Determine ROI for adding, expanding asphalt plants
August 9, 2010 By Mike Devine
It’s the height of the paving season, the jobs have been bid and your crews are on site ready to work.
It’s the height of the paving season, the jobs have been bid and your crews are on site ready to work. A call from one of your haul truck drivers lets you know they’re still waiting in line at a competitor’s asphalt plant. With the competitor’s trucks taking priority and the season at its peak, the lines are extra long. Once the trucks get through the line, it’s a 20-mile drive to the worksite since there are no plants located closer. To top things off, you know you’re paying a $25-per-ton premium because a recent consolidation of large producers has driven the costs higher. It’s certainly not the first time you’ve had a job held up this way, either.
The inconvenience and cost may be frustrating, but can you justify purchasing an asphalt plant with a price tag somewhere between $500,000 and $4 million? It’s not a simple answer, nor is it the same answer for everyone. There are numerous factors to consider when deciding whether the return on investment for an asphalt plant will happen quickly enough to meet an individual company’s expectations. You need to consider the market, the plant and permit costs, the local environmental regulations, area competition, aggregate supplies, mix cost … The list goes on, but everything ties directly to the bottom line.
There’s no need to be overwhelmed. Just walk through the process one step at a time. Even if you already own an asphalt plant, but are considering expanding to a larger plant or adding components, the same process applies. Upon taking the time to clearly analyze the situation, you will be able to pave a clear path into a profitable future.
What can the market hold?
Among the first things to determine will be the size of the market. Determine the capacity being used, but also take into account potential customers’ capabilities. Start with looking at the availability of aggregate. Large asphalt producers consume the bulk of aggregate supplies in some markets, so a new asphalt producer may need to look for a nearby aggregate source. Ensure that the source will be able to fulfil needed supplies through peak paving months.
|While the price might not be right for everyone, purchasing your own asphalt plant could have numerous benefits down the line.
Spend some time looking at contracts awarded in the area, as well. How many tons of asphalt are put down in an average year? How many paving companies work in the area, and how large are the crews? Analyze what percentage of bids a new asphalt plant would be able to supply in the years to come.
One of the most common mistakes a new asphalt producer will make is to buy a plant smaller than what can be supported. Once a company has control of its own asphalt supply, it will be able to lay down considerably more material while also producing and selling hot mix. Don’t assume that bigger is always better, though. A plant with a capacity that greatly exceeds demand doesn’t make sense either.
For help determining market capacity, contact a knowledgeable asphalt plant manufacturer. The manufacturer should be able to assist with determining production and storage capacity, RAP systems, portability needs and the right drying and mixing technology. They also will be able to explain additive options and should be familiar with the relevant environmental regulations.
Where will the plant go?
Upon deciding that the market can support another asphalt producer and the amount of asphalt that could be produced, begin exploring property locations. Rules and regulations vary greatly from one area to the next with regard to permitting, land use, environmental controls and transport restrictions.
Permitting rules and fees can vary for each province or territory. For instance, some local government entities will list exact permit fees for various activities. In other areas, fees are calculated by plugging a few measurements — asphalt production quantity, diesel generator kilowatt hours and gallons of diesel burned — into an equation. Additionally, acquiring a permit can sometimes be a long process — six to 12 months in some cases — so it’s best to start early.
Environmental regulations have considerably less impact on plant locations today than they have in the past. Asphalt recycling has become increasingly more common since the 1970s, and plant manufacturers have developed new drying and mixing methods to further themselves from being inaccurately labelled as air polluters. It’s been several years since asphalt plants have been removed from government lists of industries considered to be major sources of hazardous emissions. There are still areas where it may be difficult to get a permit for certain plant designs, however.
One final item to check on will be transport restrictions that may apply to the area. Also, if it hasn’t already been established, a new producer will need to set up trucking provisions to transport material from the plant to the jobsite. The main thing to keep in mind is to explore any restrictions and permitting fees early in the process to prevent any surprises later.
Beyond restrictions and regulations, consider portability requirements when deciding where to locate a plant. While a stationary plant will be the best choice in some circumstances, a portable plant will be the better option in areas where jobs are considerable distances apart or in a market where there is little growth and a small population density. Other markets may see workload shift from one area to the next based on the season, which also would make a portable plant more viable. Typically, it’s easier to get a permit for a portable plant’s locations than for a stationary unit. Portable permits will be granted for one main location, and then — depending upon the state — subsequent temporary permits for operating locations will be easier to obtain or may not even be required.
