By Chris Olsen, CEO, Roading New Zealand
Over the past six months bitumen prices have risen around 30 percent to almost $1000 per tonne. Never before have bitumen prices been so high.
These increases have lead to people across the sector asking the following questions and wondering what can be done about them:
- Are prices going to stay the same, drop or further increase?
- What do these increases mean for contractors?
- What are the implications for local authorities, Transit New Zealand, Land Transport New Zealand and the government?
- Are contractors who ignore the risk of bitumen price increases and consequently win the contract, the type of contractor Transit and local authorities want to use?
In trying to answer these questions I’ve talked to quite a few people and thought it might be useful if I outlined my findings here.
To start, bitumen prices appear to have stabilised in the past month. Looking to the future is really anyone’s guess as to what bitumen prices will do, but I understand from a number of independent sources, both here and overseas, that bitumen prices are more likely to increase over the next year than decrease.
For contractors, these increases are bad news. A survey of Roading New Zealand members revealed that resealing contractors are making significant losses and that some contractors, especially the smaller ones, are struggling to absorb these shock price increases because they do not have financial base to do so. There are a number of reasons for these losses. The main ones being:
- Contractors cannot control or predict international bitumen price fluctuations;
- An average of 45 percent of New Zealand’s reseals contractors do not have escalation clauses;
- For those that do have escalation clauses the formula used to calculate the “rise and fall” under-calculate on average by around 15 percent. This becomes very significant when large increases occur.
Implications for local authorities, Transit, LTNZ and the government can also be pretty negative. First, contractors will be pretty reluctant to carry out any extra work at current rates. Second, some contractors may try to recoup some of their losses in next season’s contracts to remain viable. If prices remain unstable it is also more than likely that contractors will need to allow for a worse escalation situation that the client will end up paying for even though it may not eventuate.
Perhaps the most obvious implication for local authorities and Transit could be not enough funds in next year’s budgets to carry out the work. One hundred and seventy-five thousand tonnes of bitumen are used in New Zealand each year. The recent 30 percent increase in price corresponds to around $43 million extra per annum. It’s a big problem.
So what can be done about all this? Roading New Zealand has the following five suggestions:
- Local Authorities, Transit, LTNZ and the government make provision in next year’s budgets for the increased cost of bitumen;
- All roading contracts involving bitumen contain a market fluctuation (rise and fall) clause;
- LTNZ sets up a hedging fund to manage market fluctuations;
- LTNZ’s financial assistance policy for local authority emergency work be applied to bitumen price escalation shocks because of the constraints on a local authority’s ability to pay;
- The formula used to calculate the Reseals Index is updated to be more accurate.
I believe bitumen price market fluctuations is a key issue for the whole sector and would be very interested in hearing your view. You can email me at chris@roadingnz.org.nz.
Contractor Vol.32 No.2 March 2008
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