Fate of US infrastructure bill presents high stakes for asphalt

Passage of the US bipartisan infrastructure package could spur a supercycle for asphalt pavement projects, but political infighting that threatens to torpedo that legislation could leave the industry with no Plan B.

"It would pull demand for asphalt material like we haven't seen since the start of the interstate highway system back in the 1950s," Jay Hansen, executive vice president for advocacy at the National Asphalt Pavement Association, said in an interview.

"I really do expect a supercycle of demand for asphalt pavement and the materials that go into asphalt pavement, if this bill passes," he continued. "And I'm optimistic. As dark as things seem right now, I think at the end of the day Congress will do the right thing and pass the bill."

S&P Global Platts Analytics last month increased its US demand forecast for asphalt by 13,000 b/d for 2021 and by 53,000 b/d for 2022 on the belief that the housing market would remain strong and that the prospects for passing an infrastructure bill were good.

"We have seen no reason to change either assumption," said Gary Eisen, senior oil demand advisor for Platts Analytics.

Total US asphalt inventories at 23.261 million barrels for the week ended Sept. 17 were down 1.1 million barrels from the prior week, and slightly below the five-year average of 23.767 million barrels, US Energy Information Administration data shows.

Asphalt prices at the rack have been steadily rising along with crude prices since bottoming out in April 2020 on low demand stemming from the coronavirus pandemic. The asphalt price recovery has outpaced crude. For instance, California rack prices have averaged $108/b so far in September, up $61/b since April 2020, while spot Cushing WTI has climbed $54.60/b over the same period to average $73.44/b so far in September, S&P Global Platts data shows.

The infrastructure bill faces headwinds as a formidable group of House progressives are standing firm on their insistence that they will vote against the measure if Speaker of the House Nancy Pelosi follows through on her promise to moderates to bring the bill to the floor Sept. 27. Progressives want the $3.5 trillion budget reconciliation package to pass before they agree to support the infrastructure bill.

Adding urgency to the need for resolution is the looming Sept. 30 expiration of the federal-aid highway and transit construction programs. If the surface transportation law were to expire, ongoing and future highway projects could be jeopardized, dampening asphalt demand.

'No plan B'

The infrastructure bill would reauthorize those surface transportation programs for five years, provide record amounts of funding for highway programs and prevent a revenue shortfall in the federal Highway Trust Fund used to reimburse states for road projects.

"There really is no plan B," Hansen said, noting that legislators opted not to include an extension of the federal highway bill in a continuing resolution that would keep the federal government funded through Dec. 3.

Legislative aides have indicated that Congress could turn around an extension in a short amount of time, but no such bill text has been put on the table yet, and there is no guarantee that a bill could swiftly pass in the current environment, particularly if legislators were to try to add any policy changes to that bill.

If Sept. 30 rolls around with no legislative action on the matter, the Department of Transportation would begin to furlough employees and stop processing payments to the states for highway projects. Most states can weather this lapse for a few days, but a prolonged halt of payments would prompt states that are more dependent on federal dollars for roadwork to shut down highway projects, Hansen said.

He contended that this would not have an immediate impact on the road paving sector as the construction season is wrapping up. More troubling would be a standoff on the infrastructure bill that leads to another short-term extension of the highway program.

"That would not be helpful to the industry, and it wouldn't help drive demand at all," he said, as "it would be flat funding with no fix to the Highway Trust Fund."

Hansen asserted that without a fix, the Federal Highway Administration "would have to ration payments to the states so they might get 80 cents on the dollar of what the states are owed because there's simply not enough money in the Highway Trust Fund."

Fewer projects

And the longer state DOTs go without knowing what the federal contribution to their highway programs will be, the bigger the risk of depressing winter bid lettings, he contended.

The states will "reduce the number of projects that are put out to bid because they don't want to stretch themselves out to the point where they're bidding on projects in which the federal government hasn't said they're going to guarantee the payments for those projects," Hansen said. "Over time, it's going to affect the winter bid lettings, and then for the next construction season, there won't be as many projects as was expected."

The ultimate impacts, he said, would vary state to state, depending on each state's dependency on the federal-aid highway program. For instance, Texas counts on federal dollars for about a third of its highway project budget, whereas Montana's highway improvement projects were more than 80% funded by federal dollars.

Further, a year-long or shorter extension would keep multi-year highway projects on the shelf as states would focus on shorter-term maintenance projects until funding is certain.

"There's no easy path through the woods except passing the infrastructure bill that's pending on the House floor right now," Hansen said.

"It's amazing to me that members of Congress that complain about their infrastructure or complain about the flooding that they're getting in their districts so they need more money to fix their roads are voting against this legislation or at least have announced to us that they're voting against this legislation," Hansen added.

He equated the current situation to golfing in a hurricane. The infrastructure bill is sitting on the tee ready to be hit, but the political winds are swirling around and getting in the way, he said.