Author: Joelle Harms

By Darren Constantino

Large industry mergers lead the news as the aggregate industry’s outlook continues to climb.

The North American aggregates industry is in good shape based on recent aggregate production trends and predictions of near-term construction growth. And the nation’s two largest aggregate producers – Martin Marietta and Vulcan Materials – are also reporting positive news.

The past year kicked off with a successful ConExpo-Con/Agg trade show and Martin Marietta’s purchase of Texas Industries. The year also saw changes at the top of Vulcan Materials, where Tom Hill replaced Don James as president and CEO. James is now the company’s executive chairman.

Also, in 2014, the National Stone, Sand & Gravel Association operated for its first full year under the leadership of Mike Johnson. With Johnson, the association is revitalizing its efforts to secure a long-term highway bill, which saw another short-term extension this year: Congress passed an extension of Moving Ahead for Progress in the 21st Century, or MAP-21, through May 31, 2015, and authorized an additional $11 billion of transfers to maintain solvency of the Highway Trust Fund.

The U.S. Geological Survey says crushed stone production grew more than 9 percent in the third quarter of 2014, and construction sand and gravel was up nearly 8 percent.

What will we see in 2015? In addition to a return of the AGG1 Aggregates Academy & Expo – this time in Baltimore – the big news is the pending mega-merger of global heavyweights Lafarge and Holcim. The companies are discussing a union that would create one company whose combined annual sales are about $43 billion. The new company would be called LafargeHolcim, and the deal is expected to close in the first half of 2015.

“This proposed merger is a once-in-a-lifetime opportunity to deliver substantially better value to customers, with more innovation, a wider range of products and solutions, and more sustainability and enhanced returns to shareholders,” says Rolf Soiron, Holcim’s current chairman.

“LafargeHolcim will be uniquely positioned to take advantage of growth in developed markets and the world’s fastest growing economies by supplying the materials that will enable the construction industry to meet the challenges of the future.”

As a part of the merger-approval process, the companies are required to divest certain assets, and Reuters reports that Holcim is expected to have chosen buyers for those assets by the end of January 2015. Holcim says it expects to complete the deal by the middle of next year.

Construction on the rise

In its 2015 Dodge Construction Outlook, Dodge Data & Analytics (formerly McGraw Hill Construction) predicts that total U.S. construction starts for 2015 will rise 9 percent to $612 billion, a larger gain than the 5 percent increase to $564 billion estimated for 2014.

“The construction expansion should become more broad-based in 2015, with support coming from more sectors than was often the case in recent years,” says Robert Murray, chief economist and vice president for Dodge Data & Analytics.

“The economic environment going forward carries several positives that will help to further lift total construction starts. Financing for construction projects is becoming more available, reflecting some easing of bank-lending standards, a greater focus on real estate development by the investment community and more construction bond measures getting passed.

“While federal funding for construction programs is still constrained,” Murray says, “states are now picking up some of the slack. Interest rates for the near term should stay low, and market fundamentals (occupancies and rents) for commercial building and multifamily housing continue to strengthen.”

Based on research of specific construction market sectors, the 2015 Dodge Construction Outlook details the forecast as follows.

• Single-family housing will rise 15 percent. It’s expected that access to home mortgage loans will be expanded, lifting housing demand. However, the millennial generation is only gradually making the shift toward homeownership, limiting the potential number of new homebuyers in the near term.
• Multifamily housing will increase 9 percent. Occupancies and rent growth continue to be supportive, although the rate of increase for construction is now decelerating as the multifamily market matures.
• Commercial building will increase 15 percent, slightly faster than the 14 percent gain estimated for 2014. Office construction has assumed a leading role in the commercial building upturn, aided by expanding private development, as well as healthy construction activity related to technology and finance firms. Hotel and warehouse construction should also strengthen, although the pickup for stores is more tenuous.

