The Trickle Effect

Therese Dunphy

January 1, 2010

Stimulus funds were intended to jumpstart public construction, but their impact appears to be over-promised and under-delivered. An Aggregates Manager survey shows widespread production decreases and layoffs despite federal initiatives.

By Therese Dunphy, Editor-in-Chief

A snapshot of the aggregates industry during 2009 would likely feature a site operating on shorter hours, with fewer workers, and larger stockpiles. In a market that prides itself on providing the essential building blocks of life, it is clear that life in the United States changed dramatically for many throughout last year. For example, Wells Fargo reports that employment in construction has fallen by 1.6 million jobs since December 2007. The U.S. Census Bureau notes that, at $715.2 billion, construction spending for the first nine months of 2009 is more than 12 percent below spending levels for the same period in 2008. And stimulus dollars, which were expected to buoy the construction market throughout 2009, trickled in with only an estimated 16 percent of the $26.7 billion having been paid to contractors and construction materials providers by December 2009.

Closing the door on 2009

Given the big economic picture, it comes as little surprise that 2009 was one of the most challenging in recent history for the aggregates industry. Respondents to last year’s survey anticipated a difficult year with only 2.2 percent forecasting an excellent year and 20.1 percent expecting a poor year in 2009. Both positive and negative actual results outpaced those expectations — 2.9 percent reported an excellent year and 27.3 percent reported a poor year.

Taken as a whole, 2009 business results were fairly bleak: two of three respondents to the 2009-10 Aggregates Manager Forecast Survey characterized 2009 business results as fair or poor. The Northeast region appears to be the hardest hit with 69.7 percent of respondents who categorized the year in that manner.

A few bright spots were to be found, however. Among sand & gravel producers, 10 percent reported annual business results as either excellent or very good. Small producers seemed to fare comparatively well. Approximately 14 percent of those producing less than 500,000 tons per year said they had an excellent or very good year. On a regional basis, Southern producers reported excellent or very good results in the highest percentages, with 12.5 percent who reflected well on 2009.

In terms of production levels, respondents who produced both crushed stone and sand & gravel fared best among core producers. Just over 9 percent of those respondents increased production, while 22.2 percent had stable production levels throughout 2009. Despite the 10 percent of sand & gravel producers who reported positive overall business results, the same group also noted the worst production results. Three in four sand & gravel respondents reported decreased production during 2009. The contrast seems to indicate that higher margins may have helped mitigate lower volumes.

Large producers — those producing over 3 million tons per year — were the most likely to report decreased tonnage. More than 84 percent of those respondents said they produced less aggregate in 2009 than during 2008.

Regionally, producers in the West faced a second challenging year. In 2008, 68.2 percent reported lower production levels than the previous year. That trend continued in 2009 with 76 percent who reported decreased production.

Putting out fires

With production down across all types, sizes, and locations of operations, it’s no surprise that the top challenge facing producers throughout 2009 was competition for sales. Nearly three in four producers said it was either a major or minor problem, and those at operations producing between 1.1 million and 3 million tons were the most likely to note sales challenges, with 81 percent who said it was an issue.

Anecdotally, respondents noted that they responded to the challenge by focusing on customer service, advertising, and “putting a full court press on our sales force.” Many mentioned cost issues. Several producers said they were willing to shrink their profit margins, but they were “not willing to go below our cost.”

Aggregates availability and permitting edged out regulatory issues by a single percentage point to be noted as the second highest producer concern. This topic was reported most commonly by mid-size producers (1.1 million to 3 million tons per year) and those in the Northeast and West. Although the category drew 6 percent fewer producers who cited it as a problem this year compared to last year, the high response rate shows that aggregates producers continue long-term planning for their businesses.

Financial issues were raised in a new category to this year’s survey — regulatory fines. Following a sharp increase in the number and value of citations issued by the Mine Safety and Health Administration throughout the last year, citation costs tied for third place (along with regulatory compliance) among problems facing producers.

As more and more producers reported concerns about selling stone and dealing with regulatory issues, fewer of them — not surprisingly — said they have had problems retaining workers. Only 4.9 percent of respondents listed worker retention as a major problem, with an additional 22.8 who called it a minor problem. In fact, more than 56 percent of respondents reported that their staff size decreased in 2009, with the largest reductions being noted in employment among hourly workers and equipment operators.

