Indications point up

March 14, 2005

For highway construction workers, 2004 was a year of recovery from the past few years despite rising costs of materials. The conditions that caused the price jumps—the weakening dollar and growing demand for construction materials in China—came as a surprise and are likely here to stay, according to Dr. Bill Buechner, vice president of economics and research at the American Road & Transportation Builders Association (ARTBA).

For highway construction workers, 2004 was a year of recovery from the past few years despite rising costs of materials. The conditions that caused the price jumps—the weakening dollar and growing demand for construction materials in China—came as a surprise and are likely here to stay, according to Dr. Bill Buechner, vice president of economics and research at the American Road & Transportation Builders Association (ARTBA).

If steel, cement and other materials stabilize at their current levels, the cost of highway construction in 2005 will be about 2% higher than in 2004, Buechner said, and the cost increases would absorb about half of the increase in federal investment in highway and bridge infrastructure. If prices continue to rise at their current rate, they will likely consume most of the projected increase in the value of the highway construction market during the year.

The median steel price increase reported in a survey by the Association of Equipment Manufacturers (AEM) was 60%, with many respondents reporting increases of 100% or more. Some 45% expected steel prices to continue to rise through the first quarter of 2005, while 5% expected price drops.

The recovering economy sent demand for cement up in 2004. Unfortunately, imported supply was caught short, primarily because of availability of cargo ships to carry the cement.

“We see demand continuing to be strong,” Ed Sullivan, chief economist for the Portland Cement Association, told Roads & Bridges. “If the import volume can be sustained, like we saw in the last four months of 2004, you’re going to see a significant easing in terms of the tight market conditions that you saw last year.”

Sullivan expects a modest increase in domestic cement capacity in 2005, but whether imports can keep up with demand depends on complicated factors such as the fast-growing Chinese and Indian economies and the availability of worldwide shipping.

“Cement is the most problematical,” Ken Simonson, chief economist for the Associated General Contractors of America, told Roads & Bridges. “We have been importing about 20-25% of the cement used in this country for a number of years, and I don’t see any quick prospect for increasing capacity significantly. As a result, we’re very dependent on not just foreign cement suppliers but on the ships to bring the cement here.”

Prices for steel and oil at least have calmed down this year, said Simonson. “Oil prices have been volatile but in both directions. Steel prices, there are conflicting reports as to whether those have started moving down, but at least they seem to have leveled off and there’s a lot of expectation that by the end of the year steel prices will be lower.”

Buechner told European analysts on Feb. 1 that the U.S. highway construction market should grow by 4.5% in 2005. The economist delivered his remarks during a day-long seminar at Cafe Royal in London. The event was hosted by Goodbody Stockbrokers of Dublin, Ireland.

Buechner expects the total value of construction work performed on highway and bridge projects to be a record $69 billion in 2005, up from $66 billion in 2004.

Market growth is being spurred by continued increases in federal funding and a stronger American economy, Buechner said. ARTBA said increased state and local budgets should help support market growth in 2005. During recent years, state and local budget problems have held down investment in highway and bridge improvements. That crisis now seems to be receding, said ARTBA. General state tax revenues are rebounding, and economic growth is the best indicator of state and local funding for highway and bridge construction.

Federal funding looks up

More federal money going to the states also should prompt market growth. Congress approved a record $34.4 billion for federal highway investment in 2005. On Sept. 30, 2004, Congress also voted to shift $1.9 billion of fiscal-year 2004 highway funding into 2005.

President Bush’s budget request for 2006, sent to Congress on Feb. 7, included $59.5 billion for transportation, $35.4 billion of it for the Federal Highway Administration. The Bush administration increased its plan for a six-year reauthorization plan—the now-oddly named Safe, Accountable, Flexible and Efficient Transportation Equity Act of 2003—from the $256 billion it insisted on previously to $284 billion.

A couple of laws signed by the president last October made the increase possible. One law taxes gasohol, which contains ethanol, at the same rate as gasoline and channels all of the gasohol revenues into the Highway Trust Fund. That law should add $3 billion to the highway fund.

Another law will clamp down on fuel-tax evasion, a measure which should add another $1 billion to the highway fund. “This legislation provides the blueprint for investment that allows state and local governments to tackle gridlock in new and innovative ways and also improves the overall safety and performance of our transportation system,” Mineta said.

The Bush budget requested no funding for Amtrak. Mineta called the zero funding level a “call to action” rather than a shutdown of the passenger rail system. If immediate and significant reforms are made to Amtrak, Mineta said, the administration would support additional funds for intercity rail. The budget request did include $360 million to support existing commuter and freight service along the Northeast Corridor and elsewhere.

