Building Value - Part 2: Behind the Findings
The Market
The Canadian aggregates market remains robust for SSG owners. In Ontario alone, the market consumes more than 170 million tonnes of aggregate a year with governments consuming more than 50% of total production by the provinces 2800 licences. Growth remains likely throughout the balance of the decade . However, the blistering pace of construction across Canada has moderated and any economic slowdown, with the accompanying decline in infrastructure investment by governments and private businesses, would likely lead to slowing activity and growth for SSGOs.
Consolidation
Consolidation is the order of the day in the SSG sector. Of the SSGO owners, consultants, sector-specialist lawyers and regulators polled by the Sanderson Group 100 per cent agree that merger and acquisition activity driven by large global operators including CBM, Lafarge and Dufferin Aggregates and a few mid tier operators is changing the face of the Canadian stone sand and gravel business.
Licence barriers
Canada consumes aggregates at a rate much faster than the industry can develop available sources of supply for the future. One substantive barrier to re-supply is the slow pace of availability of licences for new operations and/or expansion of existing sites. In Ontario, for example, almost 15 years ago the Ontario Ministry of Natural Resources acknowledged the province was facing what it termed a critical shortage of licenced aggregates supply. Since then, however the rate of licenced re-supply has lagged consumption by an unsustainable 3:1 ratio. Responsibility for resolving the delays in licencing will hopefully be resolved by the indusrtry and the regulators sorting this out. Unfortunately, the impact of licence delays is felt most heavily by the industry as it struggles to plan its future and by the market as it faces constrained supply with the inevitably-accompanying upward price pressure.
Demographic pressure
Like the broader public, many independent stone, sand and gravel operation owners are in a life phase in which succession planning is an issue. For those with no apparent heir, creating a lucrative exit strategy looms large. For them, realizing the full value of their prime asset is crucial to an exit strategy. They face the need to use every means available to them to create wealth to make the exit strategy a success.
Fuel Cost
Half the respondents identified fuel costs as the prime financial challenge facing the aggregates industry. This is not surprising; more than 60 % of the cost of aggregates is transportation. The volatility in fuel prices continues to make long-term operational cost and revenue forecasting hazardous. Uncertainty abounds and the industry is not comforted by long term predictions of ongoing high fuel cost.
Licence Cost
Almost three-quarters of respondents say the cost of new licences is a large barrier to new entrants and expansion by existing operators. Although the fee for the actual licences is not prohibitive, the expense of mandatory site surveying and assessment is. Licence applications can cost millions of dollars and years for approval. Cumulatively, these are factors in developing new supply. The unforgiving law of supply and demand tells us that hindered supply leads directly and invariably to higher aggregates price to the market. Eventually, everyone pays for the higher cost of licences including the licencing regulators who depend on fee revenues from operators as well as tax revenue from operators and the many thousands of people directly and indirectly employed by the aggregates industry nationally.
Stagnant Product Price
About a third of respondents to the survey maintain that the price of getting the commodity out of the ground for the aggregates sector is growing rapidly (see fuel cost section above) but the price the market is paying for the commodity is stagnant. The industry maintains, with some justification, that this is not a sustainable business model.
