The construction industry is in its sixth year of a frustratingly slow economic recovery from the Great Recession; a recovery that has finally picked up some speed over the last two years. In fact, 2015 was the best year for concrete production since the economic downturn. Yet already, some economists are predicting more clouds on the horizon, thanks to international and national events that may impact construction. Concrete producers like Jim Spurlino aren’t buying into the gloom.
Spurlino, who runs Spurlino Materials, a ready-mix producer in Middletown, Ohio, serving Indianapolis, Cincinnati, Dayton, Ohio, and northern Kentucky, says most of the industry’s forecasts are too conservative and do not reflect his local market. Instead, Spurlino expects his company to continue generating revenue.
For Spurlino and many of the producers who took the 2016 TCP Survey, 2016 has been a continuation of the positive growth experienced in 2015. More than two-thirds (68%) of respondents expect to see higher revenue in 2016 due to an improved economy and growing demand. Slightly less than a quarter (23%) say their revenue will stay the same.
Shelby Materials, based in Shelbyville, Ind., was one of the 9% of concrete producers projecting lower revenue. “We’re down slightly from 2015, which we thought was an above-normal year,” explains company president Philip Haehl.
The bigger picture
U.S. Cement consumption grew significantly in 2015 to an estimated 93 million tons (and $9.8 billion in sales), according to the U.S. Geological Survey (USGS). In March, the Portland Cement Association (PCA) reported that U.S. cement consumption will continue to rise by 4% in 2016. Edward Sullivan, PCA chief economist and group vice president, noted that PCA has forecasted growth despite some conflicting economic indicators from elsewhere in the economy. “Despite some ups and downs in the U.S. economy, the underlying economic fundamentals are solid,” he said in September. The forecast reflects a strengthening labor market and implementation of the nation’s multiyear highway bill, Fixing America’s Surface Transportation (FAST) Act.
Many of TCP’s Top 10 Producers expect the FAST Act and several state-level funding initiatives to drive large, multiyear construction projects in the markets they serve. “It is also likely we will see meaningful projects in rural areas of states that have been infrastructure-starved during the last decade, and we will now be better able to develop new avenues for growth and commerce,” says C. Howard Nye, chairman/president/CEO of Martin Marietta, Raleigh, N.C.
However, it is important to note that PCA’s latest forecast was adjusted down from previous installments—most recently, from 5% forecasted growth. According to Sullivan, the latest adjustment reflects low oil prices that slowed concrete construction activity in energy-dependent states like Texas and North Dakota, a deterioration in global growth conditions, and a tightening of U.S. monetary policy in response to those conditions. In July, the Federal Reserve announced that it will continue to hold off on raising interest rates as it monitors global economic/financial developments and domestic inflation indicators.
Globally, cement and construction markets are on a turbulent path. On one hand, a growing population is fueling urbanization and increased residential and infrastructure construction worldwide, with market research firm Technavio predicting the global cement industry will grow at a steady compound annual growth rate of more than 9% by 2020. Yet some regions like China, Brazil, and Russia are still facing economic strife and volatile geopolitical climates (the Middle East and Brexit—the U.K.’s decision to exit the European Union), all of which are stalling residential construction and government funding of infrastructure projects.
In many cases, producers with global portfolios found North America to be their strongest market—and their saving grace, as it has served to offset declines in other regions.
Expansion and jobs
In the past 12 to 24 months, one-half of producers expanded their customer base, 43% added product lines, and 21% added new locations. With expansion comes jobs. Eighty-six percent plan to hire in 2016.
What actions have you taken in the past 12 to 24 months?
|Added product lines||43%|
|Automated manual processes||27%|
|Expanded customer base||50%|
|Reopened closed plants||14%|
|Improved customer service||34%|
|Invested in new equipment||59%|
|Made personnel changes||43%|
|Reduced product lines||2%|
|Expanded truck fleet||43%|
|Reduced truck fleet||7%|
Source: The Concrete Producer
“Many positions are open,” says Steven Tripp with Chaney Enterprises, headquartered in Gambrills, Md. The concrete and aggregate supplier recently opened new concrete plants in Gainesville, Va., and Bishopville, Md. The challenge is now in filling open positions, which Tripp says is tough. (For more on how producers are recruiting employees, see the sidebar, Drivers Wanted.)
Over the past year, the construction industry has added 217,000 jobs, leaving unemployment among construction workers at 4.5%, according to the U.S. Bureau of Labor Statistics. The industry has come a long way from the 20% unemployment rate of 2010.