AGC’s Simonson was optimistic about enactment of a reauthorization bill this year:

“Based on what happened last week [Feb. 7], with the president’s figure coming in, frankly, higher than I had anticipated and with the [House Transportation and Infrastructure] committee chair [Don Young] moving the next day to introduce a bill that matched the president’s figure.” Young said he had House Speaker Dennis Hastert’s support for the bill at the president’s $284 billion figure and expected quick floor action. “They want to get a bill out of the House by mid-March. And thirdly the Senate, which had held out for a much higher figure last year, sounds like a bill will move quickly at least to the Senate floor at the same figure.”

The outlook for equipment manufacturers also is positive for the next year.

Manufacturing optimism

Manufacturers participating in the latest AEM outlook survey, conducted in October 2004, expected construction equipment markets to close out 2004 with double-digit gains in the U.S. (16.1%) and Canada (14.3%) and an increase of 8.8% in other worldwide business.

The market for exports of U.S.-made construction machinery closed out 2004 with a gain of almost 30% compared with the previous year, according to AEM, with a total of $8.9 billion worth of equipment sold worldwide. Exports to Australia/Oceania led the way with a 63% gain in 2004 purchases. The region took delivery of $784.5 million worth of U.S.-made construction equipment.

For 2005, equipment market growth is predicted to continue but at a slower pace: an 8.4% increase in the U.S., a gain of 6.6% for Canada and a 7.0% jump in other worldwide markets.

“Optimism is definitely the mood as our industry continues to recover from the business slump of the past few years,” stated AEM Chairman Charles Stamp, vice president of public affairs worldwide for Deere & Co., Moline, Ill.

Machinery makers cited commodity costs, most notably steel prices and availability, as a major determinant of 2005 business growth.

“When the U.S. government lifted steel import tariffs late in 2003, industry experts expected prices would stabilize and perhaps fall. But other factors affected the marketplace in 2004,” explained Stamp. “These included world demand from China, a weak U.S. dollar, shortages of scrap steel, rising costs of other raw materials and higher logistics costs. In addition, increased oil and gas prices will also affect our cost of doing business.”

The name of the steel game in 2004 was higher prices, lower availability and longer delivery times. As a result, many companies surveyed by AEM have delayed hiring new workers, scaled back business expansion plans and shifted some production to non-U.S. sources. Half of the survey respondents said they depend on domestic sources; the remainder obtain steel from a combination of domestic and overseas sources.

The survey showed that most of the higher steel cost is being absorbed by the equipment manufacturer. About 85% of survey respondents have absorbed some or all of the steel price increases instead of passing them along to machinery buyers. Swallowing the extra cost has caused problems for those machinery makers. As manufacturers have diverted resources to pay for increased raw material costs, 32% reported moving production capacity offshore or outsourcing; 23% have postponed hiring plans; 28% have put off planned investments; and 15% have reduced work hours or shut down some or all of their operations. About half of the equipment sold went to the rental market, according to AEM.

“There remains pent-up demand from our customers,” said Stamp, “who have been replacing aging fleets now that the general economy is growing.”

AEM’s economic indicators report for February estimated 4.4% growth in gross domestic product for 2004 despite a slowdown in the fourth quarter. Steven Crane, senior economist, thought growth in 2005 would be slowed by the country’s large trade deficit and settle at about 3.5%.

A cement perspective

Cement for constructing residential, nonresidential and commercial buildings, roads and bridges was in tight supply last year primarily because of a shortage of shipping. U.S. demand was increasing because of economic growth and favorable interest rates. At the same time, international demand for cement was increasing because of fast economic growth in places like China and India.

“The tightness in the shipping was something that caught everyone by surprise,” said PCA’s Sullivan. “It happened very quickly.” The shippers had not significantly increased the number of dry-bulk carriers on the high seas since the mid-1980s, so there was not much excess capacity in the system.

PCA expects the next 12 months to be the same as the past 12 months only less. Interest rates should rise but slowly to maybe 6.2-6.3%. Demand should rise but slower than in 2004.

“Things eased about midyear. Imports increased significantly,” said Sullivan. “A lot of those tight conditions that you saw earlier in the year have eased.”

U.S. producers also added about 2 million tons of capacity to the domestic supply side. Sullivan expects the industry to add another 0.5 million tons of capacity in 2005.

The U.S. consumed 112 million tons of cement in 2004, according to a fall 2004 PCA estimate, and looked to consume 115 million tons in 2005. Of that total, 38,000 tons went into highways and streets in 2004, and 39,000 tons was predicted to be put to that use in 2005.

“The composition of construction is changing,” Sullivan said. “The mantle of leadership used to be and still is right now single-family construction activity. Under the weight of higher interest rates, that’s going to switch. Single-family construction activity will decline. It’ll be nonresidential and public that take on the higher growth rates.”

“New statistics have shown that for every dollar of construction activity there’s been a heck of a lot more cement being used,” said Sullivan. “We have to work through some of the numbers to figure out why that’s happening.”