Transportation spending also on the rise

Energy prices remain relatively low, overall inflation is low, unemployment is holding around 6.2 percent, GDP is still a bit unsteady and growing slower than we’d like to see, but it “increased at an annual rate of 4.2 percent in the second quarter of 2014,” says FMI’s 2014 Q3 Construction Outlook Report. Select market predictions include:

• Transportation – Transportation construction continues at a solid pace with 7 percent growth in 2014.
• Residential – Multifamily construction is still expected to grow at a healthy pace of 13 percent in 2015 after reaching a near-record pace in 2014. The inventory for new homes increased to six months in July, showing some weakness in sales, but housing starts in July were 21.7 percent above July 2013 levels.
• Office – Dropping unemployment rates and rising GDP have provided a lift in the office forecast now expected to reach 8 percent growth in 2014 and grow an additional 7 percent in 2015. Large metropolitan areas like New York City will benefit the most, as vacancy rates drop to 10.6 percent compared with national vacancy rates hovering around the 16 to 17 percent range.

View from the top

Ward Nye, chairman, president and CEO of Martin Marietta, says his company’s third-quarter 2014 results reflect the acquisition of Texas Industries Inc., the benefits of our larger presence in the western United States, continued growth and enhanced profitability across the company’s heritage business and a disciplined approach to cost.

“The acquisition of TXI added $274 million of net sales and, even in advance of full integration and realization of significant synergies, contributed $44.5 million of gross profit, excluding the one-time increase in cost of sales for acquired inventory,” Nye says. “Based on our evaluation to date, we expect to surpass our stated target of $70 million in annual synergies prior to 2017. This transformational acquisition, when combined with our solid heritage business, creates a strong and broad foundation for dynamic revenue and profit growth in 2015 and beyond, positioning Martin Marietta to capitalize on increasing demand for building materials.

“In addition to aggregates and ready mixed operations, the TXI acquisition provided us with a leading position in the Texas cement markets, as well as a state-of-the-art, rail-located cement plant in Southern California. Driven by a sold-out Texas market, cement made a solid contribution to our quarterly earnings, as volumes increased 16 percent in the third quarter compared with the three months ended August 31, 2013, when Martin Marietta did not yet own the business.”

Nye says, “Job growth continues as a significant catalyst for construction activity, and Texas leads the nation in employment gains. Texas’ strong Department of Transportation budget is supporting investment in multiyear construction projects, including the expansion of Interstate Highway 35E in Dallas and the TIFIA-funded Grand Parkway project in Houston. These and other numerous state-level major projects have provided for continued stability in public-sector construction activity.”

Product line growth

For Martin Marietta, heritage aggregates product line shipments reflect growth in the three largest end-use markets. Shipments to the infrastructure market comprised 47 percent of quarterly volumes and increased 3 percent. Growth was strongest in the West Group, notably in Texas and Colorado, which continue to benefit from strong state Department of Transportation programs.

Highway awards in Texas increased about 26 percent for the trailing 12 months through August. Infrastructure shipments in Colorado were up 21 percent, reflecting activity from the Responsible Acceleration of Maintenance and Partnerships, or RAMP, program as well as reconstruction efforts resulting from the historic flooding in 2013.

The nonresidential market represented 30 percent of quarterly shipments and increased 3 percent, driven largely by energy-sector shipments. The company continues to benefit from the nation’s increasing investment in shale energy, particularly in South Texas. Martin Marietta believes this trend will continue, driven by $100 billion of anticipated energy projects along the Gulf Coast, including a significant portion in Texas, as well as anticipated infrastructure repairs in South Texas.

The residential end-use market accounted for 14 percent of quarterly shipments, and volumes to this market increased 9 percent. The overall rate of residential growth has slowed, owing in part to a reduction in available lot inventory. However, the company continues to experience significant growth in certain markets and expects an increase in aggregates-intensive subdivision development.

