Hanson Worldwide
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Buffeted by soaring transportation costs, a residential market on the skids and shrinking reserves, aggregates producers have faced their share of challenges in recent months. But as they sidestep those difficulties thanks to voraciously hungry infrastructure and commercial markets, their next worry is how to keep those markets fed.

Difficulties in the aggregates arena drove an 8% price hike for the material  over the past year. Aggregate producers say fuel costs are mostly to blame, but they also point to increased shipping distances as reserves are lost to expanding metropolitan areas. “Fuel costs have been incredibly detrimental to the market,” says Dave Chilicote, marketing director at New Enterprise Stone and Lime Co., New Enterprise, Pa., the largest privately held aggregate producer in the country. “It’s stopped a lot of jobs.”

For producers, high fuel costs are a double whammy. A transportation-heavy material, aggregates have had shipping costs nearly double in some areas while simultaneously requiring higher spending to extract the material from reserves, says Debra Stirling, vice president of corporate affairs at West Palm Beach, Fla.-based Rinker Materials Corp. “There was a 50% increase in fuel prices in 2006 and that has dramatically affected both on-road and off-road costs,” says Stirling.

Despite the difficulties in getting their products to customers, aggregate producers credit skyrocketing demand for robust production in 2006. Last year, about 2.95 billion tonnes of crushed stone, sand and gravel were produced and sold, compared to about 2.86 billions tonnes in 2005, according to Gus Edwards, vice president of communications for National Sand, Stone & Gravel Association, Alexandria, Va. The highway market, in particular, has been bolstered federal funding, says Edwards. “About 40% of aggregates goes into highway construction, that is a 10% increase from two years ago.”

Swallowing Hard

Taxpayers and project owners are swallowing a bitter pill in order to get highway and infrastructure projects under way. “We certainly have no way to absorb shipping costs,” says Daniel Sansone, CFO at Birmingham, Ala.-based Vulcan Materials Co. But thanks to stoked demand, aggregate producers have been able to let consumers shoulder the burden of increased operating costs. Even amid careening transportation costs, most of the big aggregate producers reported big earnings last year and expect the same in 2007. A 15% earnings increase posted last year by the industry’s largest producer, Hanson, echoes that claim. “Fuel costs have had a big impact, but mostly on the end-user because we’ve been able to pass on that price increase,” says Jim Kitzmiller, president at Hanson Aggregates North America, Dallas.

Because of the diverse regional factors that influence aggregate demand and supply, finding the precise pulse of the market is not an exact science, say industry observers. “It’s a very fragmented industry,” says Sansone. “The top 10 producers account for one-third of production, so there are many smaller companies out there.” While factors such as federal regulations and high fuel costs have a universal market affect, regional factors such as location and availability of reserves, and state and local regulations, play major roles for smaller producers.

For many producers, acquisitions and a migration to fast-developing states in the South are helping them navigate into new regional markets. Vulcan accomplished that with the $4.6-billion acquisition of Jacksonville-based Florida Rock Industries in February.

Sansone cautions about attributing current market trends as the reason for the many industry acquisitions. “If you go back, you’ll find there have always been acquisitions in the aggregates industry,” he explains. Kitzmiller says Hanson has been involved in “a number” of acquisitions in the past year. Producers traditionally have sought to acquire other firms to “leverage costs by increasing your portfolio and diversifying your footprint to avoid local market fluctuations,” Kitzmiller says.

Acquisitions also are an attractive strategy to deal with an ever-tightening reserve supply. Vulcan, for example, increased its reserves 20% by adding Florida Rock’s 2.5 billion tons of reserves to its existing 11.4 billion tons of reserves.

As permitting regulations become more stringent, aggregate producers around the country are seeing active quarries and operations shut down at an increasing rate, many say. Encroaching development is one cause. “We have 40 active [quarry] sites, and 40 more that are inactive.” says Chilicote. “But more and more, they are not being repermitted because of new development that has sprung up near them.” The company recently was forced to close one of it’s primary quar-rying operations in Somerset County, Pa. “It raises operating costs, but the markets have been staying ahead of it. What I'm worried about is the day when it won’t.”

Tightening Noose

Even when permits are granted to extend operations at reserve sites, it increasingly is becoming a longer and more complex process, producers says. In California, the permitting slowdown has resulted in a shortage of sand, gravel and crushed stone that is nearing crisis proportions. The state’s Dept. of Conservation earlier this month issued a warning to local planners about the region’s dwindling reserves. California will need 13.5 billion tons of aggregate in the next 50 years, but there is only enough permitted operations to produce 4.3 billion tons. The state is relying on aggregates imported from Mexico to feed projects from the $42-billion bond package approved this year to rebuild its infrastructure. Producers, contractors and owners in the region are bracing for price escalation that the supply problems may unleash.

“There is no doubt the cost of and time to permit reserves has increased dramatically in recent years,” says Stirling. “There are many more community and social concerns these days and there are significant environmental restraints. As a result, the cost of locating and extracting reserves has increased many times more.” Because of tightening reserves, in acquisitions “there is much more focus on replacement of reserves,” Stirling says. “In the Washington D.C. area, for example, there are 20 aggregate sites from which materials for everything that was built in the city came from. But as the metro has expanded, many of those quarries have not been re-permitted.”

Many say the supply-side challenges facing the aggregates industry will continue to push up prices as the domestic reserve supply continues to wane. And the higher transportation costs associat-ed with longer distances to ship the material to market will play a larger role as well, especially for imports. Global Insight economist Michele Halickman says an increase in foreign imports of aggregates already is under way, as producers in Canada and the Caribbean islands feed markets in the Northeast and Florida. “It’s a fairly new trend,” but it is not one that appears to be temporary, Halickman says. 

Halickman notes that some states are heeding the distant early warning and taking steps to preserve future aggregate reserves. Colorado, for instance, has begun to include potential aggregate reserve sites in land-use mapping. “They are starting to treat aggregates as a resource to protect,” Halickman says.

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