June 8, 2009

Roadbuilding

No relief in sight for asphalt pricing

IAN HARVEY

correspondent

Crude oil prices may be holding near recent lows, but don’t expect that drop to translate into lower asphalt prices now or in the near future.

Eric Sigurdson, asphalt operations co-ordinator at Imperial Oil’s Nanticoke refinery, the only plant in Ontario making asphalt, says there’s not much in the way of long-term relief in anyone’s crystal ball.

North America generally and certainly Ontario are short on being able to supply the demand for asphalt cement, said Sigurdson who first made the his predictions about the asphalt market to a glum-faced meeting of the Ontario Hot Mix Producers Association late last year.

Ontario alone is 20,000 barrels a day short of demand for asphalt now and with the switch to higher margin products by the refinery, there’s little chance that shortage of supply will improve.

“Refineries now are investing in coker units which will give them the choice as to how they process a barrel of crude oil,” he said. The result is an overall trend to gas and diesel, and away from asphalt.

Also, demand for No. 6 bunker oil which is a parallel product to asphalt and traditionally used in ships and generators, is dropping due to new environmental regulations, shrinking the market and making it less attractive.

At the same time Canada continues to be the number one exporter of crude to the U.S. further depleting supplies for the domestic market.

The margins for gasoline and diesel fuel remain much higher and to pay back the $1 billion investment in each coker, refineries are expected to shift production high-demand products.

“This means that asphalt is going to have to compete against those products in terms of price,” he said. “And as a result it will much more closely follow the price of crude, as gas and diesel does now.”

Each barrel of oil can be cracked to produce 70 per cent by volume of gas or diesel with the other 30 per cent suitable for asphalt.

According to the Ministry of Transportation Ontario Index, asphalt hit an all time high of $932 a tonne in August 2008, up from $435.90 in January 2008.

Through the spring and summer it rose with crude oil prices before peaking in August and dropping to $739 in November, consistent with seasonal demand. It has remained at $739 since and this season’s pricing is being carefully watched.

However, it has not followed the same drop as gasoline which has gone from a high of about $1.50 a litre to about 95 cents a litre at the pumps and the reason, says Sigurdson, is that it is being priced against those products.

Refiners get about 98 cents for a litre of gas or diesel compared to 28 cents for asphalt, he says, so it’s a pretty easy choice.

Traditionally, he said, a plant was either set up for asphalt or other products. However, with the effects from Hurricane Katrina exposing the shortage of refineries able to process gas and diesel for North America and resulting in the spike of pump prices, there’s been a flurry of investment in upgrades.

Installing cokers allows the plant to choose what it will produce and in order to pay back the investment in less than five years — an amortization every other industrial sector finds shockingly swift — they’ll likely go for the product with the highest profit margin and that’s gas and diesel, the so called “clean products.”

While asphalt cement only makes up about five per cent of the paving mix, its price is an important component in bidding.

Many contractors have been using the index as a guide but some municipalities don’t accept it as the price arbitrator.

Mike O’Connor of the OHMPA said the MTO price index actually protects municipalities in the event of a drop, as seen since August.

“When the price goes down, they get money back. Unfortunately when the price goes up they have to go back to council and ask for another $100,000 which doesn’t make for a happy time,” he said.

Despite the gloomy outlook O’Connor said it’s still not clear where Ontario asphalt prices are heading.

“What we want really is stability and predictability,” he said.

“We’re not really getting that so I’m a little disappointed. But we’re kidding ourselves if we think it’s heading back to $500 a tonne.”

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