The company is encouraged by positive trends in its business and markets, notably:

• Nonresidential construction is expected to increase in both the heavy industrial and commercial sectors. The commercial building sector is expected to benefit from improved market fundamentals, such as higher occupancies and rents, strengthened property values and increased real estate lending.
• Residential construction should continue to grow, driven by historically low levels of construction activity over the previous several years, together with low mortgage rates, significant lot absorption, higher multi-family rental rates and rising housing prices. Total annual housing starts are anticipated to exceed 1 million units for the first time since 2007.
• Heritage aggregates product line shipments to increase by 6 to 8 percent compared with 2013 levels.
• Heritage aggregates product line pricing to increase by 3 to 5 percent for the year compared with 2013.

Positive outlook

Tom Hill, president and CEO of Vulcan Materials Co., says, “Strong growth in aggregates volumes and solid operating performance in our aggregates businesses led to significant earnings growth for the company. Our third-quarter results continued to demonstrate the earnings leverage of volume growth in our aggregates business. We are also seeing the benefit of our continuing efforts to grow unit profitability and leverage our overhead structure.”

Over the past 12 months, aggregates shipments for Vulcan Materials increased 9 percent, or 13 million tons. During the same period, aggregates segment gross profit increased 30 percent, or $117 million.

“The overall pricing outlook for our aggregates products continues to improve with the recovery in demand for construction materials,” Hill says. “Our aggregates shipments have grown for six consecutive quarters, and we expect this demand momentum to lead to accelerating price growth. This lead-lag relationship between growing volumes followed by accelerating price growth is typical for our business. We already see price increases between 5 and 10 percent in certain markets, particularly where the recovery in construction activity is further along. As we look ahead, we believe price momentum will increase with continued volume growth.”

Aggregates sales were $689 million, up 15 percent from the prior year’s third quarter, due largely to strong volume growth across most of the company’s footprint. Third quarter aggregates shipments increased 12 percent compared to the prior year. Shipments in Illinois and Texas increased 31 and 21 percent, respectively, owing in part to large-project work.

Other markets, including Florida, Georgia, North Carolina and Virginia, reported volume growth of 10 to 15 percent versus the prior year. During the third quarter, the company completed several bolt-on acquisitions. Excluding shipments from these new operations, same-store aggregates shipments increased 10.5 percent from the prior year.

The freight-adjusted average sales price for aggregates increased 2 percent, or 23 cents per ton, versus the prior year’s third quarter, as almost all of the company’s markets realized price improvement. It marks the 13th consecutive quarter of year-over-year price improvement. The sharp volume increase in Illinois negatively impacted the overall increase in average selling price by 1 percent. Additionally, several large shipments of base material and other lower-priced products also impacted the reported average selling price for the quarter by about 1 percent.

2015 and beyond

Regarding the company’s outlook for the remainder of the year, Hill says, “Growth in private end markets continues to drive increased construction activity and demand for our products. Leading indicators, such as housing starts, nonresidential contract awards and employment levels, continue to show favorable above-average growth trends in Vulcan-served markets, and Vulcan markets continue to grow faster than U.S. markets as a whole.

Hill says the company will continue to convert these higher volumes into higher unit margins by operating efficiently at the plant level.

“This strong execution has resulted in a 19-percent increase in our trailing 12-month unit profitability, as measured by aggregates segment gross profit per ton, from what are already industry-leading profitability levels. This improved unit profitability, coupled with above-average demand growth, positions us well for significant future earnings growth.”

Based on these market trends, the company expects the following:

• Strong full-year aggregates volume growth near the top end of guidance range of between 7 and 9 percent, assuming normal weather patterns in the fourth quarter.
• Full-year pricing growth at the low end of guidance range of between 3 and 5 percent, with positive impact from current pricing actions benefiting price growth in 2015.
• Capital spending for 2014 to be about $240 million to support the increased level of shipments and to further improve production costs and operating efficiencies.

