National Concrete Conference. Structural Change, Impacts and Opportunities For Concrete Pavement

Transcription

1 National Concrete Conference Structural Change, Impacts and Opportunities For Concrete Pavement

2 Putting Things Into Context: Point 1. Demographics

3 US Population Millions of Persons 66 Million More Persons +21% Source: US Census Estimates

4 Licensed Drivers On the Road Millions of Licensed Drivers Million More Drivers. +22% Source: FHWA & PCA Estimates

5 2007 Road Congestion: Urban Mobility Report Lane Miles per 1,000 Licensed Drivers Mountain West North Central East North Central New England Middle Atlantic District of Columbia Pacific West South Central East South Central South Atlantic 30 mls/ mls/ mls/ mls/ mls/1000

6 2035 Road Congestion: PCA Estimates Lane Miles per 1,000 Licensed Drivers Mountain West North Central East North Central New England Middle Atlantic District of Columbia Pacific West South Central East South Central South Atlantic 30 mls/ mls/ mls/ mls/ mls/1000

7 Infrastructure Neglect: Costs Inflationary Goods delivered by truck = 90% + Commute Times Quality of life Fuel wasted CO2 emissions $150 Billion annually Urban Mobility Report Grows without expansion of highway system

8 Putting Things Into Context: Point 2. Highway Maintenance Costs

9 Maintenance Cost Per Thousand Vehicle Miles Travelled $8.00 $7.00 $6.00 $5.00 $4.00 $3.00 $2.00 $1.00 $0.00 OPEC Formed Recent Inflection Point Source: FHWA

10 Road Conditions United States 1,790,853 Lane Miles are in Poor Condition - 21% of all Lane Miles. 4,012,199 Lane Miles are in Fair Condition - 48% of all Lane Miles. Source: FHWA, 2009 IRI Survey of Federally Funded Roads

11 Putting Things Into Context: Point 3. State s Cost Structure

12 Medicaid Pressures Build Billions of $ $3,000 Blue: Total Medicaid Spending Red: State Medicaid Spending 34% $2,500 30% $2,000 $1,500 $1, % of Total State Expenditures 25% $500 $ Source: NASBO

13 Will Medicaid Crowd Out Highway Spending? Billions of Real State Spending Targeting Transportation $100 Transportation Spending: Constant 8% Share of Budget $90 $80 $70 $60 $50 $40 $30 Transportation Spending: Share Reduced to 7% of Budget Transportation Spending: Share Reduced to 5% of Budget

14 Putting Things Into Context: Point 4. Structural Changes in the World Economy Have Occurred

15 Structural Changes in Global Oil Consumption Percent of Total Global Consumption 80.0% Lesser Developed Economies 70.0% 60.0% Developed Economies Asia, Excl Japan 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% Source: United Nations

16 160 Oil Price History $ Per Barrel, West Texas Intermediate New Reality: Emphasis on LDC s & Demand Side Old Reality: Emphasis on OPEC & Supply Side OPEC Formed OPEC Induced Energy Crisis Asia (excluding Japan) = 20% world Oil Demand Source: U.S. Energy Information Agency

17 Asphalt &Oil Price Correlation Percent Change in Oil Prices Vs Percent Change in Asphalt PPI Lagged 6 months 200% 150% 100% Based On Last 10 Year History: A 10% Change in Oil Prices Results in a 7% Increase in Asphalt Prices Percent Change in Oil Prices: Black 50% 0% -50% Percent Change in Asphalt Prices Six -100% Months Later: Red Source: PCA Estimates

18 Asphalt PPI Price History 1996 = New Reality: Emphasis on LDC s & Demand Side Old Reality: Emphasis on OPEC & Supply Side Asia (excluding Japan) = 20% world Oil Demand Source: Bureau of Labor Statistics, Producer Price Indices

19 One barrel of oil equals 42 gallons

20 Structural Changes Have Impacted Asphalt Prices These Structural Changes Are Relatively Recent And May Not be Fully Recognized by Pavement Specifiers and May Not be Reflected in Their Procurement Policies.

