The Petcoke Podcast: Is US coke supply scarcity here to stay?

Author Argus

In this episode, Argus petroleum coke consultant Hayden Atkins joins editor Lauren Masterson to discuss the US coke supply picture.

The Covid-19 pandemic’s unprecedented disruption to the refining industry has dominated most thoughts about why coke supply has been so scarce. But Hayden points out that cokers have actually been running at higher rates than overall crude processing would suggest. Much of the recent extreme supply crunch actually stems from demand-driven inventory drawdowns in the first quarter. These are now catching up with refiners, who in fact face more challenging coker economics now than they did in the second quarter. 
 
Listen in as Hayden and Lauren discuss where Argus sees the US coke supply scenario in the coming months.

 

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Transcript

Lauren: Hello and welcome to "The Petcoke Podcast." In this series we'll be speaking with key industry experts to gain their insight into the latest trends for petroleum coke markets around the world. I'm Lauren Masterson, Editor of the Energy Argus Petroleum Coke Report. In today's episode, we'll be discussing the U.S. petcoke supply picture. My guest is Hayden Atkins, Senior Consultant for Argus. "The Petcoke Podcast" is brought to you by Argus Media, a leading independent provider of energy and commodity pricing information. So let's get started. Hi, Hayden. Good speaking with you today. 
 
Hayden: Hi, Lauren, thanks for having me. 
 
Lauren: The big story recently is the lack of spot supply in the market pushing up prices. What's your view on how supply actually looks at the moment and what's driving this? 
 
Hayden: So, there's two things to unpack in terms of supply and availability. The first is production or what's coming out of a coker at the moment. And if we look at the second quarter of this year, it looks like coke output was down roughly 6% year-on-year across the U.S. There was a lot of regional differentiation. And we are comparing this to a relatively weak period last year when maintenance was particularly high. But in the context of, you know, a very dramatic collapse in refinery utilization and falls in transportation fuels demand, it doesn't look like coke output has really been particularly weak. 
 
The second is the level of inventory available. And that looks like it's been dropping all year. So, inventory was starting to come down fairly quickly even before the COVID-19 crisis, really because of very strong shipments to India on the back of weak pricing that we saw at the end of 2019. And more recently, demand for China has remained pretty strong as tariffs have been removed and domestic coal prices in China have been much higher than seaborne market benchmarks. So, that looks like it's pushed down inventory levels even further. 
 
So, as we sit here today, looking through the third quarter, it looks like supply and availability is pretty tight. You know, we have inventories at low levels. It doesn't look like they're gonna be rebuilding particularly quickly. And, you know, while refinery utilization is starting to improve, coke economics don't look as compelling, you know, as they were just a few months ago. So, it doesn't really look like we're gonna be shifting the supply picture particularly quickly, you know, over the next quarter or so. Now, even though demand from some of those important price-sensitive regions like India has fallen away fairly sharply as prices have become strong compared to thermal coal prices. 
 
Lauren: Okay. So, you don't see it returning quickly. How long do you think it will take for supply to begin returning to normal, or I guess we should say the new normal? 
 
Hayden: In terms of transportation, fuel's demand and refinery utilization as a whole, it does look like we're past the worst of the downturn in terms of the strictest levels of economic lockdowns across the U.S. But we are sort of reaching this threshold in terms of economic activity that's sort of getting increasingly more difficult to leap over as COVID-19 continues to spread and be a problem in a lot of parts of the country. So, until we sort of get past that, you know, perhaps into 2021, you know, we're probably gonna remain sort of substantially below the pre-COVID-19 trend, and say until at least...until the middle of 2021. I think for complex refineries, though, particularly in the U.S. Gulf Coast, they're very competitive, both domestically and in international markets. And they're really flexible to market changes in terms of shifts in demand conditions and also to changes in crude and products spreads. So, we're probably closer to, say, a new normal for those refineries at the moment. I think in terms of petcoke output, you know, coker utilization is sort of constantly being affected by shifting, you know, crude and products spreads and, you know, even small changes in product demand. 
 
So, you know, perhaps things, you know, won't be as consistent in terms of output flow as they were a couple of years ago. But I think, you know, change in supply dynamics is sort of nothing new to the industry in terms of, you know, how quickly refineries adjust their crude and product slates and, you know, how that ultimately affects petcoke output. 
 
Lauren: Yeah, so on the topic of crude spreads, we've seen some U.S refiners like Valero coming out and saying they expect to process more sour crude as differentials start to widen  back out, or they expect them to. Do you see this happening and what do you predict for changing coke quality in the U.S. as a result? 
 
Hayden: It's Argus Consulting's view as well that, you know, we should see some widening in sour crude differentials and, yeah, other heavy feedstocks heading into the end of this year. And, you know, when that does occur, it'll probably partly mean higher coker utilization. So, that'll be part of the process of boosting petcoke output, you know, perhaps, you know, closer towards the end of this year. And it'll probably have more of a volume effect than an effect on quality. So, there may be some increase in sort of the average sulfur contents of petcoke from the U.S. Gulf Coast. But, you know, we're sort of not expecting anything particularly dramatic on the quality front. But I think, you know, that's a more important implication in the near term is, you know, they're talking about processing more sour crudes in the future, you know, when spreads widen. But, you know, if we look at the immediate future, you know, the narrow spreads are implying that, you know, there's sort of a significant headwind to petcoke output in the near term. 
 
