Viewpoint: No end in sight for Europe bitumen glut

Europe's glut of bitumen will continue, as demand remains weak across much of the continent and refineries maximise runs to take advantage of strong margins for other products.

Despite a number of refinery closures in recent years, bitumen supply outweighs demand across most of Europe. Austerity measures, introduced following the 2008 financial crash, continue to stifle transport and construction budgets, leaving little scope for demand to increase.

With refining margins for many other products strong, particularly gasoline, European refiners are making hay while the sun shines, leading to overproduction of bottom of the barrel products, including bitumen. Total's European refining margin indicator (ERMI) increased to $54.1/t in the second quarter, from $10.9/t a year earlier while BP's second-quarter 2015 global refining marker margin (RMM) was $19.40/bl, the highest level since the $23.25/bl assessed for the third quarter of 2012.

The excess bitumen produced in Europe has been looking for new homes, but a lack of available vessels and high transportation costs are curbing the ability to ship product on longer journeys. That said, a handful of shipments have been heading to destinations as far afield as North America and Asia-Pacific, although this remains rare and requires the use of larger vessels.

Bitumen demand has been strong in Asia-Pacific, but a shortage of vessels around Singapore has slowed trade and led to loading delays.

In the UK, demand for bitumen remains stronger than in much of the rest of Europe, supported by road maintenance work, with Highways England demand up on last year by around 3-5pc. A new road fund set up from 2020-21, financed from Vehicle Excise Duty — so-called road tax — will, in the longer term, ring fence money for road investment for the first time.

Supplies into the UK look set to rise thanks to a new bitumen import terminal at Stolthaven Dagenham in East London, which will start taking deliveries this month. Trading firm Trafigura's subsidiary Puma will be bringing in imported supplies to the terminal, which has a 20,000t storage capacity, meaning the UK will be well supplied despite continued firm demand.

Production shutdowns at Total's Natref, the Shell-BP Sapref, and the Engen refinery in South Africa have led to shortages there forcing refiners to import product despite the high costs involved.

Firm demand continues from north Africa, particularly Egypt and Algeria, and this has offered some support to export markets in the Mediterranean.

But the west African market remains subdued. This could change once Nigeria's recently-elected President Muhammadu Buhari appoints key ministers and makes clear what infrastructure plans will get government approval. He has pledged to fight corruption and has also removed the entire board of state-run oil company NNPC. In the meantime, some of the large cargo shipments routinely moved by major players from the Mediterranean to west Africa are instead being exported to the US and Asia.

Bitumen buyers in east Africa gave a positive response to a deal between Iran and the P5+1 block of western powers, which could lead to the lifting of sanctions on 15 December this year.

An increase in availability of Iranian supplies could give a boost to project works in Tanzania and Kenya, which have previously shown signs of increasing activity on construction projects, particularly new roads.

In Singapore the lack of vessels has been so acute that that delivery of a number of cargoes has been pushed to September from previous scheduled departures in July and August. The problem has been even more severe in Vietnam where loading delays have been exacerbated by a heavy monsoon season. There are now signs that the situation is beginning to improve.

China remains structurally long on bitumen, a situation exacerbated by sharp falls in the price of fuel oil, while bitumen prices have remained relatively steady. This has encouraged refiners to produce more bitumen, preventing prices from rising, despite the approach of September's peak season for paving works in China.

An expected build in Indian demand has been hampered by poor weather and political machinations.

Despite Europe entering its busiest time of year for paving works, an excess of bitumen looks set to continue, exacerbated by low crude prices supporting refinery margins and subsequent high run rates.

Bitumen prices remain depressed, down around 35pc on the same time last year in northwest Europe, although off the lows experienced in February, when lower crude prices and weak seasonal demand hit hardest.

Although economic conditions are improving in some countries, notably in the UK and parts of eastern Europe, bitumen prices are unlikely to increase much this year with a longer period of lower crude prices — of late accompanied by steep fuel oil discounts to crude — and abundant bitumen supply looking the most likely scenario.

jw/ts

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