Asphalt costs: ‘It’s unbelievable’

Wildly fluctuating oil prices are playing havoc with the price of oil-dependent construction materials including asphalt, roofing materials and primers, with paving companies among the hardest hit.

Oil prices having impact on petroleum-based construction materials

TORONTO

Wildly fluctuating oil prices are playing havoc with the price of oil-dependent construction materials including asphalt, roofing materials and primers, with paving companies among the hardest hit.

According to the Ontario Ministry of Transportation’s (MTO) Asphalt Price Index Table, the price of asphalt cement had remained at a relatively stable $310 to $312 dollars per tonne since last October 1, but jumped to $333 on April 1, $377 on May 1 and $434 on June 1.

“We’re being warned that we could see a price increase to $500 per tonne by the middle of July,” says Mike O’Connor, executive director of the Ontario Hot Mix Producers Association (OHMPA). “I’ve never seen increases like this in the industry, and it’s happening almost overnight.”

Asphalt cement price increases are the result of multiple factors: rising oil prices, high demand and reduced supply — Petro-Canada’s Oakville refinery closed its doors last year, leaving only Imperial Oil’s Nanticoke plant producing asphalt cement in the province. Much of Ontario’s asphalt cement is now being imported.

Where specifications allow, contractors are saving money by using asphalt with recycled content — OPSS 1150, which permits 30 per cent recycled content in base asphalt and 15 per cent in surface mixes.

The type of oil used to make asphalt cement is the “heavy molasses” at the bottom of the oil barrel, says O’Connor. Sweeter Mideast crude contains less of the thick substance, while the oil from Alberta’s Tar Sands makes an almost perfect asphalt cement.

“But we haven’t seen much of that coming east,” says O’Connor. “California has seen a lot of roadbuilding and they’re already importing it from Alberta for $500 a tonne.”

At the same time, business practices are changing. Asphalt cement producers once held the line on prices, helping to bear the cost of price fluctuations on any “carry over” business between the time of a quote and the time the product was applied. That’s no longer the case. Credit terms have also tightened.

“We used to be able to pay in 60 days,” says O’Connor. “They dictate the terms now. Contractors are being expected to pay in 30 days or less and some wholesalers are being expected to pay in three days.”

That’s leading to a change in the way paving contractors are doing business.

“It used to be normal to base our quotes on a lump sum or a fixed price — until the prices went crazy,” says Darryl Gardner, senior estimator with Mississauga’s Pylon Paving. “When we quote on a contract, it’s not like the other trades who begin their jobs in a couple of weeks. Paving is usually the last job done and lag time can be anywhere from six months to a year.”

Gardner says paving companies are being hit by energy price increases many times over.

“Transporting the oil to the plant, transporting the asphalt, heating the asphalt with natural gas — these are the biggest price increases we’ve seen in 30 years. A lot of companies in my position have 50 to 60,000 tonnes of carry over and the price of that material has gone up 11 bucks a tonne since they quoted. I think many guys are going to be forced to walk away — either from quotes they’ve already put out, or from the business altogether.”

Gardner says he’ll base future quotes on the price of the asphalt at the time the job is completed.

OHMPA is suggesting contractors tie their quotes to the Asphalt Price Index Table, updated monthly by the MTO. That table is used by the MTO to protect contractors working on provincial road contracts from being hit hard by asphalt price fluctuations. Currently, the MTO protects contractors from fluctuations in excess of 10 per cent in any given month.

But Rob Bradford, president of the Ontario Road Builders Association (ORBA), says that protection is no longer adequate. OHMPA and ORBA met with the MTO last week asking for changes.

“If the price is $400 per tonne and it rises to $440, the contractor is on the hook for the full $40,” says Bradford. “We’re asking for price protection beyond $15 per month.”

Roofers are also seeing price increases, says Peter Kallinger, technical director of the Canadian Roofing Contractors’ Association.

“It’s not just the black stuff like asphalt shingles. Refined petroleum products are part of almost every roofing material we use, from PVC to cellular foam insulation and rubber roofing. There have been a lot of technical improvements in these products, so perhaps the petroleum inputs required have been reduced but some products still have a relatively high petroleum content.”

“It’s unbelievable,” says Hugh Kennedy, President of Rainbow Waterproofing Ltd. in Milton. “A year-and-a-half ago, we were buying asphalt primer for $28 per five-gallon pail. That same pail now costs $40. We submit quotes in the marketplace where the lag time might be a year and a half, but nobody’s able to hold supply prices for more than a week. It’s incredibly difficult to provide a price to a client and stand behind that price.

“We were hit severely last year with increases in the price of ISO insulation and some sympathetic suppliers held the prices for us, but not in this situation.”

Kennedy says his company is switching to products with lower asphaltic content and hoping for the best.

“We ask our suppliers where they see this going, and they tell us they just don’t know.”

The bottom line is higher prices for end users, though consumer price increases won’t be as severe as those seen in raw material prices. Asphalt hot mix, for example, contains approximately five per cent asphalt cement, so final paving prices will rise proportionately.

“Most paving work is not discretionary,” says O’Connor. “But budgets are fixed. I expect we’ll start to see projects with a 20,000 tonne asphalt overlay cut back to save money.”

Real reason behind supply problems

Supply problems in the wake of Hurricane Katrina that damaged refinery capacity, Middle East political instability, and competition from growing economies like those of India and China are putting pressure on oil supplies and forcing up prices say industry experts.

“Almost every chemical based on petroleum products is going up and it’s been happening since before last season’s hurricanes,” says Bob Douglas, president of Camford Information Services, a company specializing in chemical industry analysis. “Unlike gasoline, most petroleum-based products will increase in price almost immediately, as oil price increases are announced.

“Canadian oil companies got into this self-made trap when they agreed to a 60-day flow through on pump price increases, but aside from keeping the government happy, there doesn’t seem to be much reason for it.”

The problem with oil prices has less to do with actual prices than with oil price stability, says Pierre Lemieux, associate professor, University of Quebec in Outaouais.

“We should not forget that the current price of $70 a barrel remains 30 per cent less than the $98.30 in current dollars ($39.50 at the time) that prevailed in April 1980, in the wake of the Iranian revolution, the hostage crisis and OPEC’s production cuts,” says Lemieux. “My guess, but it’s only an economist’s guess, is oil prices will go down in the next couple of years as supply constraints ease. Even if they don’t go down — in current dollars — to the $20 per barrel of the late 1990s, or the $40 of two years ago.”