Australia’s road construction and maintenance businesses are experiencing massive uncertainty as the Iran war drives concern over bitumen supply whilst higher diesel costs impact all parts of the sector.

And indirect effects from the war could flow through to the broader construction industry (see below).

But the degree of impact will depend on the duration of the conflict.

Big effect on roads
With shipping in the Strait of Hormuz effectively blocked, the Australian Flexible Pavement Association (AfPA) warned last week that impacts upon road construction and maintenance are likely to be severe.

It noted that the strait carries around one-fifth of global petroleum liquids along with a substantial share of global liquified natural gas. The effective suspension of commercial shipping through this passage has triggered global supply chain realignment.

In its statement, AfPA warned of exponential consequences the longer the disruption continues as further layers of risk will compound the effect on supply chain recovery timelines and costs.

“Disruption to maritime trade through the Strait of Hormuz, one of the world’s most critical energy shipping corridors, now delivers direct material consequences for Australia’s road construction sector…” the AfPA said in its statement.

“… The sector (roads and pavements) faces simultaneous supply tightening and cost escalation across its most fundamental inputs. Industry advice indicates that without a restoration of normal trade flows or suitable alternatives, Australia’s bitumen supply faces serious risk of stock outages within weeks.

“Should that occur, road construction and maintenance works will be severely impacted. Similar to other hydrocarbon-based products, bitumen is anticipated to suffer material price shocks greater than 50 percent over this timeframe.”

In a statement, AFPA says that several areas will be impacted.

First, there is bitumen and bituminous binders.

Australia imports most of its bitumen supply from Asian refineries in South Korea, Singapore and Thailand. In turn, these refineries depend on Middle Eastern crude oil as feedstock (bitumen is a by-product of crude oil refinement).

In response to current conditions, a number of suppliers have either cancelled supply commitments or invoked force majeure provisions in their contracts. (‘Force majeure’ provisions are provisions within contracts that free both parties from obligation in cases where an extraordinary event prevents one or both parties from performing their obligations.)

To maintain continuity of supply, the sector is actively sourcing bitumen from all available global markets.

Nevertheless, this carries significant cost implications in terms of freight, logistics and price differentials.

Industry advice from major suppliers and contractors indicates that bitumen prices are anticipated to rise by more than 50 per cent, AfPA says.

In addition, the global bitumen market is experiencing immediate and significant tightening of supply. This has created a very real prospect of stock depletion and stockouts in the near term.

Next, there are spray seal, emulsions and related products.

These products underpin a substantial proportion of Australia’s road maintenance program.

Spray seal operations consume bitumen at scale equivalent to or exceeding hot mix asphalt applications, AfPA says.

Bitumen emulsions, polymer modified binders, cutback bitumen, and other hydrocarbon-based products face the same supply constraints and cost pressures as base bitumen.

Next, there is the impact on diesel fuel.

Diesel fuel underpins every stage of road construction and maintenance. This ranges from aggregate heating and drying at asphalt plants to the operation of pavers, rollers, and bitumen sprayers though to material haulage from quarry to site.

Since the beginning of this month, diesel prices have risen by approximately 30 percent.

This will deliver immediate impacts in terms of material costs across all project delivery.

Finally, there is asphalt production. Hot mix asphalt manufacture demands consistent, high-volume fuel input for plant burner and heating operations.

Rising diesel costs and tightening bitumen availability are likely to constrain production capacity and place upward pressure on delivered asphalt prices nationally.

Beyond specific materials, AfPA notes that the disruption will have implications for Australian bitumen specification.

Australia operates according to a unique C-class bitumen designation for bitumen specification under Australian Standard AS2008.

However, much of the bitumen product is currently being sourced aligns to international penetration-grade specifications, These do not align directly with the Australian Standard.

It will be important for governments and road authorities to be aware about this distinction when making decisions upon procurement and specification requirements, AfPA says.

(image: AI generated via freepix

Broader construction impacts will depend on course of war

Beyond roads specifically, the war is expected to affect the broader construction sector more generally.

In an email response to questions from Sourceable, Thomas Westrup, lead economist at Oxford Economics Australia, said that in some respects, the current situation resembles an energy-driven price shock similar to that which occurred after the Ukraine invasion in 2022.

However, there are differences in that the 2022/23 crisis coincided with other inflationary pressures such as post COVID supply chain disruptions and a depreciating exchange rate.

As things stand, the impact of the latest war is primarily isolated to energy commodities (oil, LNG). However, there is the risk of this translating into broader supply chain disruptions.

All up, Westrup says that affects are likely to be twofold.

First, there are the direct impacts in terms of bitumen and diesel referred to above.

Beyond that, wider effects are likely as energy commodities affect costs associated with manufacturing and transport/shipping.

This will place upward pricing pressure on heavy or bulky materials such as steel and concrete.

The rate of cost escalation which is associated with these items is likely to exceed that of CPI inflation, Westrup said.

Asked about the likely magnitude of impact going forward, Westrup said that this will depend upon how the war progresses.

In an optimistic scenario where the conflict lasts another 1.5 to 2 months, Westrup anticipates a gradual trade recovery beginning in the second half of this year.

Under this scenario, he expects a 30 to 40 percent increase in average crude oil prices across 2026 compared with 2025. However, the price and availability impact would largely be restricted within the confines of the current year.

In terms of how this flows through into construction projects, Westrup says that diesel cost can account for something in the vicinity of five percent of overall project costs for an infrastructure development – although this varies from project to project.

For road projects specifically, the combined effect of bitumen and diesel could be around 15 percent.

Granted, Westrup acknowledges that this does represent a material impact on prices. However, he stresses that such effects would be limited to 2026.

Greater difficulty would ensue in the event of a more protracted war.

For one thing, any prolonged conflict will see prices for refined oil products maintain higher rates of escalation for a longer period.

Beyond this, the further escalation of conflict alongside a more prolonged war presents the risk of broader supply chain disruptions across the economy. This would have large, whole-of-economy impacts on prices for construction materials, plant and equipment., Westrup says.

Road sector must work together

In response to the road sector challenges in particular, AfPA has called on governments, contractors and suppliers to work together.

In terms of government, AfPA says that state and territory road authorities should work with industry contractors to review and prioritise forward works programs in a way which is aligned to current material availability.

Where supply is constrained, priority must be given to critical infrastructure and network maintenance projects.

Authorities are encouraged to engage closely and early with industry suppliers and contractors to support effective continuity of prioritised works.

Also important is engagement with industry in regard to the cost escalation which is associated with bitumen and diesel inputs.

AfPA also draws road authorities’ attention to the bitumen specification matter noted above, so they are positioned to make informed decisions on this issue.

Turing to road contractors, AfPA encourages these to review material cost escalation and supply contingency provisions.

Early communication with clients and supply chain partners is critical to ensuring project continuity.

Delivery on critical and safety-related projects must remain the most important priority.

Finally, in respect of suppliers and manufacturers, AfPA acknowledges the operational pressures suppliers which are associated with in the current environment.

The Association says that it will make every effort to keep members and authorities informed of material availability and lead times in order to enable effective forward planning across the sector.

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