State of the Industry
Fatalities overshadow 2007 in B.C. and industry responds
By Andy Bateman
Fatalities overshadow 2007 in B.C. and industry responds; aggregate producers and suppliers remain generally optimistic for 2008, despite market turmoil.
In British Columbia, events in the aggregates industry were overshadowed by four fatalities during 2007, following a five-year period with only one fatality. The latest edition of Screenings, the Aggregate Producers Association of B.C. publication, reports that the APABC has formulated a safety action plan to respond to the challenges of workplace safety in the aggregate industry. Since September 2007, the APABC has formed a Joint Safety Committee in partnership with the Construction Safety Network (CSN) to develop the plan that will be delivered to aggregate producers. As APABC president Brad Kohl said, "The biggest accomplishment we can have is establishing best practices and educating the producers on how to run an
effective safety program in their own operations." The plan is going into development immediately and will be completed in stages over the next two-and-a-half years. It will include the development of best practices, as well as an education campaign aimed at APABC members and the industry.
A subsequent update from Kohl notes that, "On January 15, 2008, the Minister of State for Mining released a "Practical Guide for Aggregate Operations" for distribution to all aggregate operators in the province. This guide is a good start to raising the profile of safety and safe operating practices in all aggregate operations in British Columbia for all companies big or small. The Ministry of Energy, Mines and Petroleum Resources has also made a further commitment to provide financial support to the APABC for development of an industry best practices safety guide followed by an education campaign. Our association and CSN are currently working with Work Safe BC to complete a risk assessment of where injuries are occurring which will then allow us to address immediate issues while the best practices guide is being developed."
Like all in the B.C. aggregates industry, Jim Allard of Allard Contractors was deeply saddened by the fatalities that occurred in 2007, but noted that the industry is taking steps to ensure that workers receive thorough training. Allard, a seven year board member of the Construction Safety Network (CSN), adds that these recent incidents are anomalous and against a background of an improving accident trend and improved culture of safety. Many APABC members have been recognized annually at the Ministry of Energy, Mines and Petroleum Resources awards event for their safety achievements. Apart from the understandably intense focus on safety, things have been going well for B.C. producers. Business conditions remain very strong, driven by continuing growth in most sectors. Like others, Allard predicts a slight downturn in residential construction in 2008, with some contractors reporting gaps in order books after the next six to nine months. For some, the levelling off may come as a relief from the torrid pace of recent years. Allard reports that some ready mix drivers, for instance, are "worked out" and in some cases not wishing to work weekends even at overtime rates.
On external issues impacting the business, Allard remains frustrated with a number of the province’s regulatory processes. The Fraser Valley Pilot Project, for instance, seeks to resolve long-term controversy surrounding aggregate licensing and land use issues in the Fraser Valley. In Allard’s view, the project is "not going anywhere" for a number of reasons. For one thing, the designation of existing licensed operations is now in limbo by the creation of a fourth and non-defined group whose owners, not surprisingly, expected to receive automatic designation under the project. Another example of the cumbersome approval process is Allard’s application for a new ready mix concrete operation in the Mission pit, a process that is now five years and counting.
For Ted Carlson, president of Mainland Sand & Gravel, 2007 could be described as the best of times and the worst of times. The defining event of the year was the company’s first ever fatal accident in September. It was, unfortunately, one of the four fatalities that occurred during 2007 in the B.C. aggregates industry, making it the worst ever year on record for industrial fatalities.
At Mainland’s Cox Station quarry, the rigid-frame off-road truck was dumping a load of processed aggregate over the top of a stockpile when the edge of the pile gave way. The truck flipped over onto its roof and the trapped operator died of his injuries. Needless to say, this accident and its aftermath have been
traumatic for all, but the determination by Carlson’s team to
remember the employee shines through.
Although this tragedy will remain with everybody at Mainland for many years, in purely business terms 2007 was a success for the company. Carlson reports a very busy year with aggregate sales, in terms of both volume and revenue, up by some 20 per cent together with average price increases of about 10 per cent. On the cost side, there have been across the board increases with the notable exception of new equipment, some 20 per cent lower due to the appreciation of the Canadian dollar against the U.S. dollar. This drop applies not only to US built equipment but equipment built in Canada and priced in US dollars. Carlson adds that new aggregate processing equipment in B.C. is exempt from the 7 per cent provincial sales tax (PST), providing a further incentive for capital investment. For producers, the only downside to this trend has been the recent decline in the trade-in or sell value of used equipment, pushed down by the fall in new equipment prices.
