4Q COST REPORT CONCRETE

By Tom Nicholson

Recession Clobbers Concrete

Industry survey says concrete firms are losing money at current price levels
rumbling ready mixed concrete markets have producers across the nation white knuckling their way through a downturn described as the worst weve seen since the Great Depression, no question, says Ed Sullivan, senior economist for Skokie, Ill.-based Portland Cement Association. Citing industry survey results which reveal a dramatic slide in ready mix concrete producers profits in the last five years, National Ready Mixed Concrete Association president Robert Garbini declares everything across the board is downresidential, commercial, public the recession has wiped out more than a decade of growth in the industry. Silver Spring, Md.-based NRMCAs industrywide survey this fall of ready mixed concrete producers ranging in size from small firms in localized markets to global cement giants showed disturbing profitloss trending, in which average profits went from $7.63 per cu yd of ready mixed concrete in 2006 to an average loss of $7.27 per cu yd in 2010. Ready-mixed concrete markets are suffering, Garbini says. The average loss per cubic yard shows an industry which cannot sustain itself. The profit data is based average national ready mixed concrete prices of about $90.46 per cu yd in 2010, which fell from a peak of $96.50 per cu yd in 2009, according to Garbini. After peak production in the boom of 2005, recession which took hold in 2008 slashed average pre-tax profit to 20 cents per cubic yard that year, which fell again in 2009 to outright losses of $3.07 per cu yd, according to NRMCA. Ready mixed concrete production in 2010 fell to just 258 million cu yds, or 0.8 cu yd per capita from a high of 1.51 cu yd in 2006, notes Garbini, adding that at the height of the housing boom in 2005 ready mixed concrete production reached 458 million cu

CosT of CemeNT has fallen for four consecutive years, reflecting weak demand for ready-mix concrete.

yd but has been declining ever since. Sullivan points to ready mixed concrete production volume declines of more than 50 million cu yd in the past six years as the result of converged factors including slowed residential building markets, high vacancy rates in commercial building markets, and waned investment in the public sector. Whos going to invest in commercial markets now? And what bank is going to give loans in those markets?

asks Sullivan, noting also that public sector road and infrastructure projects are being hurt by state budget deficits. Producers say the hardest hit in the melee are small to mid-size firms, such as Salomone Redi-Mix co. in Wayne, N.J., where director of operations John Lynch says the firm has had to cut staff by about 30% to meet expenses. Our deliveries are down and there is fierce competition for projects now, says Lynch, adding that

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4Q COST REPORT CONCRETE

+0.5%

CEMENT CONSUMPTION will only increase +0.5% next year, according to PCAs forecast.

small projects for sidewalks and masonry work make up the brunt of the firms projects currently, while larger infrastructure projects are few and far between, theres only a handful of companies in the state that can do big highway projects and that work isnt trickling down to the smaller producers. Most companies our size work within an hours distance of the plant, and so were totally reliant on small, local business owners to invest in projects locallyits the worst weve seen in years. Aside from staff and inventory austerity measures, Lynch says the only thing the firm can do is keep our salesmen out there, and keep begging (cash-strapped clients) for our money. Paradoxic stock price surges this quarter among the major producers such as Mexico-based Cemex and Germanybased Heidelberg Cement highlight current cement-demand booms in superdeveloping nations such as China and India, where careening infrastructure development tempers current losses in the U.S. and other Western markets, analysts say. Still, despite some positive-growth numbers posted by the global cement gaints this fall, and a slight uptick in total production volumes in the U.S. over last year, there is no escaping the bad news entirely, says Heidelberg chairman Bernd Scheifele. Due to our advantageous geographical footprint we were able to achieve a stable operating income (this quarter), says Scheifele. Nevertheless, we have so far been unable to translate the volume increases into higher operating profits, as we havent yet been able to completely offset the significant rise in energy and raw material costs by corresponding price increases, particularly in the cement business line. A result of the downturn is an increase of consolidations as recession-impacted smaller firms in the U.S. are increasibly gobbled up by international producers, and a change in the way cement producers are doing business. Big companies which never would have done a driveway project are more than willing to do small jobs like
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PCA foReCAsT: CemeNT CoNsumPTIoN

