The coronavirus outbreak is significantly affecting commodity markets, including bitumen. Bitumen markets are almost completely shaped by weather, and financing, and the toll that coronavirus has taken on economies has affected bitumen.
Join Argus Media’s bitumen editor for Asia-Pacific, Aabha Gandhi, and vice-president for refined products, Asia, Sunita Sharma, in an exclusive podcast where they examine supply and demand fundamentals, as well as some of the expected repercussions in Asia-Pacific markets.
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Recorded on 31 March
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Aabha: Today's podcast is brought to you by Argus Media, a leading independent provider of energy and commodity pricing information.
Coronavirus has affected commodity markets across the globe, and bitumen is no exception. I’m Aabha Gandhi, bitumen editor for Asia-Pacific markets at Argus, and with me is Sunita Sharma, vice-president for refined products, Asia. Stay tuned as we discuss the coronavirus impact on Asian bitumen markets.
Aabha: The coronavirus outbreak in China and the spread to the rest of the world is significantly impacting commodity markets, including bitumen. Bitumen markets are almost completely shaped by weather, and financing, and the toll that coronavirus has taken on economies has affected bitumen.
Sunita: Hello, this is Sunita
Aabha, let’s look at this from a supply angle. The coronavirus outbreak has sent refinery margins crashing as transport fuel demand is severely impacted. Jet margins were negative, gasoline still is, and gasoil is under $13/bl today (31 March). We are seeing refiners in South Korea, Singapore, India, and China starting to cut runs as a result. How is that likely to affect the bitumen market?
Aabha: Spot prices for bitumen, as evidenced by our fob Singapore assessment, which prices around 70pc of the Asian spot bitumen trade, had been rising steadily. They moved from the low $370s/t fob Singapore level to $410/t fob Singapore over July to November 2019. This was in anticipation that demand would outpace supply with the onset of peak roadbuilding activity post-lunar new year holidays. Argus, of course, assesses markets 30-40 days out, so end-November prices would have been reflecting cargoes loading in December and January.
But what has happened since is that we have had a huge demand shock. We are only hearing of the first of refinery run cuts you mentioned earlier, and we are expecting more. But even as we see supply reductions, it is the enormity of the loss of demand which is dragging bitumen prices down. In the two months to 20 March, we have seen prices fall by 51pc, to $175/t. And we see increasing pressure on the market.
Sunita: So, then you suggest that the worst may be yet to come. This epidemic has taken a toll on Asian currencies. How do you see that affecting demand for bitumen?
Aabha: Yes indeed. We have seen sharp falls in the value of the Vietnamese dong and the Indonesian rupiah. So, for example, last year in March the Indonesian rupiah was at 13,500 to the US dollar, now it is hovering around 16,000 rupiah to the US dollar — a drop of 18.5pc. Similarly, the Chinese renminbi was at 6.6 to the US dollar now it is at 7.1 to the US dollar, a drop of 7.5pc. And of course, the Australian dollar has been a weak performer. This time last year the Australian dollar was at 1.3 to the US dollar, now it is at 1.8 to the US dollar. Regional buyers are telling us that they are struggling to pay for US dollar-denominated bitumen costs when they are paid in local currencies.
Sunita: What’s happened with freight Aabha? Despite the weakness in the markets we have seen the cost of chartering a vessel rise.
Aabha: Yes, rising freight costs have added to the woes of the buyers. Let me give you some examples on two popular routes. We have seen the freight rates on the Korea to China route rise by a hefty 75pc from a year ago to $40/t currently. And on the Singapore-Gresik, Indonesia route, freight has gone up even more, by a staggering 114pc over a year, again to $40/t. This has partly to do with lack of availability of vessels in this region, with larger vessels above 10,000t range being moved away from Asian waters to the even more attractive Mediterranean to US east coast route. There are also fewer spot charters available, with more vessels in the region chartered on a term basis.
