Rock climbing

The context for observations about the future should always be what has happened in the past. However, most people forget about what has occurred, because things change slowly and we live in the moment. For instance, if I had been writing this article in 1980 and forecast that local, state and federal governments in the U.S. would spend over $110 billion on roads in 2005, you would not have believed me. If I had stated that the aggregate industry would produce 3 billion tons of aggregate, no one would have believed that possible. However, both of those things happened. So as you consider my observations about the future, remember what has happened in the past and do not try to make the future fit into the context of today’s troubles or successes.

More rock than people

The U.S. Geological Survey (USGS) has provided us with ample data to evaluate aggregate demand over a long time period. This historical perspective is important when we try to project events 20 to 30 years into the future. It is very easy to let current events, especially in a demand downturn, color our view of the future.

In general, aggregate production has grown at a faster rate than population. Construction aggregate production grew 72% from 1960 to 1980, or from 900 million to 1.6 billion tons. It continued to grow by 75% from 1980 to 2000, reaching 2.8 billion tons. By 2005 the industry was producing 3 billion tons.

We could apply all types of sophisticated techniques to forecast the next 20 years. Or, as I’m going to do here, we could just assume that history will more or less repeat itself. With that assumption, the result is a forecast of 5 billion tons of aggregate production by 2025. The USGS uses a more conservative growth model that places the projection at 4 billion tons.

But it does not matter which technique we use. The important thing to remember is that we will produce and consume more aggregates in the next 25 years than was produced in the past century.

A second boom

Demand for aggregates is and will be driven primarily by population and employment growth, the associated requirements for residential and nonresidential construction and the need to upgrade or replace aging infrastructure of all types.

The population in the U.S. is expected to be 380 million by 2030. This is unprecedented growth in absolute terms. Two-thirds of this growth will occur in nine states that are mainly in the western and southern parts of the country. Those states will be forced to construct infrastructure to support the population expansion.

The baby boomers get all the press these days and rightly so. For 10 years from 1954 to 1963 there were over 4 million births per year in the U.S. The boomers are the greatest consumers and largest holders of wealth in history. Their needs and desires have fueled many of the construction projects of the past decade, and their influence will continue to be felt. The baby boomer population has increased the demand for second homes and created the need for more long-term and short-term health-care facilities and more elderly friendly multifamily developments.

However, there is another huge group that is coming behind the baby boomers that also will impact our economy and construction. Between 1989 and 2005 there was another boom that averaged 4 million births per year. Demand for nonresidential construction such as stores, offices, schools and government buildings will be driven by this new group of consumers. In addition, new home development and the replacement of buildings with more energy-efficient and technologically advanced features will follow.

Beyond demographics, there are other issues driving demand for construction aggregates. One well-documented issue is aging infrastructure of all types that will need to be upgraded or replaced. In particular, highways, roads, ports and rail facilities will be required to handle increased car and truck traffic along with increased imports and exports. Another issue is the increased use of portland cement concrete in the construction of both residential and nonresidential buildings due to concrete’s resistance to wind damage and its environmental efficiency and construction flexibility.

Now that we have established a demand forecast based on population and employment growth, let’s look at the supply side.

Heavy influences

The following are contributors to the increase in aggregate demand.

Build them bigger

Traditionally, the industry has dealt with the increasing demand by either making aggregate operations larger or opening new plants to add capacity. There is no question the aggregate industry has done a great job of increasing productivity to meet growing demand. Public data show that while production at aggregate operations has doubled in the past 20 years, the number of employees has remained the same. The industry has made tremendous investments in crushing and mobile equipment, land and technology to gain productivity and meet demand. An additional outcome of these investments can be seen in the trends in aggregate pricing. Aggregate pricing over the long term has been driven by the need to reinvest in operations.

Open more of them

It is a time-consuming and costly proposition to open a greenfield quarry site. Once property has been identified, the quality and quantity of reserves must be established by drilling and laboratory evaluation and analysis. The property must be leased or purchased. Permit applications must be made and the proper zoning, if needed, obtained. Depending on many factors, including the amount of public and political opposition, it can take several years to open a greenfield site and begin operations.

Getting materials to market

Let’s say the industry can continue to invest and build more efficient quarries and that new greenfield quarries are opened. We also face the challenge of having to move the material from greater distances to the market. For a number of reasons, new aggregate, ready-mix and asphalt plants are being located much farther away from the population and employment centers. Studies conducted by Vulcan show that there is a dramatic shift in the distance from quarries to cities. For example, between 1995 and 2006 only 2% of the quarries opened in Virginia were located in or near a city limit. The results of this trend are higher delivery costs, which in turn add to the overall material cost. This contributes to higher cost for homes, schools, offices and other buildings as well as roads and other infrastructure projects. Taxpayers and ultimately consumers feel the sting of the increasing distances that construction materials must travel.

A taste for steak

Ideally, about 25% of a beef cow can be processed into top sirloin, short-loin or ribs. Steak lovers are willing to pay a premium for it, but meat packers need to find a way to use and sell as food the other 75% of a cow. Some of these products are less appealing than others. What does this have to do with aggregate? Believe it or not, aggregate producers face a similar dilemma.

Aggregate plants usually average producing 30 to 60% of clean and sized aggregate. Of the total production, 25% or less may fall into the 1/2-in. to 1/8-in. size and are appropriate for some of the current hot-mix asphalt (HMA) paving designs and ready-mix concrete applications. There are a growing number of other applications that also want to specify 1/2-in. to 1/8-in. clean aggregate. Unfortunately, as I once heard a plant superintendent say, “Quarries can’t just flip a switch and produce clean rock one day and base the next.” There is only so much quarry operators can do to break the rock a certain way. So what do we do with the other 75% of the aggregate that is not “steak”? Unlike the beef producers, we are not so good at selling the less-desirable “cuts.” The growing trend toward more unsaleable product will make everyone less efficient and aggregate more expensive.

The issues for quarry operators are:

• Reprocessing larger sizes and base products to make more steak. This causes additional operating costs from longer or additional shifts;
• Fewer products available for other customers, especially if we reprocess 1-in. by 1/2-in. product;
• This demand for more clean stone requires the plant to run “out of balance.” This lowers productivity and increases cost; and
• Less base and screenings used by customers (due to full-depth HMA and increased percentages of recycled asphalt pavement in HMA). This results in more unsaleable product.

The bottom line

Aggregate producers have done a great job of meeting increasing demand over the past two decades. However, current trends are making it more difficult to supply what customers want. I believe that the producers and consumers of construction aggregates need to work together to find a way to meet long-term demand for building materials. HMA customers’ best interests will be served by working with the aggregate producers to find the proper balance in mix and pavement designs.