So, you know, it's just another one of those indicators that suggest that, you know, output will be soft, you know, over the next quarter or so, you know, even as the demand for petcoke has picked up from, you know, a couple of key countries now in Latin America and Europe. 
 
Lauren: So, besides just crude slates, some refiners have been processing high-sulfur fuel oil following the implementation of the MARPOL VI rules, correct? Has this had any effect on U.S. coke supply as far as you can tell? 
 
Hayden: Yeah, so, the pretty substantial increase in fuel oil imports for further processing in coke is one of those factors, which contributed to the strong coke output before the COVID-19 problems hit the refinery sector. And this probably contributed to reasonable output, you know, over the last quarter as well. So, if we do look at some EIA numbers, the fall in petcoke output is more moderate than the decline in coker throughput. So, it does suggest that the yield of petcoke coming out of cokers, given what's going into them, has increased this year compared to this time last year. I guess, you know, the economics again of that are much less compelling given that the discount for high-sulfur fuel oil is so narrow at the moment. So, if this product isn't going into cokers it's sort of less clear where it's gonna end up over the next, you know, six months or so too. So, to some degree if, you know, U.S. Gulf Coast refiners are pulling back from that market, you know, there should be some correction in those flows, you know, probably towards the end of the year. And you know, prices should probably drop relative to everything else. 
 
Lauren: Let's talk specifically about U.S. West Coast supply. This seems to be the most affected market by supply cuts. We've just had Marathon announce they won't restart Martinez, and we still have the Richmond California ordinance against the coke terminal there that could affect Rodeo. Do you think that we've seen the last of the supply reductions out there and how is this going to affect low-sulfur coke consumers? 
 
Hayden: So, refineries on the West Coast, you know, are generally some of the least competitive within the U.S. and are sort of more captive to that domestic market than the U.S. Gulf Coast in terms of transportation fuel demand. And refinery utilization has been much slower to recover on the West Coast than it has elsewhere in the U.S. So, from, you know, kind of from that perspective, I guess we can't rule out further sort of meaningful changes to how some refineries might be utilized or set up. And, you know, that may affect, you know, how cokers at some of these refineries will be used going forward without, sort of, any specific examples of where it might be affected. I guess, though, you know, the fact that Martinez is now sort of indefinitely idled and very unlikely to come back, it sort of does improve the outlook for, you know, those that remain. And, you know, transportation fuels demand while, you know, recovering more slowly than elsewhere, you know, should, you know, continue to improve over the next coming quarters. 
 
So, to some degree, we should see you know petcoke output, you know, pick up from, you know, the absolute mid-year that, you know, we saw through that April and May period. But ultimately sort of the availability of low-sulfur shot coke is gonna be permanently lower than it once was. So, you know, some of the more marginal consumers of that product, you know, may ultimately be priced out and switch to an alternative in, you know, say using higher-sulfur coke or coal, you know, if they can, given the demand profile from some of the other consumers. 
 
Lauren: So, one other aspect of petcoke supply that's important to keep in mind is how its transported. Louisiana just signed a deal with the U.S, Army Corps of Engineers to deepen the Lower Mississippi River from Baton Rouge to the Gulf of Mexico, which would allow these ports to load larger Panamax vessels. Do you think this could have any impact on the petcoke market? 
 
Hayden: Yeah, I think it will be a competitive advantage for those refineries on the Mississippi in terms of competing into sort of long haul markets like India, where, you know, small changes in transportation costs can add up to a pretty significant competitive advantage, say, against refineries in Port of Houston or elsewhere in the Gulf. So, it probably won't drastically affect the netback pricing, sort of, outlook as a whole because we're sort of only partially shifting the ability to use Panamax vessels, you know, rather than, you know, changing it, the structure of the market overall. But to the degree that it'll provide a competitive advantage to some refineries, I think is, you know, a positive for them in terms of, you know, reducing logistics costs. 
 
Lauren: Okay, so lastly, you've recently come out with a multi-client study looking at regional market balances and longer-term price forecasts. Can you tell us a little bit about what that covers? 
 
Hayden: Yeah, sure. So, yes, things are obviously very uncertain at the moment, you know, just in the immediate term let alone over the next five years or so. But, you know, ultimately to make decisions you kind of need to take a view. And, you know, we've taken a view on what we think demand and supply and trade balances across the world are gonna look like over the next five years and, you know, what we think that will mean for prices for both fuel-grade and anode-grade petcoke. And, you know, even though there is all this focus on, you know, very near term trajectories of economies, you know, grappling with the pandemic, we shouldn't really lose sight of some of the bigger picture trends that are gonna shape these markets, you know, once we're sort of past this COVID-19 pandemic problem, you know, which will hopefully be sooner rather than later. And, you know, we've also taken a view on, you know, how petcoke is going to be? affected by significant changes in adjacent markets like thermal coal and aluminum markets as well. 
 
So, if anyone is interested in any more details on this study, you know, feel free to contact me. Probably the best way is via email and I'm at hayden.atkins@argusmedia.com 
 
Lauren: Okay, thanks a lot, Hayden, you've given us a lot to think about. And thanks everyone for listening. If you enjoyed this podcast please be sure to tune in for the other episodes in our series, "The Petcoke Podcast." For more information on Argus petroleum coke coverage, please visit www.argusmedia.com

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