National Concrete Conference Structural Change, Impacts and Opportunities For Concrete Pavement
Putting Things Into Context: Point 1. Demographics
390 370 350 330 310 290 270 250 230 210 US Population Millions of Persons 66 Million More Persons +21% 190 2000 2005 2010 2015 2020 2025 2030 2035 Source: US Census Estimates
Licensed Drivers On the Road Millions of Licensed Drivers 270 250 230 47 Million More Drivers. +22% 210 190 170 150 2000 2005 2010 2015 2020 2025 2030 2035 Source: FHWA & PCA Estimates
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/1000 31-50 mls/1000 51-70 mls/1000 71 90 mls/1000 90 mls/1000
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/1000 31-50 mls/1000 51-70 mls/1000 71 90 mls/1000 90 mls/1000
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
Putting Things Into Context: Point 2. Highway Maintenance Costs
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
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
Putting Things Into Context: Point 3. State s Cost Structure
Medicaid Pressures Build Billions of $ $3,000 Blue: Total Medicaid Spending Red: State Medicaid Spending 34% $2,500 30% $2,000 $1,500 $1,000 21.5% of Total State Expenditures 25% $500 $0 1970 1995 2004 2009 2014 2019 2024 2029 2034 Source: NASBO
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 2007 2012 2017 2022 2027
Putting Things Into Context: Point 4. Structural Changes in the World Economy Have Occurred
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% 1970 1980 1990 2000 2010 Source: United Nations
160 Oil Price History $ Per Barrel, West Texas Intermediate New Reality: Emphasis on LDC s & Demand Side 140 120 100 80 60 40 20 Old Reality: Emphasis on OPEC & Supply Side OPEC Formed OPEC Induced Energy Crisis Asia (excluding Japan) = 20% world Oil Demand 0 1946 1956 1966 1976 1986 1996 2006 Source: U.S. Energy Information Agency
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 1983 1988 1993 1998 2003 2008 Source: PCA Estimates
Asphalt PPI Price History 1996 = 100 300 New Reality: Emphasis on LDC s & Demand Side 250 200 Old Reality: Emphasis on OPEC & Supply Side 150 100 50 Asia (excluding Japan) = 20% world Oil Demand 0 1982 1987 1992 1997 2002 2007 Source: Bureau of Labor Statistics, Producer Price Indices
One barrel of oil equals 42 gallons
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.
DOT s Challenge
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.
New Paving Realities How relative paving costs have permanently changed
Paving Material PPI Price Comparisons 1996 = 100 300 250 200 150 Old Reality: 1982-2004 Average Annual Concrete PPI Increase: +2.1% Average Annual Asphalt PPI Increase: 1.1% Asphalt PPI 100 50 Concrete PPI 0 1982 1987 1992 1997 2002 2007 Source: Bureau of Labor Statistics, Producer Price Indices New Reality: 2005 2012 Average Annual Concrete PPI Increase: +4.0% Average Annual Asphalt PPI Increase: 12.0%
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 2003 2007 2011 2015 2019 Source: PCA estimates using Wispave (Wisconsin DOT paving cost software)
Life Cycle Bid Concrete Vs Asphalt Paving Costs Per Two Lane Road Mile - Urban 1,400,000 Asphalt 1,200,000 1,000,000 800,000 600,000 400,000 Concrete 200,000 FY2003 FY2005 FY2007 FY2009 FY2011 FY2013 FY2015 Source: PCA estimates using Wispave (Wisconsin DOT paving cost software)
$ 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 -$20 1960 1966 1972 1978 1984 1990 1996 2002 2008 $0.00 Source: FHWA, EIA
Average Annual Price Increases: 2000-2011 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
Pavement Life Expectancy: Asphalt Versus Concrete Years Before a Major Reconstruction is Required 25 Concrete: Average = 29.3 Years Number of State DOTs Reporting 20 15 10 5 Asphalt : Average = 13.6 Years 0 1-5 Years 6-10 Years 11-15 Years 16-20 Years 21-30 Years 31-50 Years Source: PCA 2008 Highway Report
The Free Market Will Work - Eventually Urgency to Act
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.
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.
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.
Efficient Spending Policies The New Paving Realities dictate the need of DOT policy review
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.
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.
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.
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.
Key LCCA Components Initial Costs Engineering Assumptions Length of Analysis (Time) Inflation Rates
CONSTRUCTION MATERIALS & CPI INFLATION RATES National BLS Inflation Indexes since Jan 1971 to Current Price Index (Base Year = 1971) 800 700 600 500 400 300 200 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%) 100 0 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-10 1. U.S. Department of Labor, Bureau of Labor Statistics, http://www.bls.gov/ppi/home.htm (Data thru Dec 2010)
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 1,000 800 600 400 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%) 200 0 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-10 1. U.S. Department of Labor, Bureau of Labor Statistics, http://www.bls.gov/ppi/home.htm (Data thru Dec 2010)
Concrete s Relative Price Position Vs Asphalt 160 150 140 130 120 110 100 90 80 70 60 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
Concrete s Relative Price Position Vs Asphalt 160 150 140 130 120 110 100 90 80 70 60 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.
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.
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 1977 2010. 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.
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.
Concrete s Relative Price Position Vs Asphalt 160 150 140 130 120 110 100 90 80 70 60 Relative Asphalt/Concrete PPI Current DOT Use of LCCA Source: Bureau of Labor Statistics: Producer Price Index, Asphalt Paving Mixtures & Blocks, Ready Mix Concrete
Concrete s Relative Price Position Vs Asphalt 160 150 140 130 120 110 100 90 80 70 60 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
Concrete s Relative Price Position Vs Asphalt 160 150 140 130 120 110 100 90 80 70 60 Relative Asphalt/Concrete PPI New Realities Structural Shift Source: Bureau of Labor Statistics: Producer Price Index, Asphalt Paving Mixtures & Blocks, Ready Mix Concrete
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
Consequences of Current LCCA Use MIT Report on Methods, Impacts and Opportunities in the Concrete Building Life-Cycle
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 $0.0 2012 2015 2018 2021 2024 2027 2030 2033 2036 2039 2042 Source: Jim Mack, Cemex
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 $0.0 2011 2017 2023 2029 2035 2041 Source: Jim Mack, Cemex
Policy Inflection Point The New Paving Realities dictate the need of DOT policy review
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.
PCA Top Down Strategy
Bottom Up Strategy
National Concrete Conference Structural Change, Impacts and Opportunities For Concrete Pavement