Hill says, “Our business continues to improve. Our employees remain focused on increasing unit profitability, delivering expected incremental earnings and improving our valuable aggregates franchise. Our confidence in the prospects for a sustained multi-year recovery in aggregates demand continues to grow. Our markets are recovering from trough levels of demand and are outpacing the rest of the U.S.”

The 2014 State of the GNSS Industry Report reveals the results of our annual survey of GNSS professionals, covering the state of their business, the economic climate for GNSS products and services, driving market factors, the government’s role in funding and regulating, budgets devoted to R&D, the effects of jamming, and the “Issue of the Year.” Click here to download the 2014 State of the Industry Survey, sponsored by NovAtel, Trimble, and u-blox.

By Kevin Yanik

A new era of propane production has arrived, but will U.S. retailers adapt their businesses or allow market forces to dictate their future?

Shale gas production is at an all-time high, global demand for the U.S. product is feverish, and markets are developing that can strengthen our footing in the world energy sector for years to come.

A golden age for propane production is under way in the United States, and based solely on the sheer volume being produced domestically, specifically from natural gas plants, an argument can be made that now should also be a golden age for those delivering propane.

It’s not, though. Yes, propane production is up. But consumption is down here in the U.S., which is a net exporter of propane for the first time since the U.S. Energy Information Administration (EIA) began tracking exports in 1973.

More domestically produced propane is available now than at any point in U.S. history, yet gallon consumption in the residential and commercial markets – the backbone of the U.S. industry – has trended downward. Markets such as autogas are emerging to potentially make up for lost gallons, but the gains being made in secondary markets aren’t yet making up for losses in traditional markets.

So what gives?

“If you’re a retailer in the Midwest, the Pacific Northwest or the Gulf Coast and all of these market forces are going on around you, you have to be wondering what is going on with your business,” says Bob Myers, an industry consultant who spent 25 years with Petrolane, in a phone interview. “Unless you do something about it, market forces are going to continue to dictate your business.”

But are U.S. retailers willing to adapt amid changing market dynamics? Or is the status quo a sufficient retailer goal for the foreseeable future? These are questions we explored this fall with a number of propane retailers, who took our annual State of the Industry survey and offered feedback about their businesses and the impact of the market dynamics around them.

Signs of growth and decline

Although the market dynamics are changing rapidly, retailers tell us their propane delivery businesses have been relatively successful over the last 12 months. In fact, the retailers we surveyed rated their success this year, on average, as a 7.97 on a scale of 1 to 10.

Regionally, Midwest retailers rated their 2014 success the highest (8.23) on a 1-to-10 scale, even despite the supply and infrastructure issues faced there last winter. New England retailers (7.18) rated their success the lowest among the seven U.S. regions we surveyed (see Figure 1).

These success figures simply reflect how propane retailers say they’re doing. What are propane retailers doing to grow their businesses and, in turn, the industry? We asked retailers a few growth-related questions, including how many employees they’ve added, how many bobtails they’ve purchased and how many tanks they’ve set in the last 12 months.

About one-third of retailers tell us they have the same number of employees today as they did a year ago, and only a handful of retailers say they have fewer employees today than they did one year ago. More than half of retailers say they’ve added between one and five employees in that span, and nearly 10 percent report hiring six or more people in 2014.

Retailers’ hiring plans for 2015 are similar to the plans they made for this year. About 43 percent plan to have the same number of employees by the end of next year as they do now, and more than half plan to add between one and five employees to their operations.

Still, a number of propane retailers tell us that hiring the right people for available jobs is a challenge. For example, a few retailers say they’re struggling to find capable drivers. But the struggle hasn’t stopped a significant number of retailers from adding bobtails.

According to our data, 38 percent of retailers added between one and five bobtails this year and 39 percent plan to add between one and five bobtails in 2015.

