In the first of a three-part podcast series focused on global asphalt/bitumen markets, we’ll take a deep dive into specific regional market impacts as reflected in the Argus Asphalt Annual 2022.
Starting with Europe and Africa, Argus market experts Keyvan Hedvat, Irina Vinogradova, and Juan Castillo, provide a breakdown on the effects of the Russian/Ukraine conflict and other market disruptors on supply and demand and discuss the long-term outlook.
[Juan] Hello. Welcome to our podcast, "The Asphalt Story". In this series, we will be discussing the key highlights of the global asphalt market as presented in Argus' "Asphalt Annual 2022". In this episode, we want to give an overview of Europe and Africa bitumen markets, and the impact from the Russia-Ukraine conflict and other market disruptors. "The Asphalt Story" is brought to you by Argus Media, a leading independent provider of energy and commodity information. I am Juan Castillo, a consultant for Argus Consulting in Houston, and with me today are Keyvan Hedvat, editor of the Bitumen Report covering the Europe and African markets, and Irina Vinogradova, manager in Argus Consulting responsible for the specialty products coverage in London office. So to start with Keyvan, could you please tell us what is the demand destruction and the supply situation within the context of the Russia-Ukraine conflict?
[Keyvan] Yes. I mean, we've seen multiple impacts really of the global oil price spike and of the Russia-Ukraine conflict. Of course, the spike began before that conflict, and this has dominated the bitumen landscape, and as it has so many other energy and commodity markets. The most destructive impact on bitumen and asphalt demand has been felt, you know, across several markets in the Mediterranean, in the black sea, in other parts of Europe, as well as many parts of Sub-Saharan Africa as well.
We've seen road contractors all the way from Benelux to Romania, in Spain, and Italy, and in major bitumen importing markets like Algeria where project work has stopped or has been slowed down or delayed because of the massive spike in input costs. Of course, that's come from bitumen itself because of the way the oil prices have gone up and driven up outright prices for bitumen, but also a whole range of energy costs, you know, whether it's gas or diesel, which go into running plants and machinery where road project worked is involved, asphalt mixing plants, and all the other plants and machinery needed to conduct project work.
All these costs have all together, in a perfect storm, have risen dramatically. And what has happened is basically that projects that have been agreed or tenders awarded in maybe a year ago, two years ago, three years ago to contracting firms at certain fixed prices in many markets with a little flexibility really, with little wiggle room, what has happened to them is that, you know, now suddenly when the time comes to do the work, the costs of actually doing it have risen exponentially. So this is part of the reason why many projects have been slowed, you know, or stopped in some cases. And that's had a major negative impact in overall bitumen and asphalt demand. That's really what's happened.
I mean, one notable example, for example, Algeria is a major, you know, a leading bitumen importing market, which often consumes or usually consumes 700,000 to 800,000 tons a year of the product in cargoes which go to the Algerian ports. Usually, in this, sort of, peak season through much of the year from February, March to October, November, it will be something like, you know, they would usually be importing 60 to 70 KT a month of bitumen. What's actually been happening so far has been nothing more than 20, and in some, maybe up to 30 KT a month. Maybe something like a third of, you know, usual volumes.
And similarly, maybe not as bad, but a similar impact has happened in Romania where again a market that again is a major importer of its considerable needs for road and highway work. Bulgaria market too has been hit and, of course, Ukraine itself which was becoming a major import market into its black sea terminals. You know, this has happened from August 2020 onwards, they began being a major cargo importer and last year imported something like up to 200,000 tons of bitumen into various black seaports, including Nikolayev, for example, or Kharkiv and others. Of course, that market is now out of the equation, and that's taken up a whole slug of demand as well.
