The Asphalt Story: North America

In the second of a three-part podcast series focused on global asphalt/bitumen markets, we'll take a deep dive into specific regional market impacts as reflected in the Argus Asphalt Annual 2022.

In the first episode we focused on the European and African bitumen markets. Next, we'll move on to North America. Argus market experts Juan Castillo and Maria Ahmed provide a breakdown on the expected growth in the coming years and provide insight into the market impacts from the Infrastructure Investment and Jobs Act.

• Learn more about the Argus Asphalt Annual 2022
• Explore Argus' global bitumen/asphalt coverage
• Listen to the first episode in the Asphalt Story mini-series

Transcript

[Juan]: Hello, and welcome to our podcast, "The Asphalt Story." In this series, we will be discussing the key highlights of the global asphalt market as presented in Argus' "Asphalt Annual 2022." In this episode, we want to give an overview of the North American Asphalt market and the impact from the Infrastructure Investment and Jobs Act and other market disruptors. "The Asphalt Story" is brought to you by "Argus Media," a leading independent provider of energy and commodity information. I am Juan Castillo, a consultant for "Argus Consulting Services" in Houston, and with me today is Maria Ahmad, asphalt editor, covering the North American market.

So, in November 2021, the Infrastructure Investment and Jobs Act was passed into law in the U.S., providing $1.2 trillion to support core infrastructure such as rails, ports, airports, streets, and highways, with $110 billion in new spend for roads and bridges that would be distributed to the state and county-level governments over the next five years. This investment comes as a relief to the Highway Trust Fund to support the repair and modernization of over 15,000 bridges and 20,000 miles of highways across the country, put into perspective the IIJA grants around $60 billion in federal funding per year, which represents a 30% increase over current baseline spend granted from other allocations.

Now, we should be reminded that federal funding has historically accounted for just 25% of annual spend on highways and bridges and that the extent to which these funds will be readily available for the state and local governments is yet to be seen. Still, asphalt demand in the U.S. is driven by government-funded roads, and we expect to see an overhaul of the country's core transportation infrastructure, which will boost asphalt consumption through 2026. At the same time, we have to recognize that we are living through extraordinary times in the aftermath of the COVID-19 pandemic and the ongoing conflict in Eastern Europe, which the markets are being quick to reflect.

On the production side, for example, as lockdown restrictions are being lifted and life moves into the new normality, U.S. refiners are prioritizing the production of gasoline along with the start of the summer driving season, also supported by record-high refining margins that disincentivize asphalt production. Right now, the spread between asphalt and Argus' coker yield - which represents the value of a barrel of asphalt after being processed in a delayed coking unit, stands at 10% of asphalt price in the U.S. Gulf Coast and mid-continent, while a couple of weeks ago, it was barely 3%. But earlier in March, for example, this differential got to be as high as 25% of asphalt price, favoring the production of lighter products.

So, Maria, following the expectations borne by the IIJA, and what we are seeing in today's markets, what is your appreciation of the asphalt production in the U.S.?

[Maria]: Right. Thank you, Juan. This bill marked a really significant victory for the asphalt industry. As you mentioned, most U.S. asphalt demand relies on federal funding. Even though this bill didn't address the underlying issue of the solvency of the Highway Trust Fund which is primarily funded via the federal gasoline tax it was a significant increase over previous funding levels. It would be natural to assume that the higher funding levels will also lead to higher U.S. production as, you know, refiners are anticipating more demand, but the current refining picture in the U.S. is a little bit more complicated than that. Following the onset of the COVID-19 pandemic, we've seen an acceleration of refinery closures and rationalization in the Americas, similar to the trend we've seen globally because motor fuel consumption dropped because of pandemic lockdowns. We also saw many refineries shift towards renewables fuels production mostly in the western half of the U.S. And of course, U.S. asphalt refineries weren't spared from this restructuring, and so asphalt refining capacity and subsequently production over the past several years has been impacted as a result.

One of the refineries was Holly Frontier, they started shutting down their 52,000 barrel a day refinery in Cheyenne, Wyoming, back in August 2020, ahead of the conversion of that refinery to renewable diesel output. Calumet in Great Falls, Montana has plans to do the same this year, it will be converting its 25,000 barrel a day refinery to renewable diesel production starting this September. That's estimated to make around 600,000 tons of asphalt a year, the refinery is actually planning to power down in August most likely for a month-long turnaround associated with the conversion. And then we have PBF refinery back on the East Coast. It shut several units at its Paulsboro, New Jersey refinery back in late 2020. That was part of widespread capacity cuts across its refining system, and that reduced capacity at Paulsboro by around 80,000 barrels a day. This was very significant as PBF remains a sole asphalt producer on the U.S. East Coast, so the region was already short of product and data refinery reduction made it even more substantially short of asphalt. So, all of those closures had a notable impact or will have an impact on asphalt production.

