Industry In Crisis?

In August, the Northern Ireland arm of the Quarry Products Association (QPANI) sent out a call to action from Government as the quarry industry in the province was in ‘crisis’.The QPANI predicted that as many as 700 jobs could be lost if the present conditions prevailed. In light of the announcement MQR set out to find out why things are so bleak in Northern Ireland, whether the same is happening across the rest of the UK and whether it has reached crisis point.

Northern Ireland hasseen its share of problems over the years, most of which don’t need repeating. Until recently it looked as if it was starting to pull itself up again with the help of a lift from the housing market. Sadly, this help was fuelled by a bubble.

“We said for a long time that the bigger the bubble, the bigger the bang. And it has proved to be a really loud one,” regional director for the Quarry Products Association Northern Ireland (QPANI) told MQR.

The end of the euphemistically labelled ‘troubles’ brought an end to economic stagnation in the province. This brought a raft of investment. House prices rocketed with rises at one period last year being the highest across the UK.

Research from economists at Ulster Bank in mid- April this year noted that construction had overtaken manufacturing and retail as the key economic driver in Northern Ireland. But then came the powerful waves of the credit crunch.

By the end of April the same economists were predicting the average price of a house would fall from £250,000 last summer to £175,000 by the end of the year. The effect on the quarry industry was predictable.

And as Northern Ireland is still attempting to get back on its feet as a fully functioning economy, quarry firms do not have the diversity of marketplace in which to find economic shelter that companies in England enjoy.

Although Northern Ireland has an £18billion strategic investment plan running from 2008 to 2018 many projects are not set until 2010 or later. And although the Government has promised to invest £612million in the roads network over the next three years and £3.1billion by 2018, there are currently only two major contracts operational, and it is now the industry is in trouble, says Best.

“This is the worst operating environment that the industry has experienced in over 25 years,” he told MQR. “And with no end in site to the credit crunch and high energy costs the short to medium future looks grim.”

And it is not just in road building. Investment in education and health is not coming through quickly enough, he says. Ineffective decision-making is further impeding the industry’s ability to sustain itself during the downturn.

However, it is not a matter of a lack of political will, says Best. “There is a lot of goodwill on the part of the politicians we meet. After all, they know that if we lose skilled people now there will be no-one to deliver the strategy after the downturn.”

He is calling on government to fast track a number of major infrastructure projects outlined in the strategy, as well as work with financial institutions to look at ways of helping protect companies from insolvency.

It also needs to reduce the levels of duty on fuel and energy for certain key business sectors, he says. To help pay for it, he feels Government shouldn’t be shy when it comes to borrowing money to pump prime the construction market. “After all, it is the engine room of our economy,” he says.

The effects started to be felt late last autumn. Over that time nearly 300 jobs across the quarry products and concrete sectors have been lost. QPANI members predict 700 will be lost by the end of the year – 15% of the total workforce.

A rapidly declining customer base together with increasing raw material and energy costs are taking their toll. Over the past nine months business has fallen by 30% while energy costs have grown by 86% and transport costs by 46%.

While Northern Ireland may be the most exposed to shifts in economic climate because of its current state, the rest of the UK is by no means fully protected from the worst ravages of a downturn.

QPA director-general Simon van der Byl: “We expect volumes of aggregates and concrete to fall by 5-10% by the end of the year. But it is bricks and blocks that will be the worst hit.”

For the blocks market it is simply more bad news. Since its 2003 peak, demand for blocks has fallen every year with the only respite being in 2007. This year saw figures start to fall again.

However, the credit crunch impact is being felt across building products with the downturn already prompting closures. These include 28 jobs being shed at Cemex tile plants in Burtonon-Trent and at Lockerbie in Scotland, around 20% of the workforce.

Hanson has also closed a range of operations in response to the downturn. These include two brickworks. The Measham plant will close in September with the loss of 50 jobs and its Stairfoot plant closed in August with 76 jobs lost.

It is also cutting back on production at three other brick sites by removing production lines or shifts. It has closed its Southampton aggregate block works with the loss of eight jobs and taken two shifts from its Thermalite operations at Purfleet and Hams Hall.

But bricks and blocks are not the only sections affected. Hanson is also closing two asphalt plants at Swinburne and Gwalchmai along with its industrial limestone operation at Shap. It is also reducing production at its Abergele Quarry. It is either mothballing or taking shifts from other operations across the country, all in response to the downturn. And these two are not alone.

In late July Tarmac announced it was making 310 people redundant from its Building Products arm as operations are restructured or mothballed in light of the housing slump. It has seen demand fall by 30-35% year-on-year.

Building Products director Clive James told MQR: “No one could have forecast the scale or speed of the decline of demand and I don’t think it is over yet. The supply base is in real danger. The mixture of poor economic performance and unprecedented cost increases is a real threat (see box page 12 for more).”

The company’s Topblock operation in Cambridge is being mothballed as is a plant at its Linford site in Essex. Meanwhile a shift will be removed from its Hilton Main Topblock business. Headcount is also to be cut at its Ninfields site.

As part of a reorganization of the sales function of Building Products, jobs are to be lost at Durham, Ford, Newark and Hilton with sales services being relocated to Tarmac’s head office at Ettingshall in Wolverhampton.

Further job losses are to be suffered by its mortar businesses in Cambridge, Meriden, Middlesborough and Northampton. Meanwhile, its Topfloor business will see jobs lost at its Lound fixing and safety deck operations.

