The economic downturn and a drop in the price of asphalt binder should combine to make the upcoming construction season somewhat different from 2008 for Northwest paving contractors and asphalt producers.
Though the price and availability of asphalt shouldn't be the problems they were last year, 2009 won't be without its challenges, however. Federally backed state highway programs should continue to produce substantial numbers of paving projects, but with cities and counties facing severe budget shortfalls and the private market for paving all but dried up, competition for work figures to be intense.
"The marketplace has changed," said Tom Gaetz, executive director of the Washington Asphalt Pavement Association. "Demand is low, so the supply (of asphalt) is adequate for now and even to meet more demand. Our industry is probably running at 65 percent. There's a tremendous amount of capacity."
First, a little background: The price of a ton of asphalt in the Northwest was sitting at about $300 — a bit higher in Alaska — at the beginning of last year. At that point, the rising cost of crude oil and the changing economics of oil refining combined to start driving asphalt prices upward. After peaking in the late summer, prices began coming down. But as of December, they were still far above the levels of the previous year.
The following is a state-by-state recap of asphalt prices in the PB&E territory during 2008, according to the state DOTs:
Alaska — peaked at $710 in September; dropped to $626.67 by December;
Idaho — peaked at $859.38 in early October; dropped to $600 by December;
Montana — peaked at $687.50 in August; dropped to $573.50 by December;
Oregon — peaked at $747 in September; dropped to $501 in December;
Eastern Washington — peaked at $859.38 in September; dropped to $587.50 by December;
Western Washington — peaked at $727.50 in August; dropped to $495 in December.
Nationally, construction materials prices overall dropped 2.5 percent in December 2008 from the previous month, according to the Jan. 15 producer price index report by the U.S. Labor Department. This was the third straight month when construction materials prices have fallen. However, despite the drop, construction input prices are 2.7 percent higher than the same time last year.
By comparison, asphalt prices dropped 1.1 percent for the month, but were still 51.7 percent higher than a year ago.
Shift in Production
Jim Huddleston, executive director of the Asphalt Pavement Association of Oregon, wrote an advisory last fall to explain the cost increases of asphalt binder and the impact they had on the cost of hot mix paving materials.
"Approximately 3 percent of a barrel of crude oil is refined into asphalt," Huddleston explained. "Lighter crude sources produce less asphalt and more fuel products. Furthermore, re-refining or coking of crude oil decreases the yield of asphalt and increases the production of fuel products.
"The primary reason for the reduction in supply of asphalt and the cost increases is the historical disparity in revenue (produced) between the more profitable fuel products and the less profitable residual products including asphalt. To maximize revenue from crude oil, refineries have elected to utilize lighter crude slates, and some have installed re-refining or coker units to reduce yield of asphalt and increase yield of higher-revenue fuel products."
Cokers are billion-dollar machines that refine the chunkiest, low-grade and least expensive crude oil into highly profitable fuels, such as gasoline and diesel. Ken Simonson, an economist for the Associated General Contractors of America, said the installation of cokers is pretty much a permanent change for refiners, and more of them are likely to drop out of the asphalt business, which will keep up the pressure on asphalt for some time.
But Huddleston drew a more hopeful conclusion.
"The cost increases in asphalt have all but eliminated the disparity in revenue between fuel products and asphalt," he observed. "Thus, the result of this market shift is that the higher revenue should result in higher production of asphalt by refineries. Furthermore, the recent decline and stability in crude oil prices should result in increased stability in the price structure of asphalt binder."
Municipalities in Alaska, Idaho and Washington blamed road work delays on the asphalt situation last year. Recent drops in the price of crude oil have helped to hold off further increases in the price of asphalt, but as the DOTs' data show, the product is still a lot more expensive than it was a year ago. It remains to be seen if this will result in any paving projects being postponed or scrapped this year.
Meanwhile, cities and counties are experiencing an additional problem because there remains a shortage of the asphalt emulsion used for chip seal pavements, WAPA's Gaetz said.
But overall, Gaetz does not expect a repeat of last summer's travails when this year's paving season hits full stride.
"The corrections have been made, and coupled with the downturn in the economy we should have plenty of capacity to meet demand in 2009," he said.
Meanwhile, APAO's Huddleston said he is hopeful that the federal economic stimulus legislation under consideration in Washington, D.C., will boost the market for asphalt in Oregon, which he estimated is off by 20 to 30 percent from historic levels.
"We are excited and hopeful for the stimulus package," he said. "It could mean in the order of a couple of hundred million dollars for Oregon. That bodes well for paving. It would have a significant impact on tonnage. Otherwise, we're looking at a pretty dismal year."