For some sealcoating contractors, 2004 was a year of frustration marked by unexpected difficulty in obtaining sealer and even mid-season price increases. But despite the fact that many of the factors contributing to 2004 frustrations will still exist, the sealcoating industry expects a more stable industry this year.
"I do think 2005 will be a better year than 2004," says Drew Bachman, sales manager, North American Operations for Koppers Inc., a supplier of RT-12 to the sealer industry. "Now, to what degree is hard to say because there are so many factors involved."
In fact, it was likely a convergence of factors in 2004 that lead to a "perfect storm" in the sealcoating industry resulting in delivery delays, price increases, and even some temporary shortages. Yet some contractors didn't even know it was raining.
What sealcoating contractors experienced depended on their region, the amount of sealer they contracted for, their relationship with their sealer supplier, and their supplier's relationship with its RT-12 supplier, among other things. In short, the sealcoating industry experienced a few months of instability unlike anything it had seen since the 1980s.
The closing of two crude coal tar distillation facilities, mechanical problems at some production facilities, logistical problems transporting product, fuel and energy surcharges, a fast-growing economy, and even reduced aluminum imports all contributed to the shake up.
But the long-term impact of 2004 varies depending on who you talk with. Some think the impact is likely to be minimal, a small bump in what for the most part for years has been a smooth and stable industry. Others see 2004 as a demarcation point that will force the industry, its contractors, and their suppliers to take a hard look at themselves and retool their operations to better protect their business.
"2003 was not an issue but 2004 was a very difficult year and it wasn't just for us," says John Craun, vice president and general manager for carbon products, Reilly Industries, an RT-12 supplier. "My sense is that things were very tight on the supply side industry-wide. I don't see this kind of year being repeated, but it does teach us some things about how the industry might be changing as it moves forward. My sense is 2005 will be a year in which the producers of coal tar sealer and RT-12 work much more closely on issues of supply surety and logistics."
Not surprisingly, raw material suppliers and sealer producers become skittish when it comes to discussing pricing and production issues, but without discussing specific figures they do offer some insights into what happened and what contractors can expect this year. And virtually everyone agrees contractors can expect some increase in sealer pricing this year — but probably nothing more than a "typical" price increase, which some think is actually overdue.
A different industry
The advent of sealcoating began long before the first issue of Pavement was published 20 years ago. In fact most industry experts point to the early 1950s as the first time the industry attempted to produce a product designed to protect and help extend the life of existing asphalt pavements. That original sealer material is a distant cousin of the materials available to contractors today, which must meet a variety of governmental specifications. Industry associations, notably the Pavement Coating Technology Center and the Asphalt Sealcoat Manufacturers Association, have gotten into the act as well, testing mix designs and application procedures to ensure their product is used as effectively as possible.
So today's sealcoating material, whether based on asphalt or refined coal tar, is produced within fairly strict guidelines that include a variety of secret fillers and performance-enhancing additives based on each sealer producers own proprietary sealer recipe. But the raw material the sealer producers use — RT-12 for refined coal tar sealers or asphalt emulsion for asphalt-based sealers — is similar because it is purchased from a narrow list of suppliers. And it is this raw material, and the material from which it, in turn, is produced, that has the greatest impact on the sealer the contractor buys.
In 2004 producers and users of both dominant types of sealer encountered some difficulties. As oil prices skyrocketed, producers of asphalt-based sealers faced concerns on how to handle pricing (see page 26). Producers of refined coal tar sealer faced even greater obstacles.
Capacity not an issue
Crude coal tar, the primary ingredient in RT-12, is a byproduct of the coking process used to produce steel. RT-12 is the primary ingredient in coal tar sealers. In the past RT-12 producers have been able to buy high-quality crude coal tar, which enables them to produce RT-12 that meets specifications relatively easily. When the crude coal tar is of lesser quality, however, the RT-12 producer must work harder, take longer, and spend more to produce material that meets the specifications. In the past this has been of little concern as the quality of crude coal tar has remained stable and the quantity plentiful, despite predictions in the mid-1990s that a crude coal tar shortage was on the horizon.
Mike Goeller, sales manager for Railworks Wood Products Inc., an RT-12 producer, estimates U.S. companies buy roughly 180 million gallons of crude coal tar annually for use in a wide variety of products. He says that in the second quarter of 2004, 46 million gallons of tar were distilled in the U.S. and Canada, a drop of less than 1% compared to 2003 levels.
"I don't think there was a crude tar shortage problem in 2004," Goeller says.