21 DOT s Challenge

22 DOT s Dilemma Expand road system to meet new demographic demands. Repair & maintain road systems in context of rising maintenance costs. Accomplish these goals in the context of long term structural issues impacting state budgets.

23 New Paving Realities How relative paving costs have permanently changed

24 Paving Material PPI Price Comparisons 1996 = Old Reality: Average Annual Concrete PPI Increase: +2.1% Average Annual Asphalt PPI Increase: 1.1% Asphalt PPI Concrete PPI Source: Bureau of Labor Statistics, Producer Price Indices New Reality: Average Annual Concrete PPI Increase: +4.0% Average Annual Asphalt PPI Increase: 12.0%

25 Initial Bid Concrete Vs Asphalt Paving Costs Dollars Per Two Lane Road Mile - Urban $1,400,000 $1,200,000 Asphalt $1,000,000 $800,000 $600,000 $400,000 $200,000 Concrete Source: PCA estimates using Wispave (Wisconsin DOT paving cost software)

26 Life Cycle Bid Concrete Vs Asphalt Paving Costs Per Two Lane Road Mile - Urban 1,400,000 Asphalt 1,200,000 1,000, , , ,000 Concrete 200,000 FY2003 FY2005 FY2007 FY2009 FY2011 FY2013 FY2015 Source: PCA estimates using Wispave (Wisconsin DOT paving cost software)

27 $ Per Barrel, WTI $120 $100 $80 $60 Maintenance Cost Per Vehicle Mile Travelled Are Highly Correlated to Oil Prices Pre-OPEC Average Annual Increases MC Per VMT = 2.5% OPEC ERA Average Annual Increases MC Per VMT = 6.5% Oil = 15.4% Benign OPEC ERA Average Annual Increases MC Per VMT = 1.9% Oil = 0.0% Maintenance Costs Maintenance $ Per 000 VMT $9.00 $8.00 $7.00 $6.00 $5.00 $40 $4.00 $20 $0 Oil Prices New Realities ERA Average Annual Increases MC Per VMT = 7.7% Oil = 10.6% $3.00 $2.00 $1.00 -$ $0.00 Source: FHWA, EIA

28 Average Annual Price Increases: Average Annual Increase 12.0% 10.0% Average Annual Price Increase 8.0% 6.0% 4.0% 2.0% 0.0% CPI Highway Deflator Asphalt Concrete Construction Wages Source: Bureau of Labor Statistics

29 Pavement Life Expectancy: Asphalt Versus Concrete Years Before a Major Reconstruction is Required 25 Concrete: Average = 29.3 Years Number of State DOTs Reporting Asphalt : Average = 13.6 Years Years 6-10 Years Years Years Years Years Source: PCA 2008 Highway Report

30 The Free Market Will Work - Eventually Urgency to Act

31 The Old Realities: Asphalt Wins Emergence of middle class among developing countries did not achieve take-off. Oil Prices, while volatile, relatively low. $20-$25 oil prices per barrel. Concrete not at initial bid parity until $65 - $70 per barrel. Little use of cokers by refineries. Asphalt cheaper initial bid and in many cases life cycle cost basis. Concrete not a broad based effective competitor. 94% of all roads paved with asphalt Procurement policies developed in this context.

32 The Old Realities: Asphalt Wins Procurement policies aimed at encouraging competition. Competitive arena defined as asphalt pavers - excludes concrete pavers Initial Bid Policies Escalator Clauses MEPDG Equivalent Design Alternative Bid Life Cycle Policies No need to perfect calculation, or in many cases to even perform. Asphalt usually wins.

33 It s All About Efficiency in Spending Tax Dollars An Economic Axiom: Free Markets best allocate resources by the unbiased picking of winners and losers. Must accept the new paving realities and not rely on old truisms that led efficient spending in the past. New cost competitive alternatives to asphalt - concrete. Open the market to free market competition. Must rid themselves of policies that distort the true cost of initial paving costs. Efficiency can be achieved by letting the free market work Asphalt Escalators, accept alternative bid and equivalent design. With new cost dynamics, must use LCCA that reflect long term cost fundamentals.

