Demand for Frac Sand and Concrete Drives Scarcity

Despite appearances, we are running out of sand. While that might seem farfetched - sand is seemingly everywhere - there is not only a thriving international trade in the commodity, but it’s the second-most heavily exploited natural resource after water and, by volume, the most heavily extracted solid material in the world. 

Like any commodity, sand requires uniformity. Uniform sand, or "aggregate," includes gravel, crushed stone and a number of recycled materials, such as crushed concrete, each of which has unique applications. Specialty sands also exist for industries such as golf, volleyball, sports fields and playgrounds, as well as retail and technical services. Each has unique shape, size, hardness and color specifications.

(See also: This Material is 85% of Everything We Mine, and It's Running Out)

Sand is formed by erosive processes over thousands of years and, according to a UN Environmental Program (UNEP) report, is being extracted far more quickly than it can be renewed. While the U.S. imports only about 1% of the total sand that it uses, according to the United States Geological Survey, developing countries like China and India have had to import significantly larger quantities to meet the demand created by recent construction booms. Sand's scarcity translates to price appreciation, which makes investing in sand compelling.

The price of sand and gravel has increased dramatically over the last decade, from $7.06 per metric ton in 2007 to $8.80 in 2016. Specialty sands generate even higher prices: frac sand, which is used in the process of extracting oil through hydraulic fracturing, cost about $25 per tonne in 2017 but in times of short supply has climbed to $70 per tonne.

But investing in sand is challenging. Sand’s weight relative to its value makes it expensive and challenging to move and store. Investors are also unable to buy or sell futures contracts tied to sand, as they would with other commodities, such as soybeans or oil. As a result, investors interested in deepening their exposure to sand need to look to equity in companies associated with sand production. 

Conservative estimates place world sand consumption in excess of 40 billion tonnes a year, according to UNEP. That number is twice that of the annual amount of sediment carried by all of the rivers of the world, which means that mankind is the largest transforming agent in the world with respect to aggregates. Demand is asymmetric: Increasing demand is predominantly tied to urban growth in Asia, though it is worth noting that information on global sand consumption, particularly in emerging and frontier markets, is scarce.

Aggregate is the main constituent of both concrete and asphalt. It is also the primary foundation for  building roads, parking lots and runways, homes, buildings and landscapes. According to the U.S. Geological Survey, for each metric tonne of cement used, the construction industry needs about six to seven times more tonnes of sand and gravel.

China produces over half the world’s cement, an estimated 2.41 billion metric tons (BMT) in 2017. Global cement production is expected to increase from 3.27 BMT in 2010 to 4.83 BMT in 2030.

Energy Exploration and Production (E&P) also consumes vast quantities of sand, mostly due to its use as a primary proppant in hydraulic fracturing. Proppants are mixed with a liquid to keep fracking wells open and facilitate the removal of oil and natural gas. For scale, individual fracking wells often use seven million pounds of sand, with some requiring up to three times as much. Wells have grown longer and wider since modern-day hydraulic fracking came about in the 1990s.

Frac sand suppliers are highly fragmented, with some 50 producers globally. In addition to energy producers themselves, frac sand suppliers were among the hardest hit by the shale oil bust beginning mid-2014, as drilling activity plummeted.  Major oil and gas producers saw their market halve, but the carnage among sand suppliers was worse. With the steep decline in rig counts, sand suppliers like Emerge Energy Services (EMES) and Hi-Crush Partners (HCLP) saw their stock prices depreciate more than 90% from their 2014 highs.

But by 2016, the U.S. frac sand market heated up, even as oil prices remained depressed, due to the increasing size of wells. Producers also increased the number of fractured stages per well, which fueled a boom in the amount of sand used to drill. As U.S. crude continues to recover in price, coupled with high demand for U.S. natural gas, frac sand demand should continue to surge. 

Among those producers that are publicly traded, is U.S. Silica Holdings (SLCA) the largest pure-play fracking sand provider. Fairmount Santrol Holdings (FMSA) also has a significant business lines supplying for foundry, building products, water filtration, glass and recreation markets. Hi-Crush Partners  and Emerge Energy Services are structured as master limited partnerships. EOG Resources (EOG) is a large producer, but uses all of the sand it mines in its own wells.

The barriers to entry for frac sand producers are high. Not only does it take time, expertise and capital to build a new mine, it’s difficult to time the market exactly. Furthermore, there can be supply limitations due to infrastructure or shipping constraints.

Environmental issues are also a concern.  Sand extraction lowers water tables and decreases sediment supply, resulting in the destruction of ecosystems like fisheries. Sand extraction has also been linked to inland and coastal land loss, water contamination, and river embankment and coastal infrastructure damage.  

Furthermore, planned expansion of infrastructure in many parts of the world is more ambitious than had previously been estimated. India's current  $120 billion building boom making has placed sand in such high demand that illegal mining has engendered a sand mafia. Saudi Arabia, which already made headlines for importing sand despite its desert locale, announced a plan to build Neom, a $500 billion mega-city spanning 10,230 square miles.

Sand mining and dredging have been largely ignored by policy makers. But as climate change's ramifications on coastal cities becomes more evident, this too will likely change. Today, in the U.S., the fastest-growing use of sand includes fortifying shorelines eroded from rising sea levels and increasingly powerful ocean storms, particularly after a hurricane-intensive 2017. Inland uses include temporary sand dams and sandbag installations to protect residents and property from surging lakes and rivers, as well as mudslides, like those that impacted California in 2018.

While sand substitutes exist, they are expensive. Increasingly, producers have begun to turn to recycled asphalt and cement, although comparative usage is quite small.

In addition to producers, investors looking to make a play on sand could look into dredging companies and dredging/blasting equipment manufacturers, given recent advancements in robotic crushing technologies. For investors concerned about the long-term effects of a sand shortage, glass makers (windows, glassware and cell phone screens), water filtration, septic systems, swimming pools, solar panels and wind turbine manufacturers all rely on the material. Sand is used in the railroad industry, as well as for molds in foundries that make everything from airplane and cruise missile parts to artificial hips.