Tarmac is also closing its Kirkby pre-cast plant in Nottinghamshire. The work will be distributed partly to its Henlade pre-cast site in Somerset but mostly to its Lincolnshire Tallington operation.

Meanwhile, both Lafarge and Aggregate Industries (AI) have said they have a hold on recruitment and losing people through natural wastage. They are both being a little more coy over closures. However, with interim reports from AI owner Holcim and the Lafarge Group both showing weighty reductions in sales over the first half of the year for UK operations (see news page two), it can only be a matter of time before redundancy and mothballing starts.

One bright note is that asphalt sales remain level, with the second quarter of 2008 seeing a rise of 6% compared with the same period last year, according to QPA figures. However, this is not as bright as it seems. The brave face in adversity is down to older roads contracts, soon to come to an end.

The Government announced in July that it was dedicating £6billion to roads in the UK. However, before getting excited the vast majority of the expenditure is to finance existing projects - so along with the half finished houses now dotting the country thanks to the sudden halt in construction brought on by the crunch we don't get half finished motorway widening schemes - and traffic management technology to utilise motorway hard shoulders.

There were three new road-building schemes announced set to enter construction over the next three years. These are the upgrading of the M1 between Dishforth and Barton, the widening of the A14 between Ellington and Fen Ditton and the widening of the M25 between junctions 16 and 23, and junctions 27 and 30.

These are doubtless important investments but hardly a long-term approach to roads infrastructure. Hard shoulder running may be an easy-fix for governments with short-term budget problems but it pushes the problem of roadbuilding onto future governments without addressing the issues.

Van der Byl: "Without investment the road structure will degrade, no matter how many hard shoulders are opened up during congested periods. Heavy vehicles make the problem worse, and as we seek to lower fuel costs the problem will worsen as firms seek to maximise capacity on the roads."

But this is not a UK wide problem. An interim report from Ennstone in late August showed its UK operations had held on to its 11.3% profit from revenue for the first half of this year compared with 2007.

In the report, chairman Vaughan McLeod put the success down to the company's strengths in "key regional markets" and as the report later points out this is "...particularly the case in Scotland".

The housing market in Scotland has been resilient. However, it is starting to show cracks. Figures in late August from the Registers of Scotland showed the housing market contracted by 20% over the past year. Estate agents are saying that "Brickormortis" is starting to set in.

But this is not the main reason Scottish heavy building products firms have bucked
the trend so far. The British Aggregates Association's Richard Bird welcomes the part the new Scottish government has played in the industry's fortunes.

He told MQR: 'The simple answer is that the Scottish National Party has put the money into infrastructure. Under the previous government there were a lot of contracts being mooted but they were never started. Examples of this are the extension to the M74 and M80. These are now underway.

“We also have the new Forth crossing, new schools and hospitals and we also have the 2014 Commonwealth Games being held in Glasgow. It always used to be Scotland that had the bad news but that seems to have changed now.

“We are now all crossing our fingers for next year, but at the moment I cannot think of anyone who is doing badly. Even concrete firms appear buoyant,” he said.

But quarry firms in Scotland are benefiting from more than just public investment. There is also a desire to ensure that investment is not wasted. A good example of this is Scottish Water, the Scotland-wide government-owned infrastructure company.

It has £2.4billion to invest in Scotland over the next three years. As part of its tendering process it is calling out directly to quarry firms of all sizes to supply materials directly instead of falling victim to construction companies seeking to squeeze margins.

Scottish Water’s George McGregor explains: “We want to ensure that the man digging the material from the ground doesn’t fall victim to middle men. Scotland is a big country and if quarries go out of business that means we have to transport material further. We want to ensure our delivery partners are paid well and paid on time.”

The firm is currently advertising in the European Journal for suppliers of a range of materials in Scotland, including concrete, aggregates and asphalt. If you are interested email:george.mcgregor@scottishwater. co.uk.

If all public sector investment is being handled this way in Scotland then it can only help quarry firms in staving off any downturn. However, the investment needs to be there in the first place and there are some indications it is not.

Some companies working in road-building in Scotland told MQR that while the Scottish Executive is busy announcing spending plans, local authorities are telling them they have no money. “Scotland has been good up to now but the party is definitely coming to an end,” one operator said.

Outside of Scotland it appears to be Wales and the South West that are particularly affected by the downturn. However, in London and the South East it is a different picture given recent government commitments such as the Olympics and other housing projects. However, demand is falling back.

So does this all add up to an industry in crisis? No. Not yet anyway. Northern Ireland has been hit hard by its history, Wales’ slate industry has been hit and some regions across England are
taking knocks.

Most in the industry agree that an upturn won’t happen until 2010 and then it may take some time to get moving again. All eyes are now turning to the government and what happens here is open to debate.

Government has a target to build 2million homes by 2016. Already the proportion of completions accounted for by social housing has grown from 17% to 24%. The early September announcement from the Government to bring forward spending on social housing should further fuel public sector demand. But with RICS estimating house-building completions falling to below 100,000 next year when the figure needs to be over 200,000 to meet the 2million target, more needs to be done to boost the private sector other than a 30% interest free loan for firsttime buyers and a reduction in stamp duty.

Simon van der Byl is choosing to be optimistic. “The housing market has probably
reached the bottom end. There appears to be some sense coming back into the money markets,” he told MQR.

Only time will tell if he is correct. Doubtless the vertical integration model has helped shelter the larger players from the downturn and niche markets such as agricultural lime are also doing well because of the value of farmland.

However, for most it is a matter of suviving the worst and there is a time limit to survival. Action from the government in areas other than housing could make all the difference.