In the coronavirus environment one must not forget that the IMO implemented the 0.5pc sulphur specification from 1 January 2020. The run-up to 1 January resulted in freight rates rising very sharply because of expensive low-sulphur fuel oil.
Right now, we are also seeing operational challenges aplenty at both load and discharge ports. What we are seeing now, in Indian ports for example, are force majeures. Vessels were already being delayed with crew asked to complete a 14-day quarantine before discharging cargoes. This is adding further tightness to the already restricted vessel market. Argus assesses the Bandar Abbas-Mundra and Bandar Abbas-Haldia routes and these have gone up 17pc and 11pc between January and February of this year.
So yes, buyers have had a triple whammy — weaker local currencies and rising freight costs, even as demand evaporates because of the lockdowns.
Sunita: Aabha, governments across the world are scrambling to put together measures to stimulate their battered economies, in the aftermath of the virus. Has experience shown us that infrastructure spending is likely to increase as a result, and bitumen consumption likely to go up?
Aabha: There were already ambitious road construction programmes across the region as governments sought to boost slowing economies. India, for example, had vowed to increase road construction from 25 km/day to 40 km/day. It’s very likely that they will step this up to shore up the economy.
Similarly, for China, which is in the last year of its 13th five-year plan. This year was already expected to be a strong year for China in terms of infrastructure spending. But we expect to see the Chinese government push road construction further.
Having said that, we have never been faced with a situation like this. The typical basis for comparison is SARS, but the scale this time is bigger than anything then, even in terms of fatalities and impact on economies. As per the Argus Asphalt Annual China’s bitumen imports last year stood at nearly 4.2mn t. In the first quarter of 2019 alone China had imported 878,000t. This year the numbers should be sharply lower.
Sunita: Tell us a bit more about the impact of lower demand in China. Do we expect to see increased exports?
Aabha: As of now the only exporter out of China is state-owned refiner Sinopec, which exports to Vietnam, Thailand, Myanmar and small volumes to Indonesia. Australia is also a buyer of Chinese cargoes. Sinopec exports around 30-40,000 t/month. But we are given to understand that the Chinese government is looking at the taxation structure to make it viable for independent refiners to consider the option of exporting cargoes, particularly from the Shandong side.
Sunita: How do you see the impact on the Mideast Gulf bitumen trade from coronavirus?
Aabha: I think it is particularly relevant to the Indian market, especially as it remains reliant for bitumen imports from the Mideast Gulf. India is a 6.6mn t demand market. Imports are taking an even bigger share of the pie. Imports in India for the financial year ending in March are expected to cross 1.2mn t. But with cases rising in India and the country under a 21-day lockdown, construction activity has fully halted. This is the peak construction season in India and now the uncertainty over the lockdown is tremendous. Importers and refiners are now basically sitting on inventory losses. Demand was already slow because of tighter availability of funds, but the lockdown will have a far larger impact on bitumen consumption.
Sunita: And finally, Aabha, how do you see the bitumen market for the second quarter in Asia?
Aabha: I think the second quarter will be as challenging as the first one, if not more. There are a few fundamental factors to keep in mind. By end-April the fasting month of Ramadan starts. This is followed by the Hari Raya Puasa holidays end-May. The second quarter is also the onset of the wet season in Vietnam and parts of south China, and this is of course followed by the start of the winter season in Australia.
I think it is very important to keep in mind that high inventories across Asia in the first quarter will be carried over into the second quarter. But demand will remain weak and that will add pressure to supplies and prices. This of course hinges on the coronavirus impact lasting into the middle of the year at least. But volatility is the new reality we all live with.
Sunita: Thank you Aabha. And thank you, of course, for tuning in to our Argus podcast. If you are interested in reading more news stories about the impacts of the coronavirus outbreak on the world economy and commodity markets please log on to the Argus coronavirus hub: www.argusmedia.com/coronavirus
And if you are interested in a trial copy of the Argus Bitumen report, please go to www.argusmedia.com/en/oil-products/argus-bitumen
Aabha: Thank you everyone, and keep safe.