So these are some of the main destructive impacts that we've seen on the demand side. We've also seen much slower activity than usual, you know, as we go into the peak part of the season across Europe, you know, in markets like Italy, Spain, and Portugal, and as I mentioned before, Benelux too. But, yeah, gradually demand does increase. But what has happened is that with the biggest impact being felt in the Mediterranean markets, especially in the Central to Eastern Med and Black sea, which form a kind of supply-demand sort of market with Greece and Turkey, and Italy as the main export points, and Romania, Bulgaria, Ukraine as it used to be, and as well as, of course, the north African markets like Algeria through to Egypt, all those markets where demand has sort of lagged behind the available supply, we've seen prices for bitumen cargoes running at, you know, substantial discounts in many cases. FOB discounts to FOB Mediterranean high sulfur fuel or cargoes, whereas normally by this time of year, in the May, June period, they would be at substantial premiums.
And for these reasons, for reasons of rising freight rates, you know, which has been, you know, also driven by oil markets and, of course, bunker fuel costs spiking and making delivered prices into those locations I mentioned like Algeria, for example so high and buyers even more resistant to buy within the Med, there has been a real trend of moving cargoes from the Med to the north where markets, which have been relatively balanced, where supply has also been being restricted to a certain extent, while demand has not been so badly impacted as it has been in the Med.
So, you know, there has been shutdowns of refineries, permanent ones, which have been ongoing for a number of years, but the latest of them in February, when the ATPC refinery in Antwerp was shut down permanently, and all of a sudden there were, you know, a major maintenance shutdown of Shell's refinery in Pernis, a very important bitumen-producing refinery in the Rotterdam area, and prolonged shutdown since I think late 2020 at TotalEnergies' Donges refinery on the French Atlantic coast. We're still waiting for that to restart. The latest thinking is for the bitumen part of it. The rest have restarted, but for the bitumen, it seems like it's gonna be mid-June by the time that has started.
So those factors, as well as the much-reduced exports supply of Russian bitumen cargoes, which were a increasing feature of the North European markets for some years, and peaking really last year, at something like 400,000 tons out of St. Petersburg in Lomonosov. Those flows have also slowed considerably although there's more signs of more regularity in those flows now but, of course, much less than they would have been otherwise. But, yeah, all these factors together have kept the Northwest European, Northern Scandinavian Baltic markets relatively tight compared to the Med, and that has attracted sizeable volumes, and of course, that it's also resulted in the north for let's say Rotterdam cargoes being traded or indicated at premiums of something like $40 a ton to FOB Rotterdam high sulfur fuel oil barges.
We've also seen the Mediterranean high sulfur fuel oil prices, you know, the deficit of those two FOB Rotterdam high sulfur fuel oil. The Med North gap has basically widened a lot. The north became much more stronger relative to the Med in high sulfur fuel oil. And that has helped to encourage some of the arbitrage movement from the Med to North, because of those pricing differences, despite the fact that the freight rates are very high as I've mentioned before, especially on that kind of length of journey.
And the final thing really we're looking at now is to see...well, aside from, of course, the real impacts of the, you know, Russian crude and feedstock, you know, exports, how much the sort of various sanctions or self-sanctioning will actually end, and what timeframe they'll actually really impact supply. There has been the impact on some refineries for sure, a noticeable impact, but we wait for that. But we also wait to see if the westbound transatlantic arbitrage for bitumen does open up. And there may be some signs that that will happen in this coming period, maybe sometime during June, and we'll start to see more. But up to now, considerable volatility on oil markets, and high stocks in the U.S., particularly the U.S. East Coast key market there. And of course, and good availability from Canada, and to a certain extent from Columbia have prevented a real arbitrage from Europe. And buyers have been not wanting to commit in the U.S. East Coast to buying cargoes, given the volatility of prices and how much they can shift from one week to the next, one day to the next.
So we wait for a number of factors to make themselves felt, but this is the overall picture in bitumen at the moment. Waiting for it to kick start. Waiting for it to tighten and generate some momentum during the season. And that's where we're at.
[Juan] Thank you very much Keyvan. And now, to you, Irina, what can you tell us about the changes to the long-term demand drivers and the demand recovery rate?