RT-12 producers insist there wasn't a raw material shortage last year, pointing to the industry's overall capacity to produce refined tar from crude coal tar. The most significant impact on refined tar supply was Honeywell Industries' decision to close a tar distillation facility in Detroit that supplied the Midwest with roughly 4 million gallons of refined tar. That, combined with Koppers Inc.'s decision to transform its Birmingham, AL, production facility into a terminal to distribute RT-12 throughout the Southeast, created some logistical problems but likely did not affect the overall supply of crude coal tar available to the industry. Any sealer "shortage" problem, if that's what it was, was localized throughout the country and could be traced more to some mechanical difficulties at some regional plants and to trucking problems.
Accompanying the recent tremendous growth in demand for steel was an increase in coke production, and thus a stabilization in crude coal tar production. So in theory there should have been plenty of crude coal tar to produce RT-12 for sale to coal tar sealer producers.
And most RT-12 producers think there was enough crude coal tar.
"There has been a declining supply of crude coal tar over the years but it's more of an acute quality issue and a capacity issue that has developed recently," Goeller says. "Less crude coal tar is being produced today than 10 years ago so the reduction in capacity we experienced last year might just be catching up with the reduction in coal tar being produced domestically."
In other words, it is likely the remaining tar distillation plants had not been operating at capacity and the refined tar production lost by the closing of the Detroit and Birmingham operations was probably picked up by other existing tar distillation plants. But because the production was absorbed by plants in other regions, RT-12 plants in the Midwest and Southeast might have been unable to obtain as much crude coal tar as they wanted on the schedule they had expected.
Impact of steel demand
So simply from a volume standpoint, there was enough crude coal tar to feed the RT-12 producers so they could supply the sealer producers. It was just being produced in the "wrong" places and the industry needed some time to adjust. But other elements of the "perfect storm" came into play, including the demand for steel.
Craun says the single biggest supplier of crude coal tar in North America is U.S. Steel in Clairton, PA. He says the plant, which produces roughly 25% of the crude coal tar produced in North America, had serious quality problems with crude coal tar in 2004.
"There is a high demand for steel so the steel industry is very strong after years of being depressed in this country," Bachman says. "When the steel industry is strong there is a corresponding high demand for coke, and at the moment the coking ovens are running flat out."
As Goeller explains, that can be both good and bad because when the coke ovens "are running full out" the quality of the tar can be affected.
"Just as with anything else, when you run things that fast you can end up with a lower quality," Goeller says. "And in the case of tar, when the quality is poor you can't use it for RT-12."
RT-12 producers say that not only did speed of production contribute to lower crude coal tar quality, but the quality of the coal used in the coking process also had an impact.
Koppers' Bachman points to the coal used for much of the year, saying steel producers were not able to use certain traditional types of low-volatile coal in many of their coking operations. He says the switch to other types of coal created quality issues where crude coal tar is concerned.
Most crude coal tar is used to make binder pitch for the aluminum and graphite electrode industries, both of which are larger users of coal tar than is the sealer industry. Craun and Goeller say the highest-quality coal tar is generally used to make binder pitches and the lower-quality tar is used to make RT-12. Goeller says that roughly 20% of the crude coal tar purchased ends up used in RT-12.
"When you have capacity issues you're going to make product for the bigger industries and in this case that's the aluminum and roofing industries," Goeller says.
Tar of the lowest quality often is burned for fuel by the steel producers, and with energy costs rising throughout much of 2004, and with virtually all industries getting hit with fuel and energy surcharges, many steel producers had an even greater incentive to burn their crude coal tar.
"Crude coal tar is an alternative source of energy for steel companies, which is an energy intensive business" Craun says. He added that "energy is also a big cost in the coal tar products business, and the continued run-up in natural gas prices is something that we need to recover in our product pricing."
With the highest-quality crude coal tar being used in some of the bigger industries and some of the poorest quality tar being burned as fuel, some RT-12 suppliers experienced a crude coal tar shortage (some termed it a "pinch" or "tightness") last year, and so did their sealer-producing customers.
Bachman, however, attributes any market tightness (he agrees there wasn't a crude coal tar or RT-12 shortage) to logistical problems and/or mechanical or production issues at some plants. He is hoping for improvement in those areas in 2005.
But regardless of the reason, and depending on where you were working, this RT-12 shortage could have meant you couldn't get the sealer you needed on time, you couldn't get all the sealer you contracted for, or you had to pay slightly more for extra sealer you needed. In many areas of the country sealcoating contractors noticed no problems at all.
Will price become an issue?
"Everything you're buying today costs more to make and costs more to buy than it did yesterday," Bachman says. "In that sense sealer and the material used to produce it are no different than any other product."
So indications are that prices on both asphalt emulsion sealer and refined coal tar sealer will increase this year. In many ways that reflects a stable industry in which price increases as needed in small increments.
Craun and Goeller, however, view what happened in 2004 as an indication of changes in the sealcoating industry. They say refined coal tar sealer and the RT-12 used to make it are becoming less of a commodity product and more of a specialized product. And where commodity products are readily available with few price fluctuations, specialized products are often subject to availability and pricing that fluctuates.