Another measuring stick of growth is tank setting (see Figure 6). The retailers we surveyed set a varying number of tanks in the last 12 months. Twenty-five percent say they set between 100 and 199 tanks; 21 percent set between 50 and 99 tanks; and 22 percent set between 10 and 49 tanks.

Some retailers set even more tanks this year. Nearly one in five set between 200 and 499 tanks, and about 7 percent set at least 500 tanks.

Others were not as successful. Three percent didn’t set a single tank in 2014. A handful of others set fewer than 10 this year.

Yet another growth indicator is whether or not retailers expanded the geographic territory in which they deliver propane. According to our data, slightly more than half of all retailers expanded their sales territories.

But how did retailers expand? Slightly more than half say they expanded their businesses into new propane markets, while 13 percent of retailers expanded through energy conversions.

The primary way retailers say they expanded was to take their propane competitors’ customers. Sixty-eight percent of retailers expanded that way. Sixteen percent grew their businesses through acquisitions.

These figures reflect growth for individual businesses, but are they indicative of true industry growth?

“There’s a lack of new housing on propane,” says a Midwest farm co-op representative in our survey. “We were in continuous growth mode for years. That has slowed, so marketers are fighting each other for the leftovers, while natural gas and electricity are killing us.”

Competitive threats

The continued rise of competitive energies such as natural gas and electricity is troubling for the industry. A greater concern retailers expressed to us through our survey, though, is their own propane security.

What’s particularly troubling to them is that propane is plentiful within the United States, yet they feel they’re struggling to secure it for their own delivery needs.

“We have become a greedy industry,” says a Midwest independent retailer in our survey. “U.S. consumers must be first before shipping outside of the U.S. Our supply and demand has gotten out of hand. I hesitate to say this, but our industry needs to be regulated by Congress.”

A number of retailers have similar feelings about exports. In fact, about two-thirds of retailers tell us they’re in favor of propane exports, but only when domestic supply is sufficient. Fourteen percent say they are not at all in favor of exporting propane, while about one in five retailers say they are totally in favor of exports and the notion of free-market enterprise.

In addition, our survey results show that the type of operation – MLP, independent retailer or farm co-op – doesn’t make a difference in how retailers feel about propane exports. The majority wants to secure their own propane first – even if that doesn’t necessarily make business sense for those producing propane.

“Quit exporting fuel to other countries, creating imaginary shortages and driving the cost up on our fuel,” says a Rocky Mountain independent retailer in our survey.

Are propane exports a real problem, though? Myers begs to differ.

“This industry really shouldn’t care how much [companies] export,” Myers says. “What we should care about is getting enough storage. When the storage is full going into the winter, let the exports take place. We’re moaning about the fact that we don’t want these exports, but then you have to ask where are the strategic reserves that you really need? Adequate storage ensures supply for the customers, and it also takes volatility out of the pricing – two essentials needed to grow an autogas market.”

U.S. propane reserves don’t have to be monumental in size, Myers adds. They simply need to be sufficient to get the U.S. industry through winters and help to eliminate peaks in demand.

“Exports are going to happen,” Myers says. “There’s a market for them. There’s billions of dollars being spent to get them out of here, and people are making long-term contracts predicated on that.”

Export markets aren’t the only ones affecting U.S. supply. Petrochemical companies in the United States and internationally are buying propane to convert it into propylene, a common building block used in the manufacture of plastics and other products, as part of a dehydrogenation process. The good news for propane retailers is that petrochemical companies in general are demanding less propane (and more ethane) this year than in recent years, according to industry consulting firm Cost Management Solutions.

Still, the combination of petrochemical demand and the increasing demand for U.S. propane around the world raises a question about U.S. propane retailers, whose businesses are more seasonally based: If petrochemical companies and international customers prove to be more viable outlets for propane, where does that leave retailers in the supply equation? And what prices will retailers have to pay?

Unless retailers present producers with more year-round business, securing propane may become an even greater challenge.

