Viewpoint: Asia bitumen market faces more turbulence

Asia-Pacific bitumen markets continue to be buffeted by non-fundamental factors, with volatile crude prices, the US-China trade war, new US sanctions on Iran and weakness in key currencies all affecting market activity in 2018. And while the demand outlook is largely stable for 2019, the pending implementation of tough new marine fuel emissions standards could impact production economics in the next 12 months.

Regional bitumen markets have already been adapting to new arbitrage flows, partly as a result of larger fleets being deployed by trading houses. More competitive bitumen prices in the Mediterranean compared to Asia have also driven arbitrage shipments.

But one major trade flow — of bulk cargoes from Iran to southeast Asia — came to a complete halt in May, when the US announced new sanctions on Tehran. The sanctions on Iranian oil exports, which took effect in November, have significantly hit trade, with all container and bulk shipping lines exiting Iranian waters.

Oman and the UAE have stopped discharges of Iranian cargoes at several ports as they check documentation, further restricting activity. Qatar, which is already facing a trade embargo from Gulf Co-operation Council countries, has switched to importing cargoes from Singapore and the Mediterranean market in place of Iranian supplies.

Iran bulk and drum prices rose by only around 7pc and 6pc respectively in the first 11 months of 2018. Exports of bitumen from Iran are expected to fall further from November.

Supplies from Bahrain have replaced Iranian volumes in the market. Bahraini cargoes have been moving to southeast Asia since September, opening up a new supply route. Bahrain bulk cargoes had never moved to Asia-Pacific before 2018.

China demand flat

Imports to China, the largest bitumen market in Asia, were flat at 2.4mn t in the first half of 2018. Availability has been squeezed, with supply curbed from two refiners in major exporter South Korea. S-Oil installed a new residue fluid catalytic cracker while Hyundai Oil Bank started a delayed coker unit, cutting bitumen production at both companies.

Chinese imports also came under strong pressure from a fall in the value of the yuan against the US dollar, partly as a result of the trade war between the countries. This may have supported Chinese exports, which crossed 500,000t for the first time in January-June. Most cargoes stayed in the region, but vessel repositioning from Asia to the Americas resulted in Chinese cargoes moving to Chile and the US west coast.

China's bitumen demand has held fairly stable and is expected to total around 30mn t in 2018, similar to 2017.

Southeast Asia slow

The southeast Asian bitumen market remains steady in 2018, with demand in Indonesia and Vietnam holding stable. Indonesian imports for the first half of 2018 were at 381,951t unchanged from the same period a year earlier. But Indonesian road works have slowed, primarily because a weaker rupiah against the US dollar has made imports more expensive. Vietnam's imports fell by 8.1pc from a year earlier to 388,049t in the first half of 2018. Prolonged wet weather hit road construction in the country, while the availability of lower-priced imports from Iran was not sufficient to offset a decline in shipments from southeast Asia.

India remains a growth major regional growth centre, with state-controlled refiners in the country seeking cargoes through imports for the first time in 2018. Consumption in April-September, the first half of India's 2018-19 financial year, rose by 20pc from a year earlier to 2.9mn t. India's total imports, mainly by private-sector firms, fell by nearly 48pc over the period, largely because of the monsoon season.

The demand outlook for most of the region looks stable in 2019, with national elections due in Indonesia and India. Demand typically slows in an election year in Indonesia, but the opposite occurs in India, as road project work picks up pace. And China's 13th five-year plan from 2016-20 is also nearing an end, with demand typically rising around the fourth and fifth years of the plans.

Bitumen production economics have remained weak against high-sulphur fuel oil for most of 2018, encouraging refiners across the region to maximise fuel oil output. Indications are that production from Singapore-based refiners will be low in January 2019, although demand is also expected to remain slow amid the northern hemisphere winter. But a new production dynamic will emerge in 2019, as the implementation of the International Maritime Organisation's new emissions standards — which cut sulphur content in marine fuel to 0.5pc in January 2020 from 3.5pc now — threatens to significantly affect refinery operations.