PERCENT CHANGE 2011 2012 2013 2010-2011 2011-2012 2012-2013

ToTAL CemeNT CoNsumPTIoN

PoRTLANd CemeNT mAsoNRy CemeNT PORTlAND CEMENTS SHARE TOTAl CemeNT ANd CLINkeR ImPoRTs iMPORTS SHARE OF TOTAl

70,980 69,138 1,843 97.4% 6,350 9.2%

71,324 69,449 1,875 97.4% 6,350 9.1%

76,632 74,533 2,099 97.3% 6,350 8.5%

+1.1 +1.2 3.1 -6.4 --

+0.5 +0.5 +1.8 -0.0 --

+7.4 +7.3 +11.9 -0.0 --

souRCe: PORTlAND CEMENT ASSOCiATiON iN THOUSAND METRiC TONNES.

that now, says Bernie Cawley, executive director of Centennial, Colo.-based Colorado Ready Mixed Concrete Association. Cawley points to the sale in November by cement producer LeFarge of its readymixed operations in Colorados Front Range region to Martin Marietta as an example of the industrywide consolidations the recession is spawning. Staff cuts of truck drivers and laborers have been so bad for ready mix concrete producers that in Colorado some firms have resorted to plucking managers from office positions in order to drive trucks or perform other manual-labor jobs on projects. As a result, CRMCA training programs are seeing unprecedented numbers of mid-level managers singing up for training in labor and field technician jobs,

Cawley says. Cawley says. Were getting many more trainees this year because mid-level managers are replacing workers who have been let go, t hese are managers who typically never worked in the field before but now need to do it, he adds. If there is a silver lining to be found it wont make the horizon until 2013, analysts say, when pent-up demand could likely spring back into some markets. Things will stay flat for a while, at least until the second part of 2013, Sullivan forecasts. Even so, manpower and equipment resources could remain a lingering hurdle for recovery in ready mixed concrete markets once demand returns, Sullivan says, theres a chance it may take until 2015 to fully recover. PCA predicts markets will increase just 0.9% next year.

PCA foReCAsT: CoNsTRuCTIoN PuT-IN-PLACe

PERCENT CHANGE $ bil. 2011 2012 2013 2010-2011 2011-2012 2012-2013

ToTAL CoNsTRuCTIoN ToTAL ResIdeNTIAL BuILdING ToTAL NoN-ResIdeNTIAL BuILdING INdusTRIAL offICe HoTeLs, moTeLs HosPITALs, INsTITuTIoNs ReLIGIous ANd mIsCeLLANeous eduCATIoNAL CommeRCIAL PuBLIC uTILITy PuBLIC CoNsTRuCTIoN BuILdINGs HIGHWAys ANd sTReeTs CoNseRVATIoN seWeR sysTems WATeR suPPLy mILITARy / mIsCeLLANeous

486.3 163.7 87.6 20.6 14.7 5.2 15.3 6.9 7.0 17.8 60.1 170.0 64.2 47.0 4.2 13.7 8.4 6.0

490.8 166.7 90.4 21.7 15.0 5.1 15.7 7.0 7.3 18.4 62.5 166.3 63.5 45.8 3.9 13.5 8.1 5.9

527.8 195.4 93.5 22.4 15.6 5.3 16.4 7.2 7.4 19.3 65.0 168.8 63.8 45.1 3.6 14.1 10.0 5.7

3.7 0.1 9.4 17.6 8.0 27.4 6.5 8.0 2.5 +2.2 +3.4 6.5 5.5 3.1 +1.2 13.0 11.9 11.2

+0.9 +1.8 +3.2 +5.6 +2.2 0.6 +2.5 +1.5 +4.3 +3.3 +4.1 2.2 1.0 2.5 7.0 2.0 3.5 3.1

+7.5 +17.3 +3.5 +2.9 +3.5 +2.5 +4.1 +2.9 +1.2 +5.1 +3.9 +1.5 +0.4 1.6 7.7 +4.9 +23.2 2.2

souRCe: PORTlAND CEMENT ASSOCiATiON SKOKiE, ill DATA iN CONSTANT 1996 DOllARS (ADjUSTED FOR iNFlATiON)..

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December 19, 2011 enr.com