- Asphalt demand seen growing in 2016 and beyond
- Refiners investing to boost production
- Gasoline tax funding problematic as consumption drops
Asphalt will be a winner regardless of whether a Democrat or Republican is elected as the next US president.
In the midst of the contentious nature of the recent presidential debates, one thing both Hillary Clinton and Donald Trump agree on is that US infrastructure is crumbling and money needs to be spent to shore it up.
Building trade organizations, including asphalt producers, were quick to offer a helping hand to both candidates, calling on both parties to include long-term, sustainable funding measures to ensure future improvements will be made.
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"We believe that an infrastructure package needs to include, as a foundation, additional sustainable revenue to ensure the permanent solvency of the Highway Trust Fund," said a recent letter sent to both candidates from the Associated General Contractors of America, which is comprised of 34 business, transportation, labor and travel trade groups.
Long-term federal funding is key for asphalt demand, as money for paving and patching potholes trickles down from the US government to states and municipalities across the land.
And asphalt demand is closely tied to long-term funding, as seen by the bump up late last year and earlier this year after the passage of the federal FAST Act, which provided five years of transportation infrastructure funding instead of two.
"Anecdotally, our members have said they have been very busy this year. We think that is tied to stable, multi-year certainty of funding," said Carter Ross, spokesman for the National Pavement Organization which represents the asphalt industry.
The passage in December 2015 of the $305 billion bill to extend federal transportation spending for five years, was the first time since 2005 federal funding for roads had a tenure longer than two years.
This longer duration assured states that money for longer term projects would be available, allowing them to buy more asphalt to fill potholes and refill road surfaces.
Despite the last-minute passage of the bill, known as Fixing America's Surface Transportation Act, or FAST Act, asphalt demand in 2015 rose to 343,000 b/d, 16,000 b/d higher than 2014. This higher demand was in anticipation of certainty the bill would eventually be passed, as neither political party wanted to take responsibility for a funding lapse.
The 2013 Report Card for America's Infrastructure, the most recent of the reports from the American Society of Civil Engineers on all aspects of the nation's infrastructure, gives all US roads a D+ rating, indicating there is plenty of room for asphalt demand growth if the funding is there.
Total US asphalt and road oil inventories fell 400,000 barrels to 21.3 million barrels, Energy Information Administration data for the week ended October 14 showed.
While these stocks are 13% higher than the five-year average of 18.4 million barrels for the week, demand trends from the key summer paving season have also been stronger.
Most recent government demand figures are for July when much of the paving work is underway. This year's July demand was 475,000 b/d, about 2% higher than the five-year July monthly average of 465,600 b/d.
Strong demand is also supported by a lower price. Third-quarter Mid-Atlantic asphalt rack prices averaged $255/ton, or $46.36/b, compared with the $396/ton, or $72.09/b, average in 2015, according to Platts price assessment data.
New York and Pennsylvania, two of the nation's largest users of asphalt nationwide, are Mid-Atlantic states. Last Friday, Platts assessed prices for the Mid-Atlantic rack at $275/ton, or $50/b, last week, up $10/ton or $1.81/b from the week earlier as the good weather has kept roadwork ongoing.
The supply/balance is tighter too despite higher production, higher imports and waning exports.
July's production of 12.8 million barrels was 4% higher than the five-year average of 12.2 million barrels, EIA data showed, as imports rose 17% above the five-year average of 1.02 million barrels, reaching 1.23 million barrels, or 40,000 b/d.
Exports in July of 598,000 barrels, or 19,000 b/d, were 27% below the month's five-year average of 815,000 barrels, or 26,000 b/d, EIA data showed.
Asphalt makers like HollyFrontier and Western Refining noted continued strength in asphalt markets would benefit third quarter results, as they discussed the positive impact of asphalt on second quarter results calls in late July and early August.
Some refiners have also increased capital spending in a tight budget environment to increase netbacks from asphalt.
HollyFrontier recently added a heavy oil rack in Denver to take asphalt from its 47,000 b/d Cheyenne, Wyoming, refinery, where recent upgrades added a hydrogen plant allowing it to run 80% heavy Canadian crude to make more asphalt and heavy products.
"The Denver market's a good market. We've invested in a heavy oil rack that allows us to sell more bottom-of-the-barrel asphalt and gas oil type of products," CEO George Damaris said in August during the company's second-quarter results call.
Tied to gasoline tax
Clinton is standing by her five-year plan to increase federal infrastructure investment by $275 billion. Introduced in November 2015, the Democratic candidate sees $250 billion of direct public investment, but has said her program would go further than the FAST Act.
She has said would create a national infrastructure bank to leverage $25 billion in federal funds, lower states' borrowing costs, and begin upgrading 25 of the most costly freight bottlenecks.
Currently, the Federal Highway Administration estimates that $170 billion in capital spending would be needed annually to significantly improve conditions and performance.
Trump, who comes from a building trades background, said Clinton's numbers to rebuild are about a fraction of what is needed.
"I would say at least double her numbers, and you're going to really need more than that," the Republican candidate told Fox News an interview in August.
Even though the candidates have differing ideas on how to fund infrastructure rejuvenation, experts say one thing worth considering is untethering the funding from the gasoline tax.
About $30 billion a year is distributed to states and down to municipalities from the 18.4 cents/gal tax, with states adding on their own taxes to this base level.
The sustainability of using this federal tax to fund ongoing road spending is being questioned, as the amount of gasoline consumed is expected be taper off as more efficient car engines and increased renewable fuel mandates kick in.
"Long term funding is certainly desirable. The Federal Highway Trust Fund was designed to provide just that, but conflicting federal policies have disrupted its stability," said infrastructure expert Henry Petroski in a recent email.
Petroski is a professor of both civil engineering and history at Duke University. He also recently published a book "The Road Taken: The History and Future of America's Infrastructure".
"The government has encouraged that adoption of electric, hybrid, and other forms of vehicles that use less or no gasoline or diesel. These vehicles thus pay lower fuel taxes, the source of revenue for the trust fund. At the same time, these vehicles contribute to the wear and tear on our roads and bridges. These are conflicting policies," he added.
Petroski notes in his book that capital outlays for infrastructure projects have in the past come from entrepreneurs and corporations and have been repaid with interest. He also said that public and private partnerships have also worked well in the past and can be a "godsend" to cash-strapped municipalities.
Nevertheless, it seems both candidates are committed to spending to improve infrastructure, differing on how the funding be structured. And this bodes well for the pent-up demand for asphalt and large asphalt makers like Marathon Petroleum and Alon USA.
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