Energy Costs and Asphalt By Nasreen Tasker Editor, Argus Asphalt Report Outline Factors that impact supply/demand fundamentals for asphalt Asphalt pricing methods Crude and asphalt graphs – Economics and sustainability Changes occurring in the market – Impact on the future A unique product Supply/demand fundamentals affected by several variables Variables in turn affect asphalt prices Factors impacting demand for asphalt Government road spending Economy – Private demand growth – Housing development Natural disasters Factors impacting supply of asphalt Refinery economics for asphalt Alternative economics – HSFO and coker economics Crude oil prices and light-heavy crude price spreads Transportation options and availability Adoption of new grades – Multiple grades in one market Asphalt pricing methods Wholesale Prices – Spot deals – Term deals – Winter-fill deals Asphalt Pricing Methods Retail Pricing – Price date-of-shipment – Fixed monthly prices – Fixed prices for a period of time – Indexed pricing – Not-to-exceed pricing Asphalt prices can be disconnected from the international crude market Treated as a byproduct by integrated refiners – Have to move out inventory Retail pricing can be slow to respond Weak demand Changing business environment Integrated refiners – Have to justify asphalt as a business unit Alternative is upgrading Specialized asphalt refiners – Not able to breakeven Difficulty in pricing asphalt Factors affecting supply/demand are unpredictable No futures market Difficult to hedge Historical resistance to changing pricing techniques – Change has begun All asphalt prices are from the Argus Asphalt Report WTI 100 USD/bl 80 60 40 20 0 Feb-00 Aug-01 Mar-03 Sep-04 Apr-06 Nov-07 Alberta Par vs Lloyd Blend 100 USD/bl 80 Alberta Par Lloyd Blend 60 40 20 0 Feb-00 Aug-01 Mar-03 Sep-04 Apr-06 Nov-07 Light Canadian crude vs. Midwest barge 550 USD/st 450 Alberta Par Midw barge 350 250 150 50 Feb-00 Aug-01 Mar-03 Sep-04 Apr-06 Nov-07 Heavy Canadian crude vs. Midwest barge 350 300 Lloyd Blend Midw barge USD/st 250 200 150 100 50 Feb-00 Aug-01 Mar-03 Sep-04 Apr-06 Nov-07 Midwest barge vs Midwest rack 400 350 Midwest barge Chicago Rack USD/st 300 250 200 150 100 50 0 Aug-98 Jun-00 Apr-02 Feb-04 Jan-06 Nov-07 East vs. West US Gulf coast 400 350 USD/st 300 W. USGC barge E. USGC barge 250 200 150 100 50 0 Jul-98 May-00 Mar-02 Feb-04 Dec-05 Nov-07 Differential between East and West GC 30 25 20 USD/st 15 10 5 0 -5 -10 -15 Jul-98 May-00 Mar-02 Feb-04 Dec-05 Nov-07 Maya economics in the Gulf coast 400 350 Maya breakeven East USGC barge USD/st 300 250 200 150 100 50 Dec-02 Nov-03 Nov-04 Nov-05 Nov-06 Nov-07 Gulf Coast barge vs. HSFO prices 500 USD/st 400 E. USGC barge Gulf coast HSFO prices 300 200 100 0 Jul-98 May-00 Mar-02 Feb-04 Dec-05 Nov-07 East Gulf barge vs. HSFO Alternative value 400 350 E. USGC barge HSFO Alternative Gulf coast USD/st 300 250 200 150 100 50 0 Jul-98 May-00 Mar-02 Feb-04 Dec-05 Nov-07 Gulf Coast coker value vs wholesale bitumen 500 Gulf coast wholesale bitumen Coker value USD/st 400 300 200 100 0 Sep-01 Nov-02 Jan-04 Mar-05 May-06 Aug-07 Asphalt Alberta 600 500 USD/st 400 300 200 100 0 Jun-98 Apr-00 Mar-02 Jan-04 Dec-05 Nov-07 Eastern Canada retail prices 450 400 Quebec Ontario Aug-01 Mar-03 USD/st 350 300 250 200 150 100 50 Feb-00 Sep-04 Apr-06 Nov-07 Things to watch in the future Reduction in asphalt production – Coker installations Things to watch in the future (2) Asphalt grades – Growing number of grades in an individual market – More complex grades being adopted Asphalt demand will vary – Global demand falls Asian demand relatively strong US demand weak – Higher asphalt prices – Set country budgets Net impact on asphalt market Regional imbalances in asphalt supply/demand fundamentals – New patterns of trade Asphalt viewed as a specialty product, rather than as a commodity Reflected in asphalt prices – More price sensitivity to refinery shutdowns – Volatility replaces historical price consistency Feast or famine Asphalt Pricing Methods Retail pricing In the past – Price date-of-shipment – Fixed monthly prices – Fixed prices for a period of time – Indexed pricing – Not-to-exceed pricing Future – Price date-of-shipment – Fixed monthly prices – Fixed prices for a period of time – Indexed pricing – Not-to-exceed pricing Asphalt pricing methods Wholesale Prices Current – Spot deals – Term deals – Winter-fill deals Future – Spot deals – Term deals Longer term deals are risky – Winter-fill deals Fewer sources Change is here Rate and timing of change will differ for various regions Potential domino effect No turning back Market participants need to be prepared – Develop relationships – Stay informed The End