Energy Costs and Asphalt

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Energy Costs and Asphalt
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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

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A unique product

• Supply/demand fundamentals affected by several
  variables
• Variables in turn affect asphalt prices

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Factors impacting demand for asphalt

• Government road spending
• Economy
• Private demand growth
• Housing development
• Natural disasters

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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

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Asphalt pricing methods

• Wholesale Prices
• Spot deals
• Term deals
• Winter-fill deals

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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

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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

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Changing business environment

• Integrated refiners
• Have to justify asphalt as a business unit
• Alternative is upgrading
• Specialized asphalt refiners
• Not able to breakeven

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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

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All asphalt prices are from the Argus Asphalt
Report

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Things to watch in the future

• Reduction in asphalt production
• Coker installations

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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

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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

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Asphalt Pricing MethodsRetail 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

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Asphalt pricing methodsWholesale Prices

• Current
• Spot deals
• Term deals
• Winter-fill deals

• Future
• Spot deals
• Term deals
• Longer term deals are risky
• Winter-fill deals
• Fewer sources

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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

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The End