The shift toward nonresidential and public construction might help explain the increase in the amount of cement used for every dollar of construction money spent, i.e., cement intensity, toward the end of 2004. Nonresidential and public construction typically have higher cement intensities.

Calling for a change

California is a good example of a state that is trying to round a corner and race to catch up with its road repair and construction needs. The state is considering allowing private contractors to build new toll roads in the state in an effort to relieve congestion and speed up road work, the San Jose Mercury News reported. Gov. Arnold Schwarzenegger reportedly supports the plan, as he supported an earlier plan to let solo drivers pay to use car-pool lanes.

To start building new interstate toll roads in California, the U.S. Congress would have to pass legislation to allow it. The stumbling block is that 54% of California voters surveyed last year said they did not want new toll roads.

Legislators in Sacramento are in favor of building new toll roads or adding toll lanes, although some people object that the best routes would be reserved for those who could afford it.

“I think California is ready for this,” Fred Kessler, a transportation consultant from Los Angeles, told the Mercury News. “The predictable sources of funds like the gas tax won’t be enough to cover the needs of a state like California.”

The guts of the AEM survey

The AEM annual outlook survey is conducted in the third quarter of the year and outlines manufacturers’ estimates of year-end business volume for the current and next year. The 2004-2005 forecast covers 68 whole machine product types and 16 types of attachments and components.

These are grouped into seven broad product segments: earthmoving, lifting, bituminous, concrete/aggregate, light equipment, attachments/components and miscellaneous equipment. The complete AEM outlook survey will be available on the AEM website (, and includes graphs with a breakdown of respondents’ average responses in each product segment, providing additional interpretative data to assist company benchmarking and trending.

Earthmoving equipment sales for year-end 2004 are forecast to increase 27.4% in the U.S. and 28.2% for Canada. Other worldwide markets for earthmoving machines should top 15.3% in 2004. For 2005, business volume in the earthmoving segment is expected to show increases of 7.8% for the U.S., 6.9% for Canada and 5.6% for other export markets. The earthmoving segment includes excavators, loaders, graders, trenching machines, off-highway haulers, tractors, scrapers and log skidders. In the lifting segment of the industry, year-end 2004 sales are predicted to gain 14.7% for the U.S., increase 11.5% for Canada and rise 7.2% for other worldwide markets. In 2005, anticipated gains in this product segment are 8.7% for the U.S., 9.7% for Canada and 5.9% for sales to other worldwide markets. Equipment in this category includes machines such as lattice boom and hydraulic cranes, tower cranes, aerial lifts, boom trucks, rough-terrain forklifts and telescopic handlers.

Sales of bituminous machinery are expected to show business gains in 2004 of 15.7% in the U.S. and 10.3% in Canada. Business volume to other worldwide markets is anticipated to grow 7.8% in 2004. In 2005, U.S. sales are predicted to be the strongest with a 10.4% increase, while a 6.5% increase is expected for Canada and growth of 9.5% for other worldwide markets. The bituminous equipment segment includes asphalt plants, rollers, asphalt pavers, cold planers, soil stabilizers and road wideners.

The business volume of concrete and aggregate equipment is predicted to show year-end 2004 growth of 12.3% in the U.S., 5.2% in Canada and 10.1% for other export sales. Sales in 2005 are anticipated to grow 9.5% for the U.S., 5.2% for Canada and 10.2% for other export markets. Machines in this category include crushers, screens, feeders, conveyors, washing equipment, rock drills, concrete batch plants and pavers.

Light equipment includes machines such as portable air compressors, tampers, breakers, saws, trowels, light towers, generators, pumps, vibrators, compactors, screeds, lasers and mixers. Year-end 2004 sales in this segment are expected to increase 8.6% for the U.S., 6.5% for Canada and 5.5% for other worldwide markets. Light equipment business for 2005 is predicted to gain 6.8% for the U.S., 5.7% for Canada and 5.9% for other worldwide markets.

The anticipated 2004 business volume for attachments and components is anticipated to grow 11.0% in the U.S., increase 8.3% for Canada and gain 8.4% in other worldwide markets. The market for components and attachments in 2005 is expected to increase 6.8% in the U.S., 5.0% for Canada and 5.7% for other worldwide sales. Examples of machinery in this category are buckets, rakes, demolition tools, tires/wheels and hydraulic and electrical components.

Sales of miscellaneous equipment for year-end 2004 are forecast to increase 9.7% for the U.S., 6.8% for Canada and 6.7% for other worldwide business. For 2005, the U.S. market is expected to gain 10.2%, the Canadian market to grow 10.8% and other export sales to gain by 10.0%. Equipment in this category includes trailers, augurs, light trucks and grouting and pipe bursting equipment.

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