34 Efficient Spending Policies The New Paving Realities dictate the need of DOT policy review

35 It s All About Efficiency in Spending Tax Dollars DOT procurement practices can hinder least cost paving selection. Asphalt Price Escalators, Lack of Equivalent Design, Lack of Alternative Design-Alternative Bid, Life Cycle Cost Analysis.

36 It s All About Efficiency in Spending Tax Dollars DOT procurement practices that hinder concrete paving share gains. Asphalt Price Escalators, Lack of Equivalent Design, Lack of Alternative Design-Alternative Bid, Life Cycle Cost Analysis.

37 Life Cycle Cost Analysis (LCCA) FHWA promotes Life-Cycle Cost Analysis (LCCA) as an engineering economic analysis tool that allows transportation officials to quantify the differential costs of alternative investment options for a given project. LCCA can be used to study either new construction projects or to examine preservation strategies for existing transportation assets.

38 DOT Old Views Asphalt is cheaper, initial bid and life cycle by a wide margin. While asphalt costs rise faster than concrete asphalt still cheapest. LCCA tool a nice exercise but since it will always chose the asphalt design it has limited value.

39 Key LCCA Components Initial Costs Engineering Assumptions Length of Analysis (Time) Inflation Rates

40 CONSTRUCTION MATERIALS & CPI INFLATION RATES National BLS Inflation Indexes since Jan 1971 to Current Price Index (Base Year = 1971) CPI-Urban (CAGR=4.4%) PPI-Commodities (CAGR=4.2%) Steel Mill Products (CAGR=4.5%) Lumber (CAGR=3.9%) Aggregate (CAGR=4.7%) Concrete Products (CAGR=4.3%) Ready Mix Concrete (CAGR=4.7%) Cement (CAGR=4.4%) May-05 Jan-74 Jan-77 Jan-80 Jan-83 Jun-05 Jan-89 Jan-92 Jan-95 Jan-98 Jun-05 Jan-04 Jan-07 Jan U.S. Department of Labor, Bureau of Labor Statistics, (Data thru Dec 2010)

41 Asphalt, Other Building Materials & CPI Annual Rates National BLS Inflation Indexes since Jan 1971 to Current Price Index (Base Year = 1971) 1,800 1,600 1,400 1,200 1, CPI-Urban (CAGR=4.4%) PPI-Commodities (CAGR=4.2%) Steel Mill Products (CAGR=4.5%) Lumber (CAGR=3.9%) Aggregate (CAGR=4.7%) Concrete Products (CAGR=4.3%) Ready Mix Concrete (CAGR=4.7%) Cement (CAGR=4.4%) Paving Asphalt (CAGR=6.8%) May-05 Jan-74 Jan-77 Jan-80 Jan-83 Jun-05 Jan-89 Jan-92 Jan-95 Jan-98 Jun-05 Jan-04 Jan-07 Jan U.S. Department of Labor, Bureau of Labor Statistics, (Data thru Dec 2010)

42 Concrete s Relative Price Position Vs Asphalt Relative Asphalt/Concrete PPI Improvement Based On: - Rising Oil Prices - Coker Investment Significant Competitive Cost Improvement for Concrete. Source: Bureau of Labor Statistics: Producer Price Index, Asphalt Paving Mixtures & Blocks, Ready Mix Concrete

43 Concrete s Relative Price Position Vs Asphalt Relative Asphalt/Concrete PPI Source: Bureau of Labor Statistics: Producer Price Index, Asphalt Paving Mixtures & Blocks, Ready Mix Concrete - Same Discount Rates for Asphalt & Concrete Now Used in LCCA Means Relative Prices Remain Constant. - To Keep Current Use of LCCA s Means to Ignore Changes in Relative Prices. - Relative Prices Have Changed Dramatically Since 2006.

44 MIT s Common Sense Approach to LCCA LCCAs have traditionally ignored the possibility of future changes in relative prices by assuming that the real prices of all construction inputs remain fixed. MIT Concludes: The typical assumption used by most state LCCA s, that concrete and asphalt prices rise at same rate is flawed. Conclusions carry huge implications for state governments and their DOT s.

