Kristin Smith

Kristin is a member of the Recycling Today staff.

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Mixed messages

Demolition Scrap Report

An increase in construction activity bodes well for the demolition industry, but scrap and oil prices are creating a difficult environment.

May 5, 2015

For the first time in many years, the outlooks for the U.S. economy and the construction industry are bright; but, several factors are creating stormy conditions for demolition contractors. Issues regarding scrap pricing and declining activity in the oil sector are causing discomfort for demolition contractors, who would otherwise be in a good position to benefit from the gains seen in the overall economy and the construction sector.

Many forecasts point to construction industry growth in 2015. In its latest report, Raleigh, North Carolina-based research firm FMI forecasts total construction put in place (CPIP) for 2015 to grow 8 percent. This supports earlier FMI predictions that CPIP will top $1 trillion in 2015, something the market has not seen since 2008. “The positive news for the construction industry indicates that the economy is on track for a resilient recovery,” FMI says.

Those sentiments were echoed by Skokie, Illinois-based Portland Cement Association (PCA) Chief Economist Edward Sullivan, who predicted a 5 percent increase in overall construction activity each year through 2019 during his presentation to C&D World attendees in Nashville, Tennessee, in late March.

Jeff Kroeker, past president of the National Demolition Association (NDA), Washington, and secretary/treasurer of Fresno, California-based demolition and recycling firm Kroeker Inc., cites a New York City-based Dodge Data and Analytics report that indicates the overall U.S. construction market would grow by 9 percent in 2015 with the commercial building segment poised to grow by 15 percent. Institutional building, which could include schools and health care facilities, will advance 9 percent, according to the report.

“The majority of NDA member companies handle commercial and industrial projects versus residential, so we can look at forecasts for those two segments of the construction industry,” said Kroeker when interviewed in the Demolition Supplement of the March/April issue of Recycling Today’s sister publication Construction & Demolition Recycling. “Anecdotally, I can tell you that nearly all of our members are reporting business (with the exception of the scrap market) is doing very well, and most are optimistic they’ll reach prerecession levels in the next few years.”
 

The exeption

Demolition firms are feeling the pinch of lower scrap metal prices. While prices have declined for ferrous and nonferrous metals, the volume of steel scrap in particular that can be generated from job sites can be in the thousands and sometimes millions of tons. Therefore, when ferrous prices drop by $100 or more as they did in February, it takes a huge toll on the industry.

Labor pains

While metals pricing may be a short-term concern for demolition contractors, the industry’s ability to find and retain skilled labor and implement succession plans for an aging workforce has much greater ramifications over the long term. During the National Demolition Association’s Demolition 2015 Convention, held in late March in Nashville, Tennessee, a panel on workforce issues brought together several major demolition contractors from around the country to discuss these problems.

John Adamo, CEO of Detroit-based Adamo, described the situation as “an aging workforce with not a lot of young talent coming down the pike.”

Adamo noted that fewer people are willing to make a career as a skilled tradesman. His company has begun engaging potential workers at the high school level.

Jim Graham, principal at Winter Environmental, Norcross, Georgia, said more than 400 fossil fuel plants soon will be shuttered because of changes to the Clean Air Act. Combined with the general recovery of the economy, he predicted a plethora of demolition work will need to be completed over the next five to seven years.

He asked, “Where is the workforce going to come from?” Graham also noted that those receiving construction training are learning more transferrable skills than demolition, often leaving a pool of potential demolition workers with little or no education.

“It’s really created this paradox for us, and the situation will be challenging for some time,” Graham concluded.

Michael Casbon, technical director for Carmel, Indiana-based sustainability consultancy ERM, says demolition jobs that are heavy on the scrap side are either pulling back or are on hold currently as companies try to protect their asset values and control their costs.

“Despite the official analysis that the economy is recovering, there are indicators within the industry to say the opposite,” Casbon says. “A lot of us have been pulling back.”

He says many jobs are going forward that aren’t as scrap-intensive, such as heavy concrete demolition jobs. As well, the slower economy in recent years led companies to invest in more interior demolition projects and in revamping existing facilities rather than undergoing total demolition and rebuild. “It’s just the scrap-intensive jobs where the scrap influences the price and value of the job that are definitely slowing down and retracting a bit,” Casbon explains.

He says demolition firms are taking two different approaches to deal with the drop in scrap prices. One is to slow down the production of scrap by pulling personnel and equipment from the job. The other approach, especially if schedule constraints are a factor, is to do the demolition as quickly as possible to minimize losses.

“It’s a double-edged sword,” describes Casbon. “It puts pressure on the demolition companies, and when they do it in a hurry, it puts pressure on safety and other things as well.”

The scrap prices are definitely throwing a monkey wrench into the typical way demolition work is bid. Usually a demolition contractor supplies a value of the scrap for the job and uses that as credit toward the actual labor and expenditures of the job. “When the scrap price drops 50 percent, like we have seen, and if you started that job and took it for $0, it puts a lot of pressure on the contractor,” Casbon says.

