From Tech Transfer Newsletter, Fall 2005 » printer-friendly

Record High Asphalt Pricing:
What Does It Mean For Your Project?

Graph: Asphalt Price per Ton F O B Refinery rises from $116 in 1998 to
  $200 in 2004, and from $195 in July 2005 to $338 in October 2005

By Scott Dmytrow,
Marketing Manager
Telfer Oil Company

In the 3 months from July to October, the price of liquid asphalt, a petroleum product, jumped 73% from $195 per ton to $338 per ton in California. In the 32 days from July 31st to Sept 1st alone, the price increased 54% from $195 to $300 per ton. These are the highest prices ever seen in the state for liquid asphalt. Since September, the price has continued to rise and is currently near $338 per ton.

The following two examples illustrate the impact that these increases can have on typical Hot Mix Asphalt and Slurry Seal projects in California.

A Typical Hot Mix Project

If we assume that the average hot mix asphalt in use on a City or County overlay is 5.5% liquid asphalt, then the $143 increase realized from July to September correlates to a $7.87 per ton increase in raw materials. This cost would be passed through the hot mix asphalt supplier to the general contractor that bid and won the contract for your project. This means that a contractor placing 1500 tons per day on a project has just been hit with an additional charge of $11,805 per day. Taking that one step further, a 2" overlay just increased in price by approximately $0.90 per square yard.

A Typical Slurry Seal Project

On slurry seal work the impact is also keenly felt. When producing an emulsion for this type of work the finished emulsion is approx 60% asphalt cement. Therefore, each ton of emulsion purchased by a slurry seal contractor for this type of work has increased $86 per ton. On a Type II Slurry Seal with an application rate of 15 lbs per square yard, the increase in cost amounts to approximately $0.10 per square yard.

What Will Happen Next?

Soaring prices have been driven by increased crude oil pricing, an emergency at one of the major asphalt producing facilities here in California, and shortages due to high demand statewide. In addition, the Gulf Coast refining facilities were struck by two major hurricanes in as many months.

No one knows what will happen next price-wise, but we do know that demand remains high while California liquid asphalt inventories remain low. We also know that rising and even fluctuating prices can have a significant impact on projects currently bidding or in production.

With that said, the question is now: how can you protect your agency from future price fluctuations?

How to Protect Your Agency from Fluctuating Prices

Caltrans is now including Standard Special Provisions (SSPs) for price escalation/de-escalation in contracts that use asphalt. In a recent memorandum issued to all Caltrans District Directors, Caltrans states:

"With the use of the special provisions that provide a compensation adjustment for price index fluctuations, the Department is taking on additional risk and cost if paving asphalt refined from crude oil increases in price. However, the Department will also benefit by use of these special provisions when the California Statewide Paving Asphalt Price Index decreases by more than 10 percent from the month when a project bid was opened, thereby receiving a credit from contractors.

Because of the current market conditions for paving asphalt, contractors that perform maintenance treatment type work also have a very high risk for increased paving asphalt costs. This market environment has caused the average number of bidders to drop significantly and bid prices to be higher than the actual cost increases, as the contractors include a risk premium in their bid price. To counter paying for risk premiums, the Division of Construction, in conjunction with the Division of Maintenance, has developed three new SSPs (S5-233, S5-234 & S5-235) that allow for compensation adjustments for price index fluctuations for paving asphalt used in slurry seals and seal coats."

With these SSPs, which could also be incorporated by local agencies, the risk for the contractors and material producers is limited so bids won't need to be inflated in anticipation of rising prices. In turn, since bids will be more competitive and realistic, your limited funds available for maintenance will be used in the most cost effective manner - for time and materials.

A Final Note About Rising Prices

Lastly, it should be noted that while the price of liquid asphalt has a major affect on paving contracts, there are additional factors that will likely contribute to increased pricing on projects. Energy costs and transportation costs have escalated in some cases almost as dramatically as asphalt prices. These are additional costs above and beyond the asphalt price increases noted above.

The bottom line is that as you plan for next season and put your estimates together, be prepared for rising prices.