Mainland’s capital investment program remains strong, with 2008 plans including two 40-tonne capacity articulated dumptrucks, a 65-tonne excavator and a 4.58 m3 wheel loader. New process equipment is slated to include a 30×54 jaw crusher, a scalping screen and two telescoping radial stackers.
On the sales side, Carlson predicts strong sales growth for 2008, with volume and revenue increasing a further 10 to 15 per cent, coupled with 10 per cent average price increases. Residential volumes may be down slightly compared to exceptionally high 2007 levels but are still expected to be strong. Recovering U.S. demand for aggregates, especially in California, is likely to create indirect benefits to companies such as Mainland Sand & Gravel. Carlson explains; "Aggregate reserves in California are being rapidly depleted with virtually no replacement through the licensing of new reserves. As a result, exports to California are likely to increase, including those from already busy B.C. based coastal operations. That export demand will put additional pressure on the domestic supply side, particularly into the Lower Mainland, to the benefit of non-exporting companies such as ours."
Still in B.C., Bob Mohr of Mormak Equipment reports continuing strong growth with total 2007 sales of $35 million (including a $7 million single project) compared to $28.5 million in 2006. Mohr explains that there was also a shift in product range last year, with more customers opting for stationary aggregate equipment plants rather than portable equipment. Going forward, Mohr expects to see some levelling off in 2008, with sales in the $30 million to $35 million range, adding that the company has been able to build inventory for the first time in five years instead of working at maximum capacity to fill confirmed orders.
Moving to Alberta, Gary Zeitner, of Mixcor Aggregates Inc. reports that "2007 showed strong price and volume increases as both cost pressures and industry demand forced prices sharply higher. In the Edmonton region, industrial development such as the Petro-Canada Fort Hills Upgrader and the Northwest Upgrader in 2008 will combine with increased infrastructure renewal (as the Provincial Municipal Sustainability Initiative commences) to more than offset slower residential development in the first three quarters of the year. Labour rates are again expected to rise significantly 2008, as various union agreements will force all companies to keep pace in order to attract qualified workers. Alternative materials such as recycling have gained some increased use, but we do not anticipate any material change in the proportion of recycled aggregate in the total market."
Steve Pegler of Calgary-based Elrus Aggregate Systems reports another very busy year in 2007, with growth in the Alberta market exceeding 2006 by no less than 50 per cent. For a manufacturer like Elrus, the strong Canadian dollar is both helping and hurting. On the plus side, the company enjoys stronger buying power of U.S. built components but, at the same time, that same buying power is also enjoyed by potential customers who can compare the cost of Canadian and U.S. built equipment virtually at par.
With the ongoing tight labour market in Alberta, the availability of local skilled labour was an important factor in the company’s decision to set up a new manufacturing facility in Aylmer, Ont. Looking forward into 2008, Pegler expects demand to remain strong with product pricing remaining similar to 2007. On the manufacturing side, 3D technology such as SolidWorks software helps to streamline the design and manufacturing process, while a steady increase in demand for standard designs is also facilitating product throughput rate.
In Saskatchewan, Dale Paton, regional manager for Inland Aggregates Ltd., reports a bright picture for the province in 2007. A strong residential market saw house prices by nearly 50 per cent, one of the biggest jumps recorded nationally, together with strong growth and development in the oil, gas and potash resource sectors. Regionally, Saskatoon remains the hot spot, with numbers for Regina somewhat softer but still strong compared to historical levels. This collective growth was reflected in a strong performance by Inland Aggregates’ Saskatchewan aggregate operations, with 2007 sales and production volumes about 10 per cent higher than 2006 which were in turn some 30 per cent higher than 2005. Paton reports the average prices for aggregates in 2007 were 8 to 10 per cent higher than 2006, which saw similar growth from 2005.Despite these nearly double digit year over year price increases, business margins have remained flat due to increased costs across the board, especially for energy, labour and materials. Paton expects similar price increases in 2008, based on continuing strong demand and tight supply.
