the lowest year in the cycle; then there will be a flat year in 2010.”
Several days later, Vulcan Materials Co. said that it planned to lay off 19 percent of the 200 employees in its Mideast division. “I think the decisions and actions that we are taking are reflective of the economy as a whole,” Tom Carroll, director of business development and external affairs for the division, told the Winston-Salem Journal. “We will continue to evaluate our business on a regular basis and make adjustments as needed.”
Hope for the future
Although the condition of the aggregates industry – and the nation’s economy – is undergoing tremendous challenges, 2008 closed with the potential for better results in 2009. On Dec. 6, President-elect Barack Obama appeared on NBC’s “Meet the Press” and described his plans for a two-year turnaround.
“We need action and action now,” Obama said. He said his plan to create 2.5 million jobs includes rebuilding infrastructure, improving schools, reducing dependence on oil, and saving billions of tax dollars.
“We will create millions of jobs by making the single largest new investment in our nation’s infrastructure since the creation of the federal highway system in the 1950s,” he declared. “We will invest your precious tax dollars in newer and smarter ways. We will set one simple rule: use it or lose it. If a state doesn’t act quickly to invest in roads and bridges in their communities, they’ll lose the money.
“We need to act with the urgency this moment demands,” he noted.
If such a package is signed shortly after Obama takes his oath of office, the results of the 2009-10 Aggregates Manager Forecast Survey may be markedly different from those in this year’s report.
The respondent pool
This year’s respondents were tipped toward smaller producers: 38 percent had annual production of less than 500,000 tons, while 23 percent produced 500,001 to 1 million tons, and 22 percent produced 1.1 million to 3 million tons. A combined 18 percent produced more than 3 million tons per year. Approximately 45 percent of respondents described themselves as owners, presidents, or officers. Another 23 percent had executive titles while 10 percent each described themselves as production managers or mine managers.
Methodology, Objectives, and Sources
The objective of the 2008-09 Aggregates Manager Forecast Survey was to determine business, production volume, spending, and workforce trends. In September 2008, Aggregates Manager mailed questionnaires to a randomly selected sample of 1,500 readers in the crushed stone and sand and gravel, crushed stone-only, and crushed gravel-only industries. A total of 398 useable surveys were returned for an overall response rate of 27 percent. The questionnaire contained $1 as an incentive.
The average annual production of the respondent’s primary product is 1.78 million tons per year, and 68 percent said they are either an owner/president/officer or an executive.