Viewpoint: European bitumen supply to tighten

Logistical challenges and tighter supply will more than ever dominate the bitumen market during the busiest periods for paving work, while the disconnect from high-sulphur fuel oil (HSFO) prices will become more pronounced as 2019 progresses.

In the past year, a reduced number of suppliers in Europe have had to move product longer distances to satisfy regional demand hotspots, while refinery problems and maintenance work has also regularly crimped supply, particularly in Germany and surrounding countries.

In its August 2018 Viewpoint, Argus expected tighter supply for the rest of the year. In the event, sharply rising bitumen prices even reversed the transatlantic arbitrage in the last months of the year, bringing US east coast cargoes into the European market. Argus expected prices would rise, and they hit a five-year high of €445/t ($506/t) at Rotterdam for the domestic market in November. The effect of higher local prices, driven in part by tighter supply as well as rallying crude prices in October, was to slow export flows.

European bitumen export cargoes have continued to make longer voyages and are likely to continue to do so, supported by the impact of US sanctions on Iran, which came into effect on 5 November, and mean many users can no longer purchase Iranian bitumen. Qatar has stopped buying Iranian bitumen and bought Greek supplies instead, in part to meet its demand ahead of the World Cup in 2022. One cargo to Qatar was also loaded in the US east coast. And US volumes have also made their way to west African destinations.

There are likely to be further closures of bitumen capacity coming with the approach of one of the biggest changes to the refining sector for decades — the International Maritime Organisation's (IMO) 0.5pc sulphur cap of marine fuels, which is to be implemented from 1 January 2020.

Bitumen-related closures in 2018 included a unit at BP's 265,000 b/d Gelsenkirchen refinery in northern Germany, while a raft of modernisations in the next year or so, including at Polish company Grupa Lotos' 210,000 b/d Gdansk facility, will further limit production.

Already, in 2018, transporting bitumen at busy times has necessitated longer truck journeys, with some vehicles moving volumes from Bavaria up to the Amsterdam area. The market has also suffered logistical problems because of low Rhine water levels.

While arbitrage journeys were forecast to increase in the last Argus Viewpoint, the movements took an unexpected twist with the transatlantic arbitrage reversing quickly late in the year and bringing a spate of cargoes from the US east coast back into Europe, particularly the Mediterranean but some to the Rotterdam, Antwerp area. Some US-bound shipments — mainly settled when bitumen prices were at their highest in Europe — continued to be seen through to December.

Bitumen prices have increased and moved well ahead of high-sulphur fuel oil (HSFO) with Rotterdam domestic bitumen prices now more than $100/t higher than for HSFO, compared with negative numbers in April-May when the paving season started. This largely reflects the sharp fall in crude and HSFO prices in the autumn, although it also reflects the stronger market fundamentals for bitumen than for HSFO in most of Europe.

The relationship with HSFO has become more disconnected with the premium of Rotterdam bitumen to HSFO ranging from less than $10/t to more than $140/t since the beginning of October.

This disconnect is set to accelerate in the next year as the lead up to the IMO changes brings a dramatic drop in demand for HSFO. Currently, around 100mn t/year of HSFO is used as ship fuel and most of this demand will be required to switch to low-sulphur fuels with only modest quantities of HSFO still permitted to be consumed if the ship has an exhaust scrubber fitted.

The pricing basis for bitumen is also starting to change with buyers and sellers unlikely or unable to hedge positions using HSFO beyond 2020. HSFO is also used widely for the cargo export market with bitumen priced as a differential to HSFO. But liquidity is set to start reducing for the 3.5pc HSFO pricing marker. In both northwest Europe and the Mediterranean, many sellers — particularly long term customers — are reluctant to be pricing and hedging themselves using HSFO post 2020, or even from second-half 2019.

With the economics of bitumen more independent than ever, the likelihood is growing of the product being sold for export on an outright basis, as is the norm from Singapore, or other markers including crude prices being used as a reference. To assist the market to this end, Argus has launched its Argus Open Markets (AOM) screen for bitumen from 10 December to allow users to indicate and agree trades on bitumen as an outright price, against crude or HSFO. Differentials of bitumen to Ice Brent crude have also started to be published in the bitumen report to allow for another reference and draw attention over the coming year to crude prices rather than purely HSFO.

Moving into the new 2019 paving season, the relative value of bitumen is likely to increase, particularly in northern Europe, as increased consumption, helped by healthier spending budgets, combines with less supply to support prices. So, differentials to fuel oil will increase, while bitumen's value against crude should also be robust as we look ahead.

While tighter supply and healthier spending budgets are likely to push bitumen prices up in northwest and central Europe, plentiful supply from Mediterranean refiners should limit any bitumen price rises next year. It is doubtful that Europe overall will become more reliant on imports. There is the possibility that some refiners may switch to more bitumen production over less profitable HSFO where this is possible. Singapore refiners already swing between the two products depending on economics, but there is less flexibility for most European refiners to switch quickly. That said, some plants do have plans — not always yet made public — to increase bitumen production at the expense of fuel oil. This will mitigate the impact of the extra supply tightness expected in 2019.