If the scrap value exceeds the price of labor, then a general contractor will pay a demolition firm to perform the demolition. Casbon says those jobs are tough to come by right now. “Some clients retain their asset value as their own, or the smarter ones put the risk on the contractor, but by doing that they understand they get a reduced value on the scrap in a high market.”

Casbon says he expects the stronger dollar to continue to keep scrap prices lower across the board in the near term. While he says scrap prices may go up by the end of the third quarter, he doesn’t see prices returning to their previous values. If that is the case, he contends that even at $200 per ton, most demolition firms can still do their jobs.

“It will take the unqualified competition that were just in it for the scrap values out of the game,” Casbon says. “I think a lot of companies started out when scrap prices were high with the idea of making money, but now that scrap prices are low, that is not their main profession or objective, and they will go back to what they were doing before, and the bigger demolition companies will start doing more of the demolition again.”
 

Drilling drivers

Another area where activity has slowed is in the oil drilling sector. At C&D World Sullivan shared predictions for a 32 percent decline in drilling and related construction in light of low oil prices; however, demolition contractors such as Gopher Wrecking, Colorado Springs, Colorado, are feeling the lull even further. Bob Mutch, owner of Gopher Wrecking, says, “On the oil side of things, there is not much going on. It has really slowed down to nothing.”

Gopher Wrecking performs most of its work in Colorado and in California. Mutch says much of his business had been in industrial projects and oil refineries, performing on-site processing of old tanks and vessels. He also notes, “Scrap and oil follow each other, so if you see oil starting to drop, you can expect scrap will start to drop.”

Mutch says oil companies are a large percentage buyer of pipe and steel and beams and plate, which they use in oil fields. He adds that the oil industry also uses heavy machinery, which also takes iron to build. “If the oil industry is not moving, there’s going to be a glut of steel sitting on the market that’s not getting sold,” he says.

The lack of oil activity has caused Gopher Wrecking to branch out into other industries. The company also does work in agricultural processing plants, but Mutch says the drought in California is hurting this business. “They’ve got so much open ground they have to let sit idle because they don’t have the water to water it,” he says.

Mutch says he is finding plenty of work in Denver, on the other hand. “Denver is just popping with demolition, interior strip-outs and all the remodeling work that is going on,” he says. “That is going full bore. In Denver, it doesn’t look like it is going to slow down in the next three to five years.”

He attributes much of the activity to the passing of legislation that legalized recreational marijuana use in 2012. Dispensaries are buying up old buildings and stripping them out, and new restaurants and hotels are going up. He says Denver is becoming a tourist attraction. “They are actually making it almost like Las Vegas anymore,” he comments. “It’s just bringing this entire big economy to Colorado.”

Mutch, who has owned his demolition firm for 20 years, says he has been in the middle of projects when the scrap price dropped overnight. In those situations, he stockpiles the heavier material and lets the lighter material sell at whatever the price may be. He also will work with scrap yards to guarantee prices for the duration of the project. “It can be a game of cat and mouse sometimes,” he says.
 

Branching out

Mutch says he remembers a scrap price drop in 1998 that put a lot of smaller firms out of business. Rather than turn in the towel, Gopher Wrecking instead ventured into house and interior demolition to make up for the lack of scrap profitability. The company also began doing more concrete demolition projects, which Mutch says worked out well. “A lot of people aren’t that diverse,” he remarks.

According to Mutch, the aggregates market is a safe market, especially in California, where environmentalists are against open-pit mining. In a place where there is virgin rock, aggregates don’t do as well.

“In California, you are always going to have demand,” Mutch says.

Profit margins are favorable in California as well. In the Bay Area, for example, he says recycled aggregate barged in from Portland, Oregon, is still cheaper than trucking virgin material out of a pit in northern California. He also predicts that, just as Florida is already doing, California will allow recycled concrete in its ready mix within the next three to five years.

As for Colorado, he says the state is behind California by about 15 years, adding that what Colorado thinks is new, “I already had to do it in California.” He says until it becomes more costly to dump material in landfills, C&D recycling material recovery facilities will not catch on there.

As for the overall demolition industry in the U.S., Mutch says he thinks it will be a steady year, with some notable activity in the Southeast.

Casbon concurs that the Southeast, notably the Carolinas and Atlanta, are seeing some action. He attributes it to the ages of the buildings housing the businesses that moved South in the 1980s to avoid unions. “These buildings have lived out their life cycle,” he says. Texas and the rest of the Southeast remained strong, even during the economic downturn of 2008-2009.

EMR benefits on both sides of the market, Casbon says. “When things get tight, clients want to make sure they are spending their dollars well. When they get so busy, they hire us to manage their contracts,” he says.


 

The author is an editor with the Recycling Today Media Group and can be reached at ksmith@gie.net.

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