U.S. Silica Holdings management announced Monday, that its Industrial and Specialty Products (ISP) business is increasing prices for the majority of its noncontracted fine whole grain silica sand products used primarily in glass-melting furnaces and building products by an average of 20%. The increases are effective with shipments after May 1.

We believe this is reflective of a tight supply and demand balance in the broad sand market, and we believe there will continue to be insufficient new supply reaching the market this year, certainly for frac sand and increasingly for industrial sand as well. We believe the increasing use of 100 mesh in the oil and gas market, and perhaps other grades as well, is pressuring supplies in the industrial markets which bodes well for U.S. Silica. We remind investors that ISP is the smaller segment and that whole grain silica is less than 80% of ISP revenues, and these price increases will take a while to roll through every customer in the segment.

We are projecting a small improvement in contribution margin per ton in the ISP segment through the duration of the year and then an improvement in the first quarter of 2015. If pricing continues to improve and 100 mesh does not cannibalize coarser grades, our contribution per ton estimates should prove conservative in the oil and gas segment, but given results the past several quarters, we are going to wait for real evidence of a sustainable change in trajectory before moving our 2015 estimates up in the oil and gas segment.

U.S. Silica heads into 2014 with a roughly 50/50 split between contracted volumes and spot exposure, getting there in part by letting two contracts roll into the spot market around the end of 2013. We believe this is the highest percentage of spot exposure the company has ever had and, in our view, is a pretty bold bet on pricing stability or pricing increases coming in 2014 and 2015. We also believe the company is getting a bit more confident in not letting contract or spot customers buy well beyond their agreements (as was the case in 2013) perhaps in advance of what could be a better pricing market or in order to diversify both customer risk and basin concentrations.