45 MIT LCCA Research Conclusions MIT found that the historical data on real prices and the assumption of constant real costs was seriously inconsistent with historical experience Ignoring that experience seriously underestimates future cost expenditures. Note: Based on US data (Bureau of Labor Statistics) for MIT used Monte-Carlo simulation and historic inflation patterns to predict future materialspecific inflation rates for the different materials Developed 50-year inflation rates for concrete, asphalt, lumber & steel MIT found that over a 50-year time frame, the mean real price of asphalt increases by 95% while the mean real price of concrete decreases by 20% L. Lindsey, R. Schmalensee and A. Sacher, The Effects of Inflation and Its Volatility on the Choice of Construction Alternatives, Massachusetts Institute of Technology, Concrete Sustainability Hub. July 2011.

46 Impacts for Transportation Projects In terms of equality for pavement type selection and LCCA, consider: Asphalt s 40-year historical inflation rate is 2% to 4% higher than that of concrete. There is sufficient historical and forecasting evidence that demonstrates this difference will continue in the future.

47 Concrete s Relative Price Position Vs Asphalt Relative Asphalt/Concrete PPI Current DOT Use of LCCA Source: Bureau of Labor Statistics: Producer Price Index, Asphalt Paving Mixtures & Blocks, Ready Mix Concrete

48 Concrete s Relative Price Position Vs Asphalt Relative Asphalt/Concrete PPI MIT 50 Year Study: Long Term Trend Source: Bureau of Labor Statistics: Producer Price Index, Asphalt Paving Mixtures & Blocks, Ready Mix Concrete

49 Concrete s Relative Price Position Vs Asphalt Relative Asphalt/Concrete PPI New Realities Structural Shift Source: Bureau of Labor Statistics: Producer Price Index, Asphalt Paving Mixtures & Blocks, Ready Mix Concrete

50 PERFORMING A LCCA USING ESCALATION RATES IS THE SAME AS OUTLINED BY THE FHWA WITH ONE ADDITIONAL CALCULATION 1. Design equivalent pavement sections 2. Estimate the initial construction costs 3. Determine the initial life of each alternate 4. Determine the maintenance and rehabilitation strategies (activities and timing) to be used on the pavement over the analysis period 5. Estimate rehabilitation costs for each activity 6. Escalate today s cost of the specific products to the activity year using the appropriate escalation rate. Escalated Cost = Current Cost x (1 + e) n where e = escalation rate and n = year of activity 7. Estimate user costs (optional)* 8. Compute Net Present Value (NPV) of initial and rehabilitation costs 9. Analyze results & reevaluate strategies as needed

51 Consequences of Current LCCA Use MIT Report on Methods, Impacts and Opportunities in the Concrete Building Life-Cycle

52 Using MIT s Approach Could Have a Large Impact On Future System Expenditures B $ $16.0 $14.0 Asphalt following the General Rate of inflation Asphalt with Inflation 1.1% higher $14.09 $12.0 Increased asphalt inflation rate could erode the DOT budgets by $40.26 Billion over the next 30 years for Arterials & Collectors. $10.0 $10.28 $8.0 $6.0 $4.0 $3.17 $2.0 $ Source: Jim Mack, Cemex

53 Using MIT s Approach Could Have a Large Impact On Future System Expenditures $6.0 $5.0 Asphalt following the General Rate of inflation Asphalt with Inflation 1.1% higher $5.07 $4.0 Increased asphalt inflation rate could erode the DOT budgets by $14.49 Billion over the next 30 years for Interstates, Freeways & Other Expressways. $3.0 $3.70 $2.0 $1.14 $1.0 $ Source: Jim Mack, Cemex

54 Policy Inflection Point The New Paving Realities dictate the need of DOT policy review

55 DOT: Policy Inflection Point Consequences: Rising Maintenance Share of Budget, initial bid overruns, higher paving cost often chosen, waste taxpayers money. Consequences: redefine competition, re-examine policies, least paving cost chosen, and sometimes it will be concrete efficiently spend taxpayers money.

56 PCA Top Down Strategy

57 Bottom Up Strategy

58 National Concrete Conference Structural Change, Impacts and Opportunities For Concrete Pavement