The impact of Covid-19 has been felt significantly in Asian bitumen markets in Asia. As countries shut borders and enforced lockdowns, road construction activity slowed and then completely halted.
Join Argus Media’s bitumen editor for Asia-Pacific, Aabha Gandhi, and vice-president for refined products, Asia, Sunita Sharma, to look back at this year’s second quarter and share Argus’ view for the third quarter.
The content and analysis in this podcast is brought to you by Argus Bitumen service.
Aabha: Today is the 14th of May and this podcast is brought to you by Argus Media, a leading independent provider of energy and commodity pricing information.
The impact of coronavirus has been significantly felt on the bitumen markets in Asia. As countries shut borders, and enforced lockdowns, road construction activities slowed down and fully halted.
I’m Aabha Gandhi, bitumen editor for Asia-Pacific and Middle East markets at Argus, and with me is Sunita Sharma, vice-president for refined products, Asia. I would like to welcome you all to the second episode of our coronavirus podcast series, where we discuss the impact of the pandemic on the Asian bitumen markets.
Aabha: It is already well known the impact that coronavirus has had on the crude and oil markets. Bitumen has been particularly impacted as road construction in several Asian countries halted as countries rushed into lockdowns to control the spread of Covid-19.
Sunita: Hello, this is Sunita. Aabha, let’s start with the supply on the Asian bitumen market. In the wider products markets, we have seen negative margins for all products apart from gasoil, and even that is struggling at well under $4/barrel. As a result, we have seen refiners across Asia cut runs. How are these reductions affecting the supply of bitumen?
Aabha: Impact on bitumen supply is now being felt in the market as refiners in Asia have lowered runs to manage middle distillate supplies. Now as you pointed out that the refineries have cut runs quite significantly, What we are now seeing is potential bitumen supply tightness in the market. So for example, at least one large Singapore refiner is in the market looking to negotiate Q3 2020 cargoes with other suppliers to buy. Kemaman refinery in Malaysia has no spot cargo available for May or June. North Asian refiners in South Korea have no bitumen available until August.
Sunita: Can you explain in detail then what are the demand fundamentals for the second quarter?
Aabha: Yes, the challenge with the second quarter really was, and has remained, is high tank inventories. When the news of Covid-19 first started coming out towards the last week of January, cargoes were being imported to start preparing for the construction season from March onwards. But cargoes had to be diverted from China at the time in February and March to other southeast Asian countries, pushing inventories higher. Typically the first quarter is a slow construction season in Asia. By the time April came, countries such as Malaysia, Indonesia and Vietnam, all started implementing lockdowns to contain the virus. But tank inventories were high and road works stopped.
Demand did weaken for the second quarter, but what has also happened at the same time is as explained that supplies have been getting tighter. So unlike 2016, when crude prices fell and corresponding demand for bitumen fell, bringing prices as low as $120/t fob Singapore, the difference this time has been that while demand has weakened, supplies have tightened and Singapore prices have probably reached a bottom at $175/t fob in mid-April. Prices are now of course rising.
Sunita: What are the latest updates for Chinese bitumen market?
Aabha: China has started to show signs of improvement. Cargoes are being imported and contractors are prepping for road works due to begin in June. China’s consumption has fallen by 13pc in the first quarter year-on-year to 6.2mn t. Production of bitumen was also lower in the first quarter by 17pc to 5.2mn t year-on-year.
Chinese importers are back in the market seeking cargoes as they start to prepare for the construction season from July onwards after the wet season eases.
Sunita: How about India’s market with the extensions of the lockdown there and refinery run rates, where does this leave the bitumen demand and supply?
Aabha: India’s lockdown has perhaps been one most of the most severe. Since the lockdown has been implemented, Indian refinery run rates have significantly fallen and while production is likely to have lowered, the demand loss is huge. India’s bitumen consumption for the financial year ending March 2020 was at 6.2mn t, lower by 5pc year-on-year. The lockdown was first implemented in India in mid-March, at the time Indian importers were bringing in cargoes to prepare for the paving season that would have lasted until at least early June. But what the lockdown has resulted in, is that construction workers left the cities to head back to their villages, which has now created a severe shortage of labour. India is gradually lifting its lockdown, and while road works have started, industry estimates it to be only around 10pc. And inventories are high across the ports in the country and were estimated to be at around 150,000-180,000t and these are just estimates of the imported inventories. Refineries are also sitting on equally, if not higher, inventories. The value loss of this inventory is huge as prices have fallen by nearly 68pc from 31 March to $102.50/t fob Bandar Abbas as of 7 May.
Sunita: With supplies tightening and demand in southeast Asia yet to pick up, how is the bitumen vessel freight rates holding?
Aabha: Asian freight rates have seen a slight lowering in recent weeks as vessel availability eases and low-sulphur fuel oil prices are low. And freight rates will come under more pressure as supplies of bitumen get tighter. Vessel owners are still holding on to the rates. But as Asia enters the monsoon season and Australia enters the winter season and supplies remain tight, pressure on freight rates will increase.
Sunita: And finally, how do you see the bitumen market for the third quarter in Asia?
Aabha: The third quarter will be very interesting to see in the Asian markets, particularly as it is almost the end of the monsoon season and road construction activities will start to pick up. China will be ramping up its pace of construction work as it looks to complete projects ahead of the end of the 13th five-year economic plan.
Southeast Asia is a bit of a mixed bag. The flip-flop by Malaysia on the extension of the lockdown has meant that the pace of road works remains weak. But Thailand, which had not released its budget since October last year, released the road works budget in early May, this has led to demand picking up. Indonesia on the other hand remains weak, partially because by the end of May is Hari Raya Puasa holidays and because there are delays in payments for road works.
But the real question now is, where are the supplies for bitumen going to come from?
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 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.