All sectors of the U.S. construction industry are feeling the heat of the economic downslide. Historically, the commercial/industrial sectors of construction will feel the effects of a slow down within six to 18 months. But housing markets, mortgage foreclosures, and lay-offs have yet to hit bottom in most areas of the country. The cost of crude oil may decline if demand drops in the U.S. But no one can say this with certainty.
The U.S. ready-mix concrete business has been hit hard already. Associated Construction Publications (ACP) asked two prominent members of the National Ready-Mix Concrete Association, as well as an owner of a ready-mix plant in Southern California to give a "snapshot" of what is currently happening in their industry, and where they see things headed in the next six months.
First up was Robert A. Garbini, P.E., president of the National Ready Mixed Concrete Association, Silver Spring, MD., followed by John T Bloom, Jr., vice president and chief economist for Cemex USA. Finally, Donald Oaks, owner of ALPHA Materials, Inc., a ready-mix concrete supplier in Southern California, was asked his views of what things look like for a typical supplier in a hard hit area like his, in Riverside and San Bernardino counties.
ACP: Have you ever seen this type of situation before, or is this unique?
Robert Garbini: I have not seen this exact set of conditions we have right now. The most obvious difference is the energy demands of China and India with the largest populations of the world driving energy prices to unprecedented levels.
The higher fuel prices coupled with the slow down in our economy and the credit crunch, all at the same time, is a historical first.
However, it is not a first in the reduced demand for ready mixed concrete. In late ‘80’s into early ‘90’s we saw an identical example of ‘easy’ credit for development on the commercial side resulting in the collapse of a thriving commercial market. The residential market at the time was relatively stable, though.
ACP: What are you hearing in the ready-mixed concrete industry – are ready-mix concrete companies thinking of shutting down, or, have some companies been forced out of business already?
Garbini: We are hearing the same things that any business would do in harder economic times—reduce expenses, and manage the businesses diligently. There have been downturns as I mentioned about the ‘90’s and also in the early 70’s and 80’s. The businesses that execute more efficiently will pass this temporary downturn.
They also recognize that the U.S. economy is still a powerful engine. The best evidence of this is the growth in population. The US will achieve a population of 400 million people by 2030. This will result in the building inventory, residential and non-residential, doubling!
The peak production of ready mixed concrete hit 456 million cubic yards in 2006, it will hit 650 million cubic yards in 2030. I’d say that’s a very pretty picture for the long run.
We also have a golden opportunity in the paving market right now. The increased fuel costs have resulted in a shortage of asphalt cement making concrete on par or superior in the first cost area along with our superior performance and durability.
ACP: These are complex issues. How do you propose the U.S. as a whole relieve the situation?
Garbini: Offshore drilling, ANWAR, shale field development, all of the above, including the development of natural gas for fuel, and high tech engines. We also need to get our infrastructure improvement up and moving again. This will increase the number of jobs and provide the networking of transportation and support needed for growth in the economy.
ACP: What can individual States do to cope with these problems?
Garbini: If the question concerns the fuel prices, the same pressures on their state’s Federal legislators to move in the energy development area, and infrastructure. The state highway departments also need to recognize the ability of concrete for paving to meet their needs for roadway improvements.
ACP: What can individual ready-mix concrete-providing companies (large, medium, or small), do to survive during these volatile times?
Garbini: The ready mixed concrete producers need to join their national and state ready mixed concrete trade associations in the call for a solution to the energy problem we’ve had for years.
In the short term, take advantage of the conditions of parity of concrete for paving. Not all construction has stopped. There’s a huge potential in the paving market — highways, streets, and parking lots. Get out there after the projects knowing that the playing field is now level in the first cost area.
ACP: Based on your assessment of the situation, where do you see cement pricing and availability six months from now?
Garbini: I would have to say that the availability is there six months from now, and will be until we see the turn around in the residential market.
There is a very positive outlook for the construction activity in the future. Look at the population growth in your locality. Is it growing? In most places in the U.S. the answer is a resounding ‘yes.’ And that’s the positive part.
ACP: Is the overall economy likely to recover and stabilize by 2009-2010?
John Bloom: At this point it time, the timing of a recovery is highly uncertain. The irrational exuberance that fueled the housing boom has, not surprisingly, resulted in a housing bust which has generated massive losses in the financial sector and pushed the economy into a full-fledged credit crunch.
This is particularly problematical since the economy relies heavily on debt to support consumption and investment. On top of this, consumers and businesses are being squeezed by record high energy prices.
The debt-dependent construction sector is in the midst of the deepest downturn since the severe recession of the early 1980s. The construction sector lost 260,000 jobs through the first half of this year, roughly 60% of total US job losses.
Aggressive public policy initiatives are needed to stabilize the economy, restore confidence and pave the way for a recovery.
ACP: Do you see an end to increased pricing in sight, or are we destined to see more of this sort of thing?
Bloom: In these unprecedented times, many energy-intensive companies have been forced to increase prices. The ready-mix concrete industry is being decimated by the rapid escalation in energy prices over the last year and a half and the deep and protracted downturn in demand. In my opinion, the business is not sustainable at current pricing levels.
ACP: What do you recommend the ready-mix industry do to survive during this difficult economic climate?
Bloom: As an industry, all companies can contact their political representatives to push for aggressive public policy actions to stimulate the economy and restore stability in financial markets. Federal and state programs to support needed infrastructure investment is a good way to create jobs and get the economy back on the path to recovery.
ACP: What are the most important issues facing the ready-mix industry in the next six-to-twelve months?
ACP: The Inland Empire of Southern California has been particularly hard hit with the housing construction slump. What has this caused for the ready-mix concrete suppliers?
Donald Oaks: Prices for cement, aggregate, and fuel have risen fast, but because demand for ready-mix is down in our market area, prices for our product are down. Even with all our cost increases, we are forced to sell a cubic yard of ready-mixed concrete at about $20 per cubic yard below what customers would pay for that same amount just one year ago.
We are in a survival mode. Most companies are down 50-percent from last year. We feel if we can pay the bills and put food on the table for the next six months — then, we’ll have a better idea of what is going to happen.
Many ready-mix suppliers are turning to commercial construction now, yet it takes about 18 months to get project approval from the county. And now land-use and water run-off rules are going to be more closely monitored on projects — all this slows down construction time. Others have plenty of bid work through public projects already funded through various voter-approved propositions.
ALPHA Materials, Inc., is surviving right now on home owner backyard projects and some commercial projects — privately owned small shopping centers, concrete tilt-up buildings, etc —that had started the approval process two or three years ago. This pipeline is filled for another year or so.
But I’ve talked to several local realtors and they predict new housing construction may start making a small comeback in November of this year.