Is It Possible to Predict the Price of Asphalt?

If there’s any certainty in the world right now, it’s the fact that things will continue to change. That can be a challenge when trying to run a successful and profitable business, especially when prices are so volatile.

Liquid asphalt has to compete with other products that are refined from crude oil and energy prices are currently soaring due to inflation. Imagine bidding today’s cash price and the cost of the hedge instead of guessing at some future price.

Brian Lawrence imagined a world where that could happen and found the solution.

Lawrence has 30+ years of experience in the asphalt industry. He worked as senior vice president at C.W. Matthews and started their liquid asphalt division, building and purchasing asphalt terminals for the company.

“Over that time period, I bought over 2 million tons of liquid asphalt and I always wondered if there was a way to predict it’s price,” Lawrence says.

As he began transitioning into retirement, Lawrence started to investigate this idea further.

“The problem with price prediction for liquid asphalt is determining what you value the liquid asphalt ton to,” he says. “People always try to do it with crude of course, but the price never correlated well enough with crude. It finally dawned on me that we do have something else to value the ton of asphalt to: the coker value.”

Each week, coker values are published and Lawrence started to create a formula to compare these input values with the actual cost of asphalt prices. He partnered with energy traders in the industry and launched Asphalt Unlimited.

Protection from Volatile Energy Costs

Crude oil volatility has never been higher than right now and asphalt prices are about to soar, maybe to unseen highs. This means energy costs are flying through the roof and if producers can do anything to help protect themselves and their bottom line, they should do it. For producers who don’t have the storage or terminals for storing their materials, Asphalt Unlimited may be able to help you tremendously.

“This is something people have looked for for a long time,” Lawrence says. “Part of the reason I did this was to help the smaller producers who can’t afford to build tanks and store liquid but still have to cover their materials on contracts that were bid out in the past. Producers are worried about energy costs that are way above what they have in their bid and I wanted to find a way to help them protect themselves.”

First up is Asphalt Unlimited’s app. This app is based on Asphalt Unlimited’s proprietary algorithm, “The Synthetic,” that pulls the daily closing prices of a variety of energy products from the NYMEX and provides an asphalt projection that mirrors the coker values of asphalt. It has been back tested against 13 years of published coker values and it produced a correlation (r-value) of 0.988041.

“Almost a perfect, positive correlation.” Lawrence says. “This gives the projection an actual basis in reality because it is based on today’s closing futures prices. The algorithm never predicted a value below the published value. To me, that fact along with the high degree of correlation (0.988041), provides a lot of confidence when either producing a financial outcome or predicting a future price, whether up or down. I think in the near future, coker values will probably provide the floor for wholesale asphalt pricing anyway.”

The values produced by the app are a retail (rack) projection and are also tailored to specific geographic areas in the 48 contiguous United States. The prices are given in ranges and are suggestive of what is a reasonable value to possibly include in a bid. The app is subscription based and all annual subscribers receive private asphalt pricing consultation with Brian Lawrence, if desired.

Asphalt Unlimited also partnered with Unity Energy Partners and created a fund as another step for protection, the financial hedge.

“Contractors can put money in the fund, investing it with us and we’re managing it for them to help them cover prices everyday,” Lawrence says. “With this fund, there are five professionals watching it every day and that’s not something a smaller producer can afford so that’s one way we’re helping. This is an investment to help you cover unanticipated costs.”

The fund procures financial energy product futures in accordance with the synthetic formula. If energy prices rise and the procured hedge goes “in the money”, the financial market will offset losses incurred in the physical asphalt market. Imagine being able to bid today’s cash price plus the cost of the hedge instead of guessing at some future price that doesn’t interfere with a low bid process! If the market goes the other way, the financial loss is capped at the cost of the hedge and the hedge holder is paying less than the bid in the physical market.

“We work with our partners on pricing, supply, and risk management,” Lawrence says. “From our unique Pricing App to the first-ever Asphalt Financial Hedge, there is no area concerning liquid asphalt where we cannot help lower costs, create better bids, and provide financial peace of mind.”