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FIRST QUARTERLY COST REPORT - AGGREGATES

Video Library
Fuel Costs Pose Double Price Whammy ENR's library has 100s of videos featuring eye-opening
Strong Demand Clashes with Stagnant Supplies and Reserves explorations of the world's most fascinating projects;
exclusive reports on "extreme construction" and new
3/19/2007
techniques; and must-watch interviews with industry
By Tom Nicholson
leaders.

Buffeted by soaring transportation costs, a residential

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market on the skids and shrinking reserves, aggregates

producers have faced their share of challenges in recent Most Viewed Stories on ENR.com
months. But as they sidestep those difficulties thanks to
voraciously hungry infrastructure and commercial markets, Skilled Trades Are Tough for Women to Crack
their next worry is how to keep those markets fed. A -million Walk-away Fee
Chicago Museum Sues Arap Over Addition’s Engineering
Difficulties in the aggregates arena drove an 8% price hike Most Commented on Stories and
for the material over the past year. Aggregate producers Blogs
say fuel costs are mostly to blame, but they also point to
Is Construction Being Cleansed by the Recession?
increased shipping distances as reserves are lost to
expanding metropolitan areas. “Fuel costs have been Hanson Worldwide Do Safety Incentive Programs Keep Workers Out of the
Photo caption Hospital?
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.”
This Week's Project Leads/Pulse
For producers, high fuel costs are a double whammy. A transportation-heavy material, aggregates have had shipping PLANNING:
costs nearly double in some areas while simultaneously requiring higher spending to extract the material from CALIFORNIA Rainbow Municipal Water District is
reserves, says Debra Stirling, vice president of corporate affairs at West Palm Beach, Fla.-based Rinker Materials seeking design services for demolition of the existing 8-
Corp. “There was a 50% increase in fuel prices in 2006 and that has dramatically affected both on-road and off-road million-gallon concrete-lined earthen Pala Mesa
costs,” says Stirling. Reservoir and also the design for a tank site to take
its place.
Despite the difficulties in getting their products to customers, aggregate producers credit skyrocketing demand for

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First Quarterly Cost Report - Fuel Costs Pose Double Price Whammy - McGraw-Hill Construction | ENR | ENR: Engineering News Record | McGraw-Hill Construction
robust production in 2006. Last year, about 2.95 billion tonnes of crushed stone, sand and gravel were produced and CONTRACTS/BIDS/PROPOSALS:
sold, compared to about 2.86 billions tonnes in 2005, according to Gus Edwards, vice president of communications for CONNECTICUT Suffolk Construction Co. Inc. has
National Sand, Stone & Gravel Association, Alexandria, Va. The highway market, in particular, has been bolstered been awarded a .5-million firm-fixed-price design-build
federal funding, says Edwards. “About 40% of aggregates goes into highway construction, that is a 10% increase from contract by the Naval Facilities Engineering Command
two years ago.”
for a waterfront operations small-craft facility
at the Naval Submarine Base New London.
Swallowing Hard
BID/PROPOSAL DATES:
Taxpayers and project owners are swallowing a bitter pill in order to get highway and infrastructure projects under way. INDIANA 9/21: Donohue & Associates, 101 W. Ohio
“We certainly have no way to absorb shipping costs,” says Daniel Sansone, CFO at Birmingham, Ala.-based Vulcan St., Suite 820, Indianapolis, 46204, combined
Materials Co. But thanks to stoked demand, aggregate producers have been able to let consumers shoulder the sewer overflow detention facility.
burden of increased operating costs. Even amid careening transportation costs, most of the big aggregate producers
View all Project Leads/Pulse »
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. ENR's Top Lists
ENR attempts to bring structure to an otherwise huge
Because of the diverse regional factors that influence aggregate demand and supply, finding the precise pulse of the
and chaotic industry by performing annual survey and
market is not an exact science, say industry observers. “It’s a very fragmented industry,” says Sansone. “The top 10
ranking companies engaged in general contracting,
producers account for one-third of production, so there are many smaller companies out there.” While factors such as
specialty contracting, engineering, architecture,
federal regulations and high fuel costs have a universal market affect, regional factors such as location and availability
planning and studies. View all.
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
ENR's Source Books
new regional markets. Vulcan accomplished that with the $4.6-billion acquisition of Jacksonville-based Florida Rock ENR publishes various sourcebooks each year which
Industries in February. rank design firms, contractors participating in our
surveys in almost fifty separate market sectors, giving
Sansone cautions about attributing current market trends as the reason for the many industry acquisitions. “If you go them an opportunity to demonstrate their particular
back, you’ll find there have always been acquisitions in the aggregates industry,” he explains. Kitzmiller says Hanson areas of expertise. View all.
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. Find a job in the Career Center

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

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First Quarterly Cost Report - Fuel Costs Pose Double Price Whammy - McGraw-Hill Construction | ENR | ENR: Engineering News Record | McGraw-Hill Construction
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
advertisement 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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● Fuel Costs Pose Double Price Whammy
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● Factors That Drive ENR's Cost Indexes
● How to Use ENR Indexes

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First Quarterly Cost Report - Fuel Costs Pose Double Price Whammy - McGraw-Hill Construction | ENR | ENR: Engineering News Record | McGraw-Hill Construction

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