“The producers sell most of their product to the petrochemical market,” Myers says. “Retailers want to sign contracts that say they’ll take it when they need it and if the price is right. But producers have the export market now, too. If retailers don’t like the price, producers are going to look to the petchems. If the petchems don’t like it, there are people around the world who may take it.”

Planning for the future

So how do propane retailers secure the future of their businesses? Unfortunately for them, no silver bullet exists to solve the industry’s problems. But a couple of obvious starts are to develop markets that can grow gallons and build infrastructure that can move the nation’s surplus supply to areas where it’s needed.

As mentioned previously, more than half of U.S. retailers say they grew their business within the last year by expanding into new markets. The motor fuels market is one that offers tremendous potential for growth, but how many retailers are truly taking action on autogas?

“Autogas could save us,” says an independent Midwest retailer, in our survey.

Another Midwest retailer – this one a farm co-op representative – agrees about the need for new propane markets.

“When I first got into this industry, most houses in the country were using propane or heating oil for heat, and the average customer used around 1,200 gallons of propane per year,” says the Midwest farm co-op rep. “Since then, not only have heat pumps cut into our base tremendously, but because of improvements in appliances and building practices, our average customer now only uses about 700 gallons per year. We are trying to not only survive on fewer customers, but the ones we do have are using almost half as much as before.”

In addition, a number of existing propane customers are coming off a winter in which their prices spiked. Retailers say pricing concerns, as well as their ability to effectively deliver during the winter months, may drive customers to other forms of energy.

In some cases, customers have already taken action.

“If you take someone who’s building a new home, they’re going to decide how they’re going to heat it,” says Keith Volker, energy division manager at Midwest Farmers Cooperative in Elmwood, Neb., in a phone interview. “If they don’t have access to natural gas, their choices are electric or propane. At the high prices we had last winter, that may sway the new homeowner to go electric.”

The heating market is critical to just about every propane retailer, and maintaining, if not developing, market share versus other energy forms in that area is a must. Infrastructure development, albeit through terminals, pipelines, rail facilities, regional storage caverns or other forms, is also a must for the U.S. market to secure its place in the future.

Storage and summer fill

Last winter served as a reminder to a number of retailers about the importance of their own storage. Some retailers made bold moves, adding bulk storage to better secure loads for this winter. But the majority of retailers we surveyed did not take action on the storage front.

In fact, 70 percent of retailers did nothing to address their storage infrastructure. Thirty percent did, however, add bulk storage. And one in five retailers added at least 30,000 gallons of bulk storage.

“We added more storage and we tried to increase awareness to our customers about the importance of contracting and summer-fill programs,” says a Midwest farm co-op representative.

This retailer wasn’t the only one to do more with a summer-fill program this past year. Two of every three retailers tell us they increased their summer-fill program over last year. In addition, retailers were active this year switching will-call customers to keep-full contracts following last winter.

According to our data, half of all retailers switched at least 5 percent of their will-call customers to keep-full contracts. In addition, 36 percent of all retailers switched at least 10 percent of will calls to keep fulls. Their action should increase their supply security this winter and for winters to come.

“Not just this year but every year we work at getting everyone we can on keep-full [contracts],” says Jeff Manthei, energy marketing and sales manager at West Central FS Inc., in a phone interview. “We manage their inventory; they don’t manage us with a phone call. It’s very ineffective and inefficient if we run at the ring of a phone.”

Contracts aren’t the only things changing in the propane industry. Change is all around us, from the elimination of key pipelines and the rise of electricity to the emergence of autogas and the increase in shale gas production. In many cases, there’s no avoiding this change. But are you willing to embrace it and adapt your businesses?

“I’ve been in the industry 18 years, and I’ve never seen anything like this last year as far as getting ready for a winter,” says Joe Stariha, co-president and CFO of Minnesota-based Como Oil & Propane. “I don’t think we ever put this much work into getting ready for a winter.”