The asphalt market in the US is seeing, like all commodities markets, an impact to demand from Covid-19. How will the asphalt market respond and what will the market look like in the future?
Join Maria Ahmad, Editor of Argus Americas Asphalt and Ozzy Speranza, Senior Consultant for Argus Consulting Services focused on asphalt as they discuss Covid-19 impacts to the US asphalt market.
Upcoming webinar: Asphalt market: Navigating the Covid-19 waters
Given the unprecedented situation caused by the coronavirus pandemic, we expect to see significant further reductions in refined product supply and demand, with some US refineries reducing rates by 15-20pc. On top of these reduced refinery run rates, Senior Consultant Osvaldo Speranza aims to examine the US asphalt market and review the key variables, including the US’ asphalt imports from Europe and asphalt exports from the US Gulf coast to Latin America.
April 22, 2020 at 2:00pm CST
TranscriptMaria: Hello, and welcome to our podcast. So today we wanna give an overview on the impacts on the America's asphalt market from COVID-19 and other market disruptors. I'm Maria Ahmad, I'm the editor of Americas Asphalt here at Argus, and with me today is Ozzy Speranza, a senior consultant for Argus Consulting Services focused on asphalt markets. So to start with, let's talk about how road construction and in turn the asphalt industry and asphalt demand has been affected by the coronavirus pandemic and these various shelter in place orders. I mean, so far we haven't seen the type of broad-scale work stoppages in the U.S. and Canada that we've seen in Europe, although maybe that could change as everyone hunkers down at home for longer and crew members, in some cases, forego work in the crisis. And then you have fewer vehicles on the road, which should also theoretically allow for faster progress on projects already underway. I mean, we had Pennsylvania's Department of Transportation order a shutdown of non-essential businesses back in March, and that included road construction, but other states, and countries, and provinces have for the most part deemed roadwork essential. So, Ozzy, from your perspective, what kind of short-term or long-term outlook are we seeing here? There's obviously a huge amount of uncertainty at the moment. But, you know, how much will business continue as normal?
Ozzy: Thanks, Maria. Yeah, and I agree with you, the majority of the U.S. markets have largely reopened, especially now that we're going into the spring paving season. Again, except for some pockets like in, you mentioned in the Pennsylvania, New York, New Jersey area, but for the rest of the country, the road work is pretty healthy. Maybe we may see some private and commercial work to slow down. But again, the majority of the country should go ahead with the road work. Now what we see on average, the backlog currently stands at roughly nine months. So that is implying that many contractors are waiting for a good paving season. And with COVID-19 effect on the economy, an elevated backlog is especially important. It's a good indicator that contractors will remain busy for the months to come. Now the question is, most likely what price will be in the market for those works and the fact that the U.S. infrastructure is about 30 years behind some global benchmarks so the question is, is this $2 trillion infrastructure that the government is pushing, when it will come into place? How will it be financed? What will be the percentage coming from the federal level versus the state or local municipalities and how the work is going to be selected. So those are some of the major questions that contracting companies have in mind for the rest of 2020 and part of 2021.
Maria: Yes. And I think another large question going forward will also just be how much revenue is going to be lost from the gasoline tax, just because there are fewer people driving right now because of the virus. So, there's obviously lower tax dollars also available for road funding. And you know, these low revenues were also a concern prior to the outbreak and with a lot of states heavily dependent on state funding for roads and even federal funding, which primarily comes from the gasoline tax, this could also be an issue going forward.
Osvaldo: That's a very interesting point, Maria. And I just make a comparison between what happening right now, the money that is coming from the low gasoline demand through taxes compared with the funds that the Department of Transportation just released for the year 2017 in which two-thirds of the infrastructure fund was coming out of the state and local government, mostly through that gasoline tax and only one-third of the money was covered by the federal government. So, again, good point. Big question mark around how the infrastructure funds are gonna be supported by the state and local government if we see gasoline demand being down almost 45pc, one of the lowest in history.
Maria: Yes. Exactly.
Osvaldo: So, let me ask you something. What do you see the issues around the infrastructure funds that are going to expire in September of this year, 2020?
Maria: Yeah. So, that's another big question mark in the industry. So, it's not just the Fixing America's Surface Transportation Act or the FAST Act which is that to expire this fall. Last time that was reauthorized, I think it was a $300-billion reauthorization bill and that ends this fall. But we also have a question mark surrounding an infrastructure bill. So, U.S. President, Donald Trump earlier this month mentioned that...again, we all know it was a major campaign pledge. And the coronavirus pandemic is actually reviving hopes that this infrastructure package which current figures put at $2 trillion might again be at the forefront of lawmakers' agenda. But we'll see what happens as things unfold in the coming weeks.