Eight out of every 10 producers increased prices in 2016, with the same percentage anticipating increasing prices further in 2017. None expects to lower prices next year. The most popular reason for these price increases is the rising cost of raw materials/cement. According to the USGS, the average price of cement per ton increased from $100.50 to $105.50 in 2015. In 2013, the average price was $95 and in 2012 it was $89.50.
Another popular reason is the industry’s well-publicized labor shortage—three-quarters of respondents are experiencing a driver shortage, with many offering more pay and benefits. Other factors include inflation and increased costs of equipment, health insurance, and regulatory compliance.
“I think the transportation-related regulations dealing with drivers and trucks have been the most arduous,” says Jim Spurlino of Spurlino Materials. “And rarely does the public fully realize the impact is passed along to everyone in the form of increased costs for roads, homes, stores, buildings … about everything you come in contact with on a daily basis.”
Another critical component of rising prices is demand.
A Pennsylvania-based producer explained, “Concrete suppliers are busy and demand is very high in our area. I don’t foresee a slowdown happening in the coming year.” A Midwest respondent also pointed out that producers must raise their prices so they can invest in the infrastructure and equipment necessary to meet increasing demand.
Investments in growth
Aside from demand and labor, one of the best indicators of a recovering industry is capital spending. When the construction industry was held in a vice grip by a severely contracted economy, for example, less than a third of producers increased capital spending. Of those who did, the money was spent only on new equipment that was absolutely necessary for operations to continue.
In fact, the U.S. construction industry as a whole only spent $17.9 billion on capital expenditures in 2010, as compared with the $41.7 billion spent in 2008 before the industry was squeezed by the economic crisis. But according to the most recent U.S. Census Bureau data, spending is on the rise, with total capital expenditures increasing to $30.3 billion in 2014.
TCP Survey data reflects this encouraging trend. In the past 12 to 24 months, 59% of respondents have invested in new equipment, with 43% expanding their fleet. What’s more, 61% plan to spend more on capital expenditures than they did in 2015. Three-quarters of producers will buy new equipment; again, mostly to expand their fleet.
In Oregon, Molalla Redi Mix Inc. is among those companies that have expanded their fleet, and co-owner Mitch Jorgensen attributes the company’s rise in revenue to increased production from those trucks. This year, the producer plans to invest in equipment to improve process-water treatment and material handling.
Many producers expressed a need to upgrade their technology. The most popular investments are computers, monitors, mobile devices, and other hardware-type equipment (36%) and mobile technology (32%). About one-quarter of producers will also buy dispatching systems (27%) and batching software (25%).
In Ohio, Spurlino Materials is investing in mobile technology, telematics, and collision-avoidance technology for all trucks. “Every employee, including all drivers, now has a tablet that is used for time and attendance, Department of Transportation inspection reports, paperless ticketing, GPS, navigation, and voice communication,” says Spurlino. “It is really amazing what these devices are capable of and how they can assist our management in running our companies.”
An Internet/WiFi connection and a mobile device, such as a tablet or smartphone, is often all that’s needed to improve communications and operations—no matter the user’s location. Cloud-based software and mobile apps can then be used to collect and quickly deliver real-time information to users across the entire operation: dispatch, drivers, sales, management, contractors, project owners, and suppliers.
Almost three-quarters (71%) of producers say the economy is what drives their business, with some expressing concern that the economic climate is still too fragile. It is a concern that is not unfounded.
During the American Society of Concrete Contractors’ annual executive leadership forum in July, Anirban Basu, Associated Builders and Contractor’s chief economist, warned that a downturn in the overall economy may occur in 2017 or 2018, with construction turning negative about a year later. Also, when asked in May about the likelihood of a recession within the next couple of years, Ken Simonson, chief economist with the Associated General Contractors of America, stated that there is a 25% chance of recession for the next 12 months, and a higher percentage after.
“But I’m an incurable optimist and do not expect a recession,” Simonson added.
Expect to see a slight dip in the U.S. construction economy during the last half of the U.S. presidential election year that could last six months or more, says Kermit Baker, chief economist for the American Institute of Architects (AIA). But Baker also predicts that things will pick back up as the new president settles into office. “This [dip] is all due to uncertainty over how policies may impact projects,” he explains.
But, like AIA’s Kermit Baker, most producers remain optimistic about the industry’s continued recovery.
“From a local perspective, our sales backlog has remained steady and our year-over-year and projects-to-bid pipeline is the same,” says Spurlino. “We think there is still some strength and momentum left that will carry us through the next 12 to 18 months at a minimum.”
What factors do you expect will most affect your business in the coming year?
|FAST Act (new five-year transportation funding law)||7%|
Source: The Concrete Producer