What will it really cost?
With a six- or seven-digit price tag, an asphalt plant is a sizeable investment for any sized company. The good news is that a plant typically will produce a return on investment faster than similarly priced equipment. This is possible since a paving company moving into asphalt production will gain greater efficiency upon controlling its own asphalt supply. When coupled with producing a product to sell, the ROI tends to happen even more quickly.
Compare plant prices and what each package contains for the cost, but also look at operating costs and production capacities. A plant that is not fuel efficient or does not produce enough tons per hour for a smooth operation will cost more over the course of its lifetime, even if it costs less up front.
Consider the cost of the mix components, too. How much will need to be invested to get started? What would be a fair price per ton to turn a profit?
How much will be saved?
ROI scenarios vary from one extreme to the other, with some asphalt producers producing enough to cover the plant cost within a year. For others, it may take 10 years or even more. Most contractors who are able to consistently produce as little as 50,000 tons per year — and for some, even less — will find that the benefits will quickly outweigh the costs. The majority of new asphalt plants will realize a return in three to 10 years. A number of money-saving factors compound to bring about a relatively fast ROI.
For starters, a paving contractor who begins producing asphalt will no longer be at the mercy of competitors’ schedules and asphalt prices. For instance, if asphalt suppliers in a particular area consolidate, their customers will typically see a cost increase. In some locations, this type of merger has resulted in nearly double the price of asphalt.
Beyond price, being self-dependent for asphalt production also greatly increases a paving contractor’s efficiency. Owning an asphalt plant means no more trucks waiting in line at a competitor’s plant, especially during peak paving months. It also means paving crews won’t be held up waiting for the truck to return with hot mix. As in most other businesses, time is money. By eliminating waiting times, contractors will be able to lay more asphalt and thus complete more projects.
In many areas, increased efficiency also will be realized through less transport time. A contractor with a portable plant can place it where it’s most convenient for them rather than commute to a competitor’s plant. Shorter hauls also mean fewer trucks will be needed to get adequate asphalt to a paving crew. These factors combined usually result in at least a 50 per cent better truck utilization for a paving contractor who adds asphalt production methods. Figuring an average of $70 to $75 truck costs per hour, that can easily add up to $1,500 per day.
For those already in the asphalt production business who may be considering a newer, larger capacity plant, costs should still be examined. While many of the questions a first-time asphalt producer may have will be null, other cost saving aspects should be calculated into the equation. For instance, a newer plant will reduce maintenance costs, offer better mix consistency and produce cleaner emissions. A larger capacity plant also will enable a company to bid on bigger projects. All of these factors should be considered when weighing the costs and benefits of purchasing a plant.
What features mark quality?
So, when it comes down to the details, what should a new asphalt producer look for to help guarantee the best ROI?
A plant with a dual-drum configuration will maximize fuel efficiency while minimizing hydrocarbon pollution. A clean-burning plant also will extend the life of the baghouse, and a dual-drum configurations’ efficiency results in increased production.
Plants with a separate mixing drum will allow more mix flexibility, which will be beneficial in the long run. By using a separate drum, additives and RAP can be introduced into the drum while remaining isolated from the drying and combustion zones.
Whether purchasing a plant for the first time or expanding to a larger plant, look for one that is easy to calibrate. This will lower the risk of drifting out of spec, which in turn gives producers confidence in the product they’re producing and customers will be satisfied. This will be an especially important feature when producing mix for Superpave jobs.
All the steps involved with researching buying or expanding a plant will take time, but it’s worth the peace of mind knowing that the best plant was purchased with the most adequate capacity. Plus, the same information used to research plant options will be needed to purchase a plant, so there’s no extra information gathering needed once a decision has been made.
It’s just a matter of moving to purchase, followed by a quick setup, and then firing up the plant to start working toward profits . . . and eliminating waiting lines . . . and lowering frustration. If an asphalt plant is a fit for your market, it’s just a matter of time until the headache of relying on others is replaced by the relief of higher, more consistent profits.
Mike Devine is president of Asphalt Drum Mixers in Huntertown, Ind.
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