Industry forecast: 2017 results lived up to operator expectations

Therese Dunphy

January 5, 2018

Following the November 2016 election cycle, optimism was up — way, way up — in the aggregates industry. In fact, respondents to the Aggregates Manager 2016-17 Forecast Survey gave the highest rated predictions since we began tracking industry sentiment in 2004. The question was: could 2017 results live up to these high expectations? The answer is a resounding “yes,” according to the results of the Aggregates Manager 2017-2018 Forecast Survey.The survey assesses production trends for the current year and asks producers their expectations for the coming year. Over its 14-year history, forecast responses have proven to be quite accurate, and last year’s rosy forecast was, once again, on target. A total of 48.1 percent of respondents predicted either an excellent or very good year in 2017. Actual results show 47.9 percent (-0.2 percent) of respondents reporting excellent or very good results. The greatest disparity between the 2017 forecast and actual results were within the good and fair results. Good results were 3.4 percent higher than forecast, while 3.4 percent fewer than predicted reported fair results. While the percentage of respondents reporting poor results was slightly higher than anticipated (+0.2 percent), 2017 results mark the only time business ratings in this category fell below 1 percent throughout the forecast’s existence.

Business conditions, as considered in terms of sales and profitability, tracked very closely with last year’s predictions. While the percentage of respondents categorizing 2017 as excellent fell slightly short of expectations, it matched 2016 results. Significant growth was seen in the percentage of respondents describing 2017 as a very good year; that rating grew nearly 8 percent from 2016 results. Growth was also seen in the percentage of respondents describing 2017 as good — up more than 6 percent. The best indicator of industry strength, however, may be the 11.5 percent year-over-year drop in respondents who described business conditions as fair. And, for the first time in 14 years of forecasts, less than 1 percent of respondents described business conditions as poor.

2017 business ratings

For more than nine out of 10 respondents, 2017 was a solid business year; 11.1 percent described it as an excellent year, 36.8 percent said it was very good, and another 42.7 percent said it was good. Results on the less favorable end of the spectrum were the lowest in the forecast’s history with only 8.5 percent describing business conditions as fair and another 0.9 percent rating them as poor.

In terms of operator size, large operators — those producing more than 5,000,000 tons per year — were the most likely to report excellent (10.5 percent) or very good (57.9 percent) results; a 9.2-percent increase in top ratings compared to 2016 results in the same ratings categories. Conversely, small operators — those producing less than 500,000 tons per year — were the most likely to report fair (13.5 percent) or poor (1.9 percent) business ratings. For perspective, this represents a more than 20-point decrease in the percentage of small producers who reported business results at the lower end of the spectrum from last year’s survey.

By commodity sand and gravel producers were the most likely to report excellent (10 percent) or very good (60 percent) results in 2017. They were followed by producers of crushed stone & sand and gravel with a combined 52.0 percent who reported excellent or very good results, then crushed stone producers with a total 43.7 percent who indicated excellent or very good results.

From a regional perspective, operators in the Northeast were most likely to report strong business conditions, with 57.9 percent who described them as either excellent or very good. Operators in the South followed, with 51.2 percent who reported excellent or very good conditions, while 45.5 percent of operators in the North Central opted for the top two business condition ratings. In the West, 38.5 percent of operators described 2017 business conditions as excellent or very good.

In terms of year-over-year results, respondents in the North Central and Northeast regions each reported top rating increases of 14.1 percent. They were followed by respondents in the South, with 6.1 percent more who described business ratings as either excellent or very good than in 2016. The West was the only region to report a decline in the top two business ratings results, with a 0.3-percent decrease over 2016. The West was also the only region with respondents who recorded poor ratings results.

2018 forecast

With a strong year behind them in 2017, operators continue to be optimistic when looking forward in 2018. More than 46 percent expect it to be either an excellent or very good year, while another 42 percent say it will be a good year. Less than 12 percent say it will be a fair (10.3 percent) or poor (0.9 percent) year. While similar to 2017 results, the ratings show growth at each end of the spectrum.

When it comes to the relationship between operation size and business ratings, bigger is better. Just over 63 percent of respondents at sites producing more than 5 million tons per year anticipate either excellent (15.7 percent) or very good (47.4 percent) business conditions in 2018. This marks a 3.9-percent increase over last year’s forecast results. Conversely, respondents at sites producing between 500,001 and 1 million tons per year were the least optimistic. No respondents in this size category call for excellent business conditions in 2018, and just 13.3 percent predict it will be a very good year. Combined results in these top two business ratings categories plummeted 39.3 percent compared to last year’s forecasts for operations in this size category.

By commodity, sand and gravel producers anticipate a repeat of 2017 results, with 10 percent calling for excellent or very good (60 percent) business ratings in 2018. While identical to 2017 results, these ratings mark an 11.2-percent increase over what sand and gravel producers projected for 2017 results in last year’s survey. Crushed stone producers report a slight decrease in expectations for 2018 with 37.4 percent calling for excellent or very good business ratings — a 2.6-percent decrease from the prior year’s forecast. Crushed stone & sand and gravel producers suggest the most significant decrease in top results, with a combined 6.9 percent fewer who expect excellent or very good ratings in 2018.