Goeller and Craun see crude coal tar and RT-12 pricing as stable only because producers have refused to pass along price increases they encountered over the years.
"We like to have stability in our business," Craun says. "We know our customers like to have that too and we try to let them know what's coming. But we can't do that to our own detriment. We have to be able to pass along higher raw material and energy costs."
That might explain both the price stability of the past and some of the price spikes some contractors experienced last summer.
"The industry got itself in a little bit of a rut because it didn't want to pass on reasonable price increases and would just end up absorbing them," Goeller says.
He says that coal tar sealer pricing might need to be looked at a little differently in the future. Due to the fluctuations in raw material prices, energy costs, and transportation costs, it might be difficult to quote a firm price for a full year.
Bachman says he expects the supply of crude coal tar to be relatively stable for at least the next two or three years.
"But sealer producers and their contractor customers need to look out farther ahead so they can be prepared for whatever changes come about in this industry," Bachman says.
Specifically, he says contractors and sealer producers need to do more long-term planning, they need to communicate their plans and needs to each other, and they need to prepare the property owner/sealcoat buyer for what might be happening.
"Many of the same issues we encountered in 2004 will still be present in 2005," Bachman says. "We will still have a strong steel industry, which means the coking industry and crude coal tar production will be strong also. The economy will likely still be growing, and all indications are demand for sealer will remain strong.
"But we'll have a more stable source of coal, and since coal is where everything starts we don't expect the degree of quality issues we had last year and we're hoping for a stable 2005."
New Sealcoating Sessions at NPE
In addition to its much-in-demand annual "Basic Sealcoating Principles" (Geoff Crenson, Bonsal American) and "Better Estimating on Sealcoating Jobs" (Jeff Stokes, Pinnacle Performance Group), National Pavement Expo, Feb. 2-5 in Atlanta, offers two new sealcoating presentations.
David Lewis, Moore Seal Inc., will present "Troubleshooting Sealcoating on the Job" Feb. 4, covering what happens in the field from "pulling onto the jobsite to pulling off the site," including handwork tips.
Mike LaForge and Rick Roscoe, The Pavement Pros, will present their step-by-step approach to running a sealcoating business in "Successful Sealcoting Made Simple," Feb.5.
For descriptions and to register visit www.pavementonline.com.
Asphalt Sealer Pricing at Mercy of Oil
Contractors who used asphalt emulsion-based sealers last year likely experienced cost increases, and 2005 could bring more of the same. With the cost of crude oil spiking from just over $30 a barrel and bursting past $50 a barrel by late October, asphalt sealer producers were forced to consider price increases. "The bottom line is the market is definitely up and it's going to stay up," says Mark Mitchell, general manager, Paramount Petroleum, Elk Grove, CA, northern division, which supplies asphalt emulsion to five asphalt sealer producers in Northern California. "The good news is counties and states are looking to do more maintenance-type work as opposed to new construction because the dollar goes farther."
Carl Reed, Asphalt Coatings Engineering, a producer of asphalt-based sealer and current president of the Asphalt Sealcoat Manufacturers Association, says the last few years have been particularly difficult for sealer producers as most costs, from fuel to asphalt emulsion to transportation, have increased. He says his company saw the price of asphalt emulsion, the main cost in asphalt-based sealer, jump 11% last summer. "I don't know of a single thing that is used in our sealer that didn't go up in 2004," Reed says. And while some sealer producers held the line, absorbing the increase until announcing 2005 pricing, many producers raised their prices mid-season. Reed says the industry is at the point where the producers are going to have to pass along their increased costs. "For most contractors a reasonable increase in the cost of sealer isn't going to be the end of the world," he says. "When compared with all overhead costs the cost of material isn't necessarily the biggest. I don't think it represents a huge increase in their cost of doing business. All our customers we talk with are pretty much expecting an increase and they're pretty understanding about it."
Mitchell says that even with last year's price increases asphalt emulsion producers and sealer producers are still absorbing more of the increased costs than they should. "As crude oil goes up we try to raise our prices but it's always hard to get the price up on anything," Mitchell says. "We're still behind the 8-ball because crude went up so high so fast we haven't been able to catch up to where the price should be."
He says he doesn't see any relaxation in pricing in 2005 unless crude drops to below $40 a barrel. "I don't see that happening," Mitchell says. "It's come off a little bit, but it's such a volatile market that who knows what's going to happen."
Mitchell says contractors should educate their customers that a bid is good for only a set amount of time and that it's in the customer's best interest to lock the bid up to protect the pricing. "Anything a customer has a bid on we try to protect and then raise our price on future work," Mitchell says. "The last year has been a real learning curve for a lot of people, there's no doubt about it."