Osvaldo: Yeah. And the push for the government on this big infrastructure package is that...obviously, the country is going into recession, we see unemployment rates skyrocketing to almost 60 million people fighting for unemployment total until now. And so, the government is pushing for not only fiscal and monetary actions but also through these big infrastructure projects funds that will provide obviously a lot of employment for people all over the country. And the fact that interest rates are very, very low in some cases or even zero, so the intent of the government is to get money from the private sector at very low rates or even to zero rates to finance this $2 trillion infrastructure project.
Maria: Yeah. Those are interesting points. And I mean, all of that is gonna affect the demand side of the equation from this year, but shifting away a little bit I guess towards pricing behavior, it's really been impacted, well, on both sides this year on the supply and demand side. So, we're seeing, you know, the twin forces of the crude oil price crash. We've seen oil prices come down to, you know, $20 a barrel and then at the same time we're seeing a lot of uncertainty and that's been weighing on asphalt prices. What do you see in terms of pricing behavior going forward?
Osvaldo: Now, in order to talk about asphalt pricing, we first need to talk about the underlying commodity, which is crude. Again, as you mentioned, crude is trading at the moment around $23 per barrel, WTI, heavy crude, Western Canadian Select in Hardisty is trading at single digits around $7 to $8 per barrel. So, that has obviously put a lot of stress on crude prices. Now, the issue here is not so much on the supply side because the market was already oversupplied before coming into COVID-19. So, the issue is around demand and not just demand for crude but also demand for refined products like gasoline and jet fuel. As you mentioned before, one of the first impacts of COVID-19 was that the airlines, they have to severely reduce the number of flights. They parked a lot of airplanes at airports all over the country and even all over the world. We see jet fuel demand dropping almost 50pc and gasoline demand dropping by around 45pc. And that will obviously put a big impact on refinery economics. So, in my view is that what we see at the moment that the U.S. refinery complex are reducing the run rates at significant levels. We are seeing places between 25pc and 30pc. The latest number that we got is that on average, the refinery is running at around 75.6pc of capacity, which is very, very low. So, that will reduce all refined production, not just gasoline, jet fuel, but also residual fuel like fuel oil and asphalt.
Maria: And there's also the risk if we don't see a demand drop-off on asphalt that continued or prolonged run cuts among refineries could actually contribute to a shortage or tightness in the coming months.
Osvaldo: Yes. And that's the right way to think about these fundamentals for asphalt. Now, the other variable to consider is the level of the inventories. We see that inventory levels for fuel oil and also asphalt is the highest. I checked the asphalt inventories and I think they are the highest since late 2000. So, we have a lot of inventory, not only at the refinery levels but mostly at the terminal levels. And so, high inventory and good demand, the question is how long those high inventories will cope with the demand and that question will be answered during the summertime and that will provide some support for the low price environment on asphalt prices on the wholesale level, both at the U.S. Gulf Coast and the mid-continent.
Maria: That's a good point. I mean, we've already seen Gulf Coast asphalt prices, they've fallen nearly $150. A short ton year to date, they started the year at $325 and we're at $175 a short ton last Friday. But we haven't seen really increased number of exports out of the Gulf Coast on some other commodity markets. We've seen lower prices actually stoke demand elsewhere. We've seen that on the U.S. West Coast and the Gulf Coast for gasoline and distillates and other refined products markets. But so far, that hasn't really hit asphalt. And part of this could be just the natural slow down in demand that you see in the Southern hemisphere as the region shifts towards winter. But what are you seeing in terms of the nature or the shifting of product inflows and exports because of the virus?
Osvaldo: Yes, yes. So, good point, Maria. Exports and imports...from the export side, the majority of the exports are going out by water from the U.S. Gulf Coast and they're going into Latin America. And almost 50pc of those exports going into Mexico. Now, COVID-19 is putting a big impact all over the world, but mostly to more fragile economies like the ones in Latin America, they are heavily dependent on natural resources. Big part of the country revenue is coming from the sale of oil and with oil been trading in the low 20s, that means that these country revenues are being heavily impacted. So, less money coming in but also the money that they have to spend, they have to be redirected into more social programs to combat COVID-19. And that's been at least the effect on the currency exchange. The dollar being stronger against other commodities, that means that whatever imports that they need to pay in U.S. dollars will be more expensive on a relatively basis. Now, on the other hand, you have product coming in into the East Coast mostly from Canada, which is the major exporter of asphalt into the U.S. Northeast, but then the refining that will come from Europe mostly from the Mediterranean, two of the major asphalt exporters are Italy and Spain. And by the way, those two countries are the epicenter of COVID-19 in Europe. So, what I see is that less exports going into Latin America, a bit more imports coming in after the COVID-19 passes. So, that will have an impact on the amount of backfill of asphalt that it will come from the mid-continent.
Maria: Thanks, Ozzie, and thank you all for listening. We hope to be back again with you soon with another update on refined product markets. To hear more details on the impact of asphalt market, check out Ozzie's in-depth webinar on April 22nd, Asphalt Market, Navigating the COVID-19 Waters. Register at www.argusmedia.com/webinars.