All eyes are on asphalt prices this summer as highway and paving contractors vie for dwindling opportunities amid rising materials costs. Indexes for May, which show an overall upward trend for paving asphalt, diesel fuel and paint for highway striping, are a cause for concern for contractors who fear a repeat of the price-hike wallop of 2008.
“Prices look relatively stable now, but it was the same in 2008 before they skyrocketed—and we never saw it coming,” says Richard E. Dinkela, owner of St. Louis-based Creve Coeur Paving LLC. “We’re trying to be more careful, to be educated on jobs before we start them so there are no surprises.”
In May, paving asphalt prices rose nationally to $246 per ton from April’s $238 per ton, which represents a 35% increase from last summer; prices for structural steel climbed to $202 per ton from $195 per ton, a 32% increase on the year, and cement showed a modest decline to $194 per ton from $197 per ton, according to Ken Simonson, chief economist for Washington, D.C.-based Associated General Contractors of America, citing U.S. Bureau of Labor Statistics’ producer price indexes released in mid-June.
Waning commercial demand and the clamor for federally stimulated public projects suggest, Simonson says, “it’s not only materials prices but just finding work that is a problem.” Increases in asphalt and steel prices are being partly balanced by falling cement prices. Thus, “Overall prices are relatively well-behaved now, but there is upward pressure in asphalt that many are keeping an eye on,” says Simonson.
Refugees from sluggish commercial markets are swarming to public-sector projects even when competition “keeps profit margins so low that contractors are practically working for free just to keep work going,” says Dinkela. His $2-million-per-year paving company has weathered the economic storm with small private jobs in St. Louis, where hot-mix asphalt prices are hovering around $46 to $49 per ton. “In 2008, prices rose to about $58 per ton. It’s what we fear again this year,” Dinkela adds.
There is some uncertainty among analysts and contractors about the increases. Anirban Basu, an economist at Arlington, Va.-based Associated Builders and Contractors, says, “The basic principals of economics would dictate that construction materials prices shouldn’t be rising. Some of the increases are merely statistical, since a year ago commodity prices were at remarkably low levels. Nonetheless, producer prices presently are demonstrating a momentum that is at least somewhat inconsistent with broader economic performance.” The reasons for this include the fact that more money is being invested in commodities by global traders who are looking to diminish their exposure to both equity and bonds, he says.
For state departments of transportation flush with federal stimulus funds this summer, the vagaries of road materials prices are less worrisome as the agencies begin implementing full programs and attracting plenty of bidders for projects.
“Asphalt is following a usual Minnesota trend, with increases of about 11% per year,” says Mary Lacho, estimator at the Minnesota Dept. of Transportation. The prices “vary depending on oil prices, competition, supplier inventory and proximity to the project,” Lacho says.
“The volatility of the oil market has been an issue and drastically affects total project cost,” says Duane Manning, assistant regional construction supervisor at the Tennessee Dept. of Transportation. Manning points to contract clauses freeing contractors from runaway prices during a project as key to securing bidders. “Most of our construction contracts adhere to the original plan quantities, so contractors can place orders for materials at the beginning of the contract to lock in their pricing,” Manning says.
“We’re bending over backward to bring in bidders,” says Lewis Cannon, construction administrator at the Connecticut Dept. of Transportation. “We offer an asphalt adjustment clause in contracts, and we reduce bid risk wherever possible.” With 114 projects for the season, he says, “we have several megaprojects in the mix and are getting pretty good bids in. Prices look relatively stable.”
Pave When Prices Are Best
Prices for liquid asphalt in Pennsylvania climbed to about $490 per ton this June from $390 per ton last June, says Scott Christie, deputy secretary of highway administration at the Pennsylvania Dept. of Transportation. “We’re tracking prices closely to do paving when prices are best,” says Christie, who noted an 80% increase in highway materials costs between 2003 to 2008. “That was rolled back only 7% this year, so any ongoing price increases are a challenge.” Rebar costs are up to about $1.50 per lb from $1.25 per lb last month, says Christie.
The clamor for state projects is attracting so many bidders to Missouri DOT’s projects that highway construction costs have decreased overall this year, says Kenneth Voss, bidding and contracts services engineer at Missouri Dept. of Transportation. “Cost of all projects, regardless of materials, are down significantly because of competition as a driving factor for lower costs,” says Voss. “The market for commercial, city and county work is down significantly. We’re seeing especially high competition on bridge projects because some vertical construction companies in this region are getting into the bridge- building industry.” Overall, the state “has seen the number of bidders per project increase from about five bidders per project to six or more,” Voss notes.
The Show Me State’s highway program may be an oasis for contractors amid dried-up commercial markets, but when federal stimulus funds are gone, “we have concerns that a long recession in the transportation construction [sector] could lead to the loss of a lot of contractors in the short term,” Voss says. “This would result in much less competition and higher prices in the future.”
Contractors and DOTs concurrently are dealing with a shortage of highway striping materials this summer because of a key plant shutdown last spring and Dow Chemical Co.’s declared force majeure of key chemicals required in waterborne road paint. As a result, estimators report price increases of 25% or more for highway striping materials.
Shortage of Reflective Paint
Paint producers announced last month a shortage of methyl methacrylate (MMA), a chemical that makes road stripes reflective. Dow Chemical Co., the largest producer in the nation of MMA, blames the shortage on the temporary closure of a Texas plant last spring. “We brought the plant back up over a week ago and are now running at full production rates,” a Dow Chemical spokesperson said in a June press release.
According to the American Association of State Highway and Transportation Officials, state DOTs spend about $2 billion per year on paint and striping materials programs; while the shortage reflects a strong demand, it may also prompt prices to remain aloft.
Typically priced around $7 per gallon, contractors fear the paint shortage will raise prices considerably. While DOTs routinely offer contract escalation clauses for asphalt and concrete, they typically do not include escalation clauses for paint.
Associated General Contractors issued a warning to contractors about supplies of titanium dioxide—a key material in white striping—dwindling as a result of pared-down production in a slow economy. Last month, AGC also issued a statement to state and federal DOTs asking them not to penalize contractors who are unable to finish projects because of supply and price problems related to titanium dioxide and MMA.