[Irina] Thanks, Juan. First I think I wanted to commend that our thinking has changed quite a lot between the previous [inaudible 00:11:06] that we published last here, and this year, a lot due to the factors that Keyvan pointed out. Previously we were thinking more in terms of how the IMO 2020 is going to impact on the water, the first results of the COVID pandemic, and the impact that it has on the bitumen and asphalt markets. Now it's more related to the Russia-Ukraine conflict and the recession that we're expecting to follow, and first signs of which we started seeing here in Europe.
So, if you compare our numbers, say on the Western Europe demand freight cost, if last year the average compound annual growth rate for 2020, 2025 was in the range of 1.4%, now it is1.2%, and also the recovery is a different shape. I mean, we're not expecting the demand to recover in the next couple of years. Partly that's due to the high prices that Keyvan mentioned.
Generally speaking, in our crude and refined products team, the thinking is that the high crude prices that we're seeing now, well March, showed us that the, um, [inaudible 00:12:34] price can be close to $140 a barrel, but these level of prices is just unsustainable. So, we're forecasting that the prices are going to reduce to around an average $98 a barrel by the end of this year and dropping down in 2023 to $85 a barrel by 2024. So, with this, well, this is a good sign for anybody further down the line, so the contractors will rejoice at having slightly more manageable prices in the 2023, 2024. However, for now, the shape of their recovery is slightly different because it shifted by one or two years further down the line compared to what we were forecasting and expecting to happen last year.
Now, as Keyvan mentioned, there have been some changes on the supply side as well. So there was 1.4 million tons capacity closures in Western Europe alone. These is permanent closures. And also there are quite a lot of maintenances in Western, Eastern Europe, and lower exports from Belarus due to these actions that contributed to having a tighter market. So if previously we were looking at production increases of 2.8% compound annual growth rate in 2020 to 2025, in this year's annual we're looking at significantly more and more dearth figures of just 1% to 13% compound annual growth rate in between 2021 and 2026.
As we are thinking currently, we do not assume other permanent closures apart from the ones that have been announced, but that said, they can happen. It's just the thinking is even if they do, other players will step up and increase the production rate to become the so-called champion producers of bitumen. So that although there is a potential that there's going to be some capacity losses, the production is going to remain pretty much the same or at a similar level.
We do expect that there's going to be some capacity additions, so [inaudible 00:15:31] refinery bitumen unit, with 84,000 tons a year of capacity, we assume to come on stream in 2023. But that said, basically, the market doesn't know when exactly it's going to start up. Probably Eno [SP] doesn't know when exactly, or if this timeline is going to be feasible to start it up by 2023, so we're just going to wait and see. It's not such a massive unit to hold our breath, but this is going to potentially ease the supply in Central and Eastern Europe situation.
We briefly touched upon African market. Well, Keyvan mentioned a few things about it. So, in the annual, when we're looking at it, it seems to be one of the few bright stars in terms of the demand growth. So the demand growth between 2021 and 2026 is going to be about 2.8% compound annual growth rate, which is significantly higher than, say, Europe which has just 1.2%, or Central, Eastern Europe, which actually has a negative growth because of the Russia-Ukraine conflict and the loss of demand in Ukraine and neighboring countries that are going to be struggling to recover from the impact of the Russia Ukraine conflict and the related instability and the recession, really.
So with Africa, there's quite a lot of projects going on, or scheduled at least. So if the prices will come down as we think they will, then we will see this growth slightly further down the line. The region will continue to be a net importer of bitumen from Europe and Middle East. So currently, we're seeing slightly less availability from Europe, so Middle East will have to step up a little to cover up the shortage.
But this recovery can be potentially slowed down due to higher than expected prices, so let's wait and see. Our forecast was based on the thinking that the crude price is going to go down by 2024.
[Juan] Thank you very much, Irina, and thanks Keyvan and Irina again, and thank you all for listening. We hope to be back with you again soon, with another episode of the series, "The Asphalt Story on the American Markets". For further information about the bitumen coverage, you can check out our Argus bitumen publication and the "Argus Asphalt Annual 2022". And to learn more about Argus Consulting services, please visit www.argusmedia.com/consulting.