Industry Market Trends

Smoother Road Ahead for Asphalt Industry

Nov 14, 2013

Since the economic crash had its roots in the housing market, all industries serving that sector were negatively affected. The asphalt industry was no exception. However, there are signs that a recovery is on the horizon for producers of asphalt and manufacturers of associated equipment. 

Despite the mitigating factors of government-funded highway projects, profit margins for asphalt companies contracted from 5.9 percent in 2008 to 4.6 percent this year. Many companies responded by cutting their workforces and delaying investments.

There is some good news for the industry, however. This year will mark the beginning of a return to steady growth as downstream construction markets recover, according to a new report on the asphalt manufacturing industry by IBISWorld. Revenue is expected to rise during the next five years thanks to sustained growth in both construction and road building.

The National Asphalt Pavement Association (NAPA) told IMT that it too predicts modest growth in asphalt paving tonnage next year, largely fueled by a small increase in the commercial sector and larger increases in the housing market.

Housing construction is one of the biggest factors that determine the fortunes of the asphalt industry. About 80 percent of the homes in the U.S. use asphalt shingles, so housing starts and remodeling -- often at the mercy of the availability of consumer credit -- will have a powerful effect on the asphalt industry.

These projections, of course, depend on the nation's continued economic recovery. They also depend on factors unique to the asphalt industry.

Tied to Petroleum

Asphalt is largely made of crushed stone, sand, or gravel. But what binds it all together is bitumen, a byproduct of petroleum production. Bitumen makes up between five and 10 percent of asphalt.

This means the fortunes of the asphalt industry are tied to the fluctuating fortunes of the petroleum industry. Researchers are exploring ways to replace bitumen with other materials, such as swine manure, algae, and other plant matter, but these efforts are still largely experimental, according to NAPA.

Industry Fragmentation

While most industries are affected by merger and acquisitions, this is generally not the case for the asphalt industry, which remains highly fragmented.  The top four producers account for only 10 percent of industry revenue. Since asphalt must be produced within 25 miles of where it will be used to avoid hardening, the industry is highly regionalized.

This also means that it's not a product that is well-suited for import or export: Canada accounts for 71 percent of U.S. asphalt exports because of its proximity to Ohio, Pennsylvania, and New York, all of which represent large U.S. production centers for asphalt.

Future Government Funding

There are currently a number of government sponsored projects on the table that could boost the need for asphalt. Government funding for highways is projected to increase during the next five years, but no project is a sure thing given the fiscal uncertainty caused by the sequester, the debate over the national debt, and the general legislative dysfunction in Congress.

Greener Asphalt

As with most industries, asphalt has seen some innovations and opportunities on the environmental front. One of the biggest drawbacks of asphalt is bitumen, which not only builds dependence on the petroleum industry into the supply chain, but also adds an odor that many end users find unpleasant. It can also represent a significant loss in "points" that count toward LEED certification of sustainable buildings.

Hayden Shipp, an IBISWorld analyst and author of the report, told IMT that low-odor asphalt represents a significant opportunity for asphalt manufacturers. In 2009, the first fully low-odor roofing system was introduced by Owens Corning.

"These systems address health concerns, and have caused asphalt roofs to grow in popularity for retailers, private hospital builders, and private schools," Shipp said. "This has not been a response to regulation, but rather growing concern about the health implications of building materials."

The industry has also invested more heavily in reclaimed asphalt pavement (RAP), which has environmental and economic benefits. RAP helps insulate asphalt manufacturers from volatile bitumen prices and meets criteria for reclaimed materials that can earn LEED credits.

Similarly, the industry has begun to offer recycled asphalt shingles (RAS) that can also lower costs and boost green credentials. The asphalt binder in these materials can be reactivated for use in new pavements, which can replace a significant percentage of the virgin binder needed for the mixes, said Dr. Audrey Copeland, NAPA's vice president for engineering, research, and technology.

"Nationally, producers are using about 19.6 percent RAP in asphalt mixes, although there is substantial regional variation in the percentage of RAP in mixes," she said. "In 2011, the use of RAP and RAS replaced about 21.2 million barrels of liquid asphalt binder and we see that number as continuing to increase."

While the economy remains fragile and asphalt companies await action on future federal transportation bills, many producers have found value in improving their operations.

"Asphalt contractors are looking at more cost-efficient production and operational processes, including the hauling and laydown construction process," Jay Hansen, NAPA's executive vice president told IMT.

Many players in the asphalt industry are understandably wary about hanging their future fortunes on the increasingly erratic whims of Congress. A combination of innovation and efficiency may be their best partners for the coming years.