Investing in the future

Throughout the six-year history of the Aggregates Manager Forecast Survey, 2009 marked the largest percentage of respondents who said they decreased their capital expenditure markets. Last year, 48 percent of producers said they lowered their capital budgets — four times as many as the forecast low reported in 2004. Those who bought new equipment typically noted that they were trying to expand product offerings, increase production, or reduce man hours.

Despite the belt-tightening exhibited by nearly half of those surveyed this year, 42 percent of respondents held their spending constant during 2009. And, 2010 expectations show a slow creep toward additional equipment investment. For this year, producers said crushers and screens top their list of investments, with 18 percent anticipating increased spending in that area. The second-place finish for equipment and truck maintenance signals that producers will continue to spend money to prolong existing equipment life while they can. Respondents said they expect to boost investments in two areas: automation (with a 12-percent increase for 2010 compared to a 9-percent increase in 2009) and conveying and materials handling (with a 15-percent increase for 2010 compared to a 14-percent increase in 2009).

Looking ahead

At the end of 2009, many aggregates producers were happy to sing Auld Lang Syne and start fresh, but after the most difficult year in more than a decade, cautious restraint is the order of the day. For 2010, just 2.5 percent expect excellent business results, 6.6 percent look for a very good year, 27.4 percent predict a good year, 42.6 percent foretell a fair year, and 20.8 percent call for another poor year. Although one in five producers anticipating a poor year may seem ominous, it’s the lowest percentage predicting results in that category since 2007.

In terms of production statistics, respondents were much more positive. Although two in three experienced declining production tonnages in 2009, approximately two in three called for either increased or stable production levels in 2010. Among core product respondents, those who produce crushed stone were the most likely to anticipate an increase in production (27.5 percent) followed by crushed stone and sand & gravel producers (19.1 percent) and then sand & gravel producers (14.3 percent). In contrast, more sand & gravel producers expect stable production (57.1 percent) than any other product category.

Like survey respondents, most economists anticipate slow growth in 2010, but as Ken Simonson, chief economist for the Associated General Contractors, noted at a recent press conference, “One-time investments in transportation infrastructure like the stimulus help, but they’re simply no substitute for having a long-term investment strategy for our roads, bridges, and transit systems.”

Remaining stimulus dollars eventually will flow into the market. To build industry investment from a trickle to a pour, however, long-term transportation reauthorization is key.

On Dec. 10, the House passed a $450 billion omnibus spending bill that contained $41.07 billion for the core highway program. The funds are expected to be supplemented by an additional $850 million in general fund dollars allocated to the states using the standard apportionment formula, $240 million more in earmark, and $739 million in mandatory spending from the Highway Trust Fund. At Aggregates Manager press time, President Obama was expected to sign the bill (for more news on transportation reauthorization, see AggBeat on page 4).

The big question is whether the flow of transportation funds will begin in time to ensure better production and fewer layoffs during 2010.

The respondent pool

This year’s respondents were tipped toward smaller producers: 46 percent had annual production of less than 500,000 tons, while 20 percent produced 500,001 to 1 million tons, and 18 percent produced 1.1 million to 3 million tons. The average annual production was 1.7 million tons.

A combined 16 percent produced more than 3 million tons per year. Approximately 61 percent of respondents described themselves as owners, presidents, or officers. Another 16 percent had executive titles while 12 percent each described themselves as production managers or mine managers.

From a business perspective, 48 percent produced crushed stone and sand & gravel, while 21 percent produced crushed stone only, 15 percent produced sand & gravel only, and 16 percent produced other products.

Methodology, Objectives, and Sources

The objective of the 2009-10 Aggregates Manager Forecast Survey was to determine business, production volume, spending, and workforce trends. In September 2009, Aggregates Manager mailed questionnaires to a randomly selected sample of 1,500 readers in the crushed stone and sand & gravel, crushed stone-only, and crushed gravel-only industries. A total of 215 useable surveys were returned for an overall response rate of 14 percent. The questionnaire contained $1 as an incentive.

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