From a regional perspective, operators were the most optimistic in the Northeast with 52.6 percent who expect excellent or very good business ratings in 2018. They are followed by the North Central (51.4 percent), South (43.6 percent), and West (38.5 percent). Of the four regions, only respondents in the North Central region were more likely to report business ratings in the top categories for 2018 compared to the prior year. The region reported a 22.9-percent increase in strong ratings expectations. All other regions had more restrained expectations for 2018 than during the previous year.

2017 production volumes

Nearly one in two respondents reported increased production volumes in 2017, compared to 2016, a 13.2-percent increase over 2016’s reports. Some respondents noted they are running more hours to try to keep stockpiles on the ground. In contrast, 6 percent noted decreased production in 2017, significantly lower than 17.8 percent who reported decreased volumes in 2016.

The average production increase was 16.6 percent — 2.9 percent higher than 2016 — while the average decrease was 20.1 percent — 15 percent lower than in 2016.

Across all sizes of operations, production results were higher. More than half of respondents at operations producing 1 million to 3 million tons (56.6 percent) said they increased production. This size range was followed by respondents at sites with 3 million to 5 million tons (50 percent), up to 500,000 tons (48.1 percent), more than 5 million tons (47.4 percent) and 500,001 to 1 million tons (40 percent). The smallest sites — those producing up to 500,000 tons per year — enjoyed significant growth in 2017. Not only did nearly 20 percent more report increased production than in the prior year, but 31.3 percent noted that production increased by 30 percent or more.

By commodity, respondents at operations producing crushed stone and sand and gravel were the most likely to report increased production volumes (61.5 percent), significantly higher than their peers in sand and gravel operations (40 percent) and crushed stone operations (37.4 percent).

By region, the South once again was the most likely to enjoy gains in production volumes. More than half (53.8 percent) reported increased production in 2017. They were followed by the Northeast (52.6 percent), West (46.2 percent), and North Central (42.4 percent).

In terms of pockets of weakness, one in four respondents at operations with 3 million to 5 million tons per year of production reported decreased tonnages in 2017. One in 10 sand and gravel producers reported decreased production, while 10.3 percent of respondents in the South reported a decrease.

Once again, worker retention was the most commonly cited major concern for survey respondents. It was the top challenge for three of four regions: North Central (30.3%), South (30.8%), and West (30.8%). In the Northeast, however, it fell from the top concern in 2016 to its third highest challenge in 2017. Instead, aggregates availability and permitting (36.9%) was the most significant challenge for respondents in the Northeast.

2018 production forecasts

Following widespread production gains in 2017, nearly four in 10 respondents (39.3 percent) expect another year of production growth. With just 3.4 percent who anticipate a decrease, stability and growth seems to be the wide-held expectation for 2018.

Respondents are bullish on 2018 production predictions, but the optimism diminishes slightly based on operation size. Nearly half (47.4 percent) of respondents at sites producing more than 5 million tons expect growth. Small producers, with less than 500,000 tons per year of production, are somewhat more reserved with 32.7 percent who anticipate an increase in production.

By region, the West expects a strong year in 2018, with 46.2 percent of respondents who predict higher volumes. They are followed by the North Central (39.4 percent), the Northeast (36.8 percent), and the South (35.9 percent).

Respondents who predicted an increase estimated an average increase of 14.5 percent — virtually unchanged from 2017 predictions. Those who called for a decrease suggested an average decrease of 8.8 percent — 33.8 percent lower than last year’s estimate.

Tackling challenges

While not without its pockets of weakness, 2017 was a strong year for the aggregates industry, and 2018 appears to be shaping up similarly. When asked about their major challenges, responses underscore the expectation of strong demand. After peaking as a top concern in 2013, competition for sales hit a five-year low in this year’s survey. Rather than competing against peers for work, finding workers to meet demand seems to be a more significant concern for most aggregates managers. Nearly 30 percent described it as a major challenge for them in 2018. Respondents noted that they are recruiting heavily at technical schools, considering increases in pay and benefits, and focusing more steadily on personnel tasks such as succession planning and developing young talent.

Operators also have an eye toward future production needs as they rated aggregates availability and permitting as their second significant challenge in 2018. In anecdotal responses, many noted that they were actively conducting exploration activities and working to either acquire or permit new reserves.

While the importance of growing a qualified work force and identifying greenfield sites cannot be understated, these are the best types of challenges for the industry to face — ones predicated on strong demand and healthy business conditions.

Methodology, Objectives, and Sources
The objective of the 2017-2018 Aggregates Manager Forecast Survey was to determine business, production volume, spending, and workforce trends. In November 2017, Aggregates Manager emailed questionnaires to a random selection of readers in the crushed stone and sand and gravel, crushed stone-only, and crushed gravel-only industries. A total of 117 useable surveys were completed.

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