Continuing strong growth in infrastructure projects is attracting people to the province who in turn create demand for construction materials and services. Perhaps ironically, Saskatchewan is benefiting from the overheated economy in Alberta. As Paton explains, people coming to work in the resource business in Saskatchewan can find employment and more affordable housing compared to the overheated Calgary and Edmonton markets. However, that situation may not last much longer if the recent sharp rise in average house prices continues into 2008.
Politically, the landscape of the province is perceived as more pro-business following the victory of the Saskatchewan party in the November 7, 2007 provincial election. It is not however an entirely rosy picture in the construction materials sector. Employee retention remains an issue, with stiff competition from a resource industry that typically offers higher wages and year round employment. The loss of employees in turn means a higher ratio of new employees and additional training to reduce the likelihood of workplace injuries for this relatively high risk group. Inland’s suppliers, themselves tight for people, are also working more or less flat out with noticeably longer lead times to obtain parts and longer repair completion schedules.
Looking forward into 2008, Paton sees a levelling off in volumes as both production capacity and trucking capacity are operating close to maximum. With the $15.8 billion acquisition of the Hanson PLC group by Heidelberg Cement (Inland Aggregates’ parent), capital investments are being closely monitored to conserve cash flow. For 2008, capital investments plans will focus primarily on the group’s Alberta operations, with Saskatchewan operations following in 2009.
Moving east to Ontario, Ken Lucyshyn of Walker Industries Holdings Inc. reports that aggregate volumes for 2007 were similar to 2006. In Walker’s Niagara Peninsula market, there have been some shifts on the aggregate supply side, including several years of reduced supply following the closure of Queenston Quarry. Last year saw an increase in supply from a long established quarry at Port Colborne that has historically shipped virtually all of its production by water to Cleveland, Ohio. The quarry’s new owners are now supplying the southern Niagara Peninsula market, adding at least 500 000 tonnes on the supply side. For Walker, volumes have been boosted by demand from the largest ever contract awarded by the Ontario Ministry of Transportation (MTO), the $167 million widening of the Queen Elizabeth Way from four to six lanes on a 7.67 km section through St. Catharines. This contract is being supplied from Walker’s Spring Creek quarry, the same quarry that supplied a previous QEW upgrade project further west of St. Catharines.
For 2008, Lucyshyn expects demand to be supported by the current QEW project together with an increased regional budget for infrastructure renewal. Overall, however, Lucyshyn sees volumes slightly down with those growth factors offset by declines in area residential construction as well as tourist and commercial development in Niagara Falls. There, the combined effects of a strong Canadian dollar and border delay issues are reflected in significantly fewer U.S. visitors and a significant slowing in hotel and casino development compared to the hectic pace of recent years. On the operations side of the business, capital investment includes environmental enclosures around crushers and transfer points to reduce noise and dust, while operating costs associated with petroleum products and explosives are expected to rise by between 8 per cent and 10 per cent. The steady rise in regulatory compliance remains a concern, with water metering, monitoring and compliance costs increasing by some $100,000 year over year at the Thorold operation alone.
Malcolm Matheson of Kitchener-based Steed and Evans Ltd. reports 2007 growth in infrastructure renewal and reconstruction, with some softening in the residential construction sector. Last year saw the company’s aggregate volumes up by 10 per cent over 2006 while aggregate prices fell by a similar percentage under competitive pressure. Hot mix asphalt volumes were slightly down from 2006.
Looking forward to 2008, Matheson sees continuing strength in infrastructure renewal, but a downward trend in both the
residential and the industrial commercial and institutional (ICI) sectors. Operationally, costs are steadily increasing and Matheson is looking for a recovery in aggregate prices to offset a number of increases such as an expected seven to ten cents per litre rise in diesel and gasoline.
Capital investment at Steed and Evans is likely to remain fairly flat for the next two to three years, with recent plant acquisitions including a mobile screening plant to screen all Granular B product at the pit face. Matheson adds that the company’s capital investment runs at about the same level as depreciation to maintain the book value of core assets. On top of that, a similar amount of equipment is leased, as lease payments are recorded as operating expenses for these off balance sheet items. This practice is in contrast to the larger companies who typically lease the majority of equipment, particularly for their mobile fleets.
