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Viewpoint: Government policies weigh on Asian bitumen

21 Dec 2017 04:38 GMT
Viewpoint: Government policies weigh on Asian bitumen

Singapore, 21 December (Argus) — Policy challenges contributed to a significant slowdown in Asia-Pacific bitumen markets in 2017 despite strengthening regional economies, with little sign of an immediate pick-up in the early part of 2018.

Demand growth in 2017 may end up being the slowest for at least three years. Several factors contributed to the slowdown, but foremost among them were curbs on infrastructure spending in southeast Asian economies, especially Indonesia and Vietnam. Indonesia's bitumen imports fell by 30pc from a year earlier to 457,850t in January-July, although this was up by 9pc from the same period in 2015. And Vietnam's imports fell by nearly 18pc in the first half of the year to 319,180t.

China's bitumen consumption had been expected to hold fairly steady. But government environmental inspections pushed up domestic inventories and slowed road construction activity. China's bitumen imports fell by 11.6pc from a year earlier to 3.84mn t in January-September as a result, even given a relatively low base in September 2016 because of the impact of the G20 summit in Hangzhou at the time.

Government policies also played havoc with demand projections for India, another major regional growth centre. Delhi's abrupt demonetisation policy in November 2016, combined with the major goods and services tax (GST) reform in July 2017, combined to send bitumen consumption lower by 4pc in April-September, the first half of the country's financial year. Bitumen is now taxed at 18pc under the GST regime. An extended monsoon and a lack of funds also hit demand.

Regional producers sent some bullish signals. Refiners in Singapore, South Korea and Thailand cut bitumen output in favour of 180cst high-sulphur fuel oil (HSFO). But this was not enough to offset weakness in demand.

Vessel availability rises

A common factor across southeast Asia markets was an influx of bitumen vessels. Around 20-25 new bitumen vessels have been added to Asia-Pacific waters in 2017, most of which are at least 7,000dwt in size. The addition of larger vessels has put pressure on freight rates, but has also opened up arbitrage routes that were previously unworkable.

Trading firm Puma has moved as many as 5-6 large cargoes, all above 30,000t, to its tankage in Langsat, Malaysia from Iran in 2017. One cargo also went to Africa. The vessels, which were loaded from Iranian producer Pasargad Oil's tankage at the Imam Khomeini port, had a freight cost of only around $45/t.

Puma was not the only firm to move arbitrage cargoes, with other trading companies shipping large cargoes from Iran to Lome in Togo, west Africa and Gresik in Indonesia. The arbitrage shipments have replaced some cargoes from Singapore and Taiwan, especially into Vietnam and Indonesia.

Uncertain outlook

Challenges for both demand and supply look likely to persist in southeast Asia through the first quarter of 2018. Indonesia is entering the lean paving season and the Chinese winter will continue to curb work on infrastructure projects. The only possible exception is Vietnam, where construction activity may pick up pace ahead of the lunar new year holidays in mid-February.

The production outlook for January is still unclear, but the wide gap between HSFO and bitumen prices may continue to encourage refiners to produce more fuel oil at the expense of bitumen. In the medium-term, the introduction of International Maritime Organisation (IMO) regulations to cap sulphur content in marine fuels in 2020 may also force Asia-Pacific refiners to choose between producing bitumen and lighter oil products.

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