That being said production actually, increased last year, rose to a six-year high at 123 million barrels in the U.S. A nd there are a couple of reasons for this. One, we may not have seen the full impact of IMO sulfur limits until 2021. For those of you who are unfamiliar, the International Maritime Organization imposed a 0.5% sulfur limit on bunker marine fuels back in 2020, and that was expected to redirect a lot of residual production into the asphalt pool. But then, of course, the COVID-19 pandemic struck, and because of lockdowns refineries reduced their throughputs drastically and that also depressed asphalt production too. So, may not have seen the full data or the full picture emerge until 2021. Another reason was, of course, because of COVID-19 transport fuel margins were hurt by lockdowns and asphalt margins were much more attractive in comparison last year and in 2020. So, this may have led to increased asphalt production, especially in the first half of 2021.

All that being said, we may not actually see higher production this year. One of the reasons is, and one of the unforeseen issues affecting the U.S. refining sector right now is tightness in feedstock markets stemming from the war between Russia and Ukraine. U.S. Gulf Coast refineries who were previously importing M 100 fuel oil from Russia as feedstock for upgrading units, for example, there was suddenly short of product and this likely pulled a lot of residual asphalt out of the market for use as an alternative feedstock. Again, this stands in contrast to last year when a slower vaccine rollout was still hurting transport fuels margins.

[Juan]: Thank you, Maria. And now switching over to the demand side, in 2021 we saw a 10-year high demand for asphalt in the U.S. Is that inertia prevailing in 2022?

[Maria]: Exactly, Juan. Last year we saw asphalt demand reach its highest point since 2008, at 135 million barrels. Part of this was due to COVID-19 stimulus funding, many of the surplus funds that weren't used up by states were instead redirected towards transportation projects, so we saw a little bump in funding last year that was unexpected. Some of the demand also benefited over the last two years by lower vehicle traffic, which allows contractors, of course, to pave longer. And, of course, the weather was a little more cooperative last year, which also allowed for a longer paving season and stronger demand. Now that we're seeing higher prices this year, however, largely because of higher global crude prices, this may ultimately have an impact on demand going forward. Most suppliers expect some demand destruction from higher asphalt prices which are currently standing around 14-year highs. Last week, Argus assessed Atlantic coast waterborne asphalt at an average of almost 660 on a delivered basis.

So, some of this demand destruction is likely expected in the second half of this year, because most projects for this current paving season have already been accounted for from previous funding, so none of the demand destruction is really being seen so far this paving season but ultimately higher prices will mean that federal funding goes less far. High prices. hrese have also impacted the arbitrage from Europe to the U.S. East Coast, we've also seen a drop in flows from Europe to the U.S. East Coast because its affected buying patterns. Because prices have become so high, East Coast buyers and U.S. buyers generally, have reported to Argus that they are buying more on an as-needed basis because of the volatility in asphalt prices and global crude prices more broadly. So, because of these costly inputs, buyers are really taking a much more cautious approach to their purchasing this year and we've seen purchasing patterns affected as a result. And speaking of trade flows, Juan, what would you say is happening with current asphalt trade flows in the region?

[Juan]: Well, we are certainly observing some changes in terms of the intra and inter-regional trade flows. In the U.S. for example, even though the refinery closures will continue to occur, we also anticipate the reopening of Husky's Superior refinery at some point in 2023, which will add to the asphalt production in the mid-continent and reduce a significant share of the imports from Canada. This could also have an impact on some of the asphalt exports out of the mid-continent as more local products would now be available in the Canadian market, which would of course be still subject to the nature of the logistics.

Now in Mexico, Pemex is working towards achieving fuel and refined product self-sufficiency and has vested its efforts in reestablishing their National Refinery System, increasing the asphalt production in recent years. Moreover towards 2024, the country should see its Dos Bocas refinery come online, which will be equipped with a yet unknown coking capacity. So, as the country continues to increase the utilization rate, we anticipate a higher output of asphalt - mostly as a byproduct of the operation, and a reduction in the country's reliance on the imports from the U.S. Gulf Coast. Additionally, during 2021 we saw Mexico started to shift its import matrix, becoming home to important cargoes from Latin America that displaced some of the Gulf Coast shipments into the country.

Now inter-regionally, the U.S. has been the main supplier of asphalt for Mexico and Central and Latin America, however, during 2021, we saw that U.S. exports into these regions were now competing with asphalt flows coming from Europe and particularly from Russia. Furthermore in South America, Colombia's ECOPETROL managed to increase their asphalt output and also became an important exporter into Mexico, and to some extent into some U.S. East Coast states.

With this, we arrive at the end of the episode. Thank you again, Maria, and thank you all for listening. We hope to be back with you again soon in our next episode of the series, "The Asphalt Story," on the Middle East and Asia. For further information about our asphalt coverage, you can check out our "Argus America's Asphalt publication" and our "Argus Asphalt Annual 2022." To learn more about "Argus Consultant Services," please visit www.argusmedia.com/consulting.

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