Matheson also points out that increasing industry regulation, however well intentioned, is placing a strain on the limited resources of medium sized companies like Steed and Evans. Just some of the current regulatory initiatives include the Workplace Safety and Insurance Board (WSIB) policies regarding Early and Safe Return to Work (ESRTW); Regulation 347 regarding waste, its management and associated Land Disposal Restrictions (LDR), as well as the proposed Drinking Water Source Protection Act which requires significant industry representation. All of these initiatives are in addition to ongoing reporting requirements such as emissions under Ontario Regulation 127 and the existing water compliance reporting system.
Steve Cruickshank of Cruickshank Construction Ltd. paints a bright picture for both 2007 and 2008. Based in Kingston, Ont., the company is well established in aggregates and paving and a more recent player in bridge construction and rehabilitation. Cruickshank reports an ongoing strong market, with 2007 volumes some 10 per cent higher than 2006. An MTO budget of $1.6 billion contributed to that growth and Cruickshank still sees "lots of opportunity", particularly in infrastructure renewal, with widespread recognition of the infrastructure deficit, increased federal spending and a dedicated fuel tax adding to the flow of funds. On 2008 capital investment, Cruickshank reports that some $4 million is slated for additions to the company’s mobile equipment fleet including pavers, wheel loaders, trucks and dozers. On the operational side, Cruickshank reports a relatively stable employee base, although mechanics can still be hard to find. Average selling prices will need to increase to offset cost increases of some 5 per cent, while overall volumes should see a slight increase, thanks to infrastructure renewal demand that should be more than enough to offset the cooling in residential construction.
Turning to economic data, the November 28, 2007 Canadian Construction Overview by Alex Carrick of Reed Construction Data – CanaData notes that many provincial unemployment rates are at or near thirty year lows. West of the Ontario-Manitoba divide, provincial unemployment rates are 4.4 per cent or less, including Alberta’s exceptional unemployment rate of 3.4 per cent. In a comparison of city labour markets, based on a composite of unemployment rate and job gains, the overview indicates that six of the strongest cities are in the west including Edmonton, Calgary, Victoria, Saskatoon, Abbotsford and Vancouver while six of the weakest, Windsor, St. Catharines, Niagara, Oshawa, Toronto, Kingston and Kitchener are in Ontario. It is interesting to note that the comments of three Ontario producers seemed to be generally in line with Carrick’s assessment of three city markets in the province. Cruickshank, based in Kingston, was strongly optimistic, with Kingston itself in the top six of Carrick’s assessment. Two other producers, supplying Kitchener (Steed and Evans) and Niagara (Walker), provided more muted commentary for those area forecasts and both of those cities are in the bottom six of Carrick’s assessment.
For the key residential sector which accounts for 40 to 45 per cent of total construction dollars, Carrick notes that Canadian housing starts were about even with 2006 through October 2007 with the only real weakness in Ontario, particularly for multiple dwellings. Over the same time frame, Alberta has been flat and B.C. up slightly, while Quebec posted a 10 per cent increase and Saskatchewan was up strongly by 67 per cent. Housing starts in Canada’s six largest cities show that Calgary’s 2006 level was an all-time high, beating 1978, and Edmonton’s was its second highest ever, exceeded only in 1978. Going forward, national housing starts should remain fairly steady with 200,000 units forecasted for each of 2008 and 2009. Total commercial starts are projected to fall from 5.38 million m2 in 2007 to 4.64 million m2 in 2008 and again to 3.99 million m2 2009. Total industrial starts, are projected to rise from 0.69 million m2 in 2007 to 0.74 million m2 in 2008, before falling back to 0.55 million m2 in 2009. Equivalent numbers for institutional starts are flat, with a projected 2.78 million m2 for 2007 followed by the same number in 2008 and a slight up tick to 2.87 million m2 in 2009.
To finish on another positive note, employment prospects certainly seem rosy for the industry. A chart of non-residential trades in demand shows projected employment growth from 2005 to 2009 of over 10 per cent for iron workers and fitters and nearly 25 per cent for boilermakers. In between these two growth figures, a number of construction trades will be in strong demand including heavy equipment operators, drillers and blasters, heavy equipment mechanics, construction millwrights and industrial instrument technicians.