Spot Bitumen Price Trend Logic Analysis
Snapshot: As a traditional commodity, bitumen is widely used in all aspects of social life including road construction, waterproof rolls, and blending bunker fuel, etc. With the production scale of China’s refineries expanding, the quality of bitumen is increasingly stable. The advantages of imported bitumen resources gradually dwindled compared with Chinese-made bitumen. As China’s bitumen industry grows mature, the price drivers of the bitumen market become more comprehensive.
The bitumen price is strongly correlated to the crude oil price. The cost logic guides the general trend of the bitumen price.
Bitumen is mainly made from crude oil, so the crude oil price, as the cost of bitumen, has a large influence on the bitumen price. As seen from the correlation analysis, the correlation coefficient between China’s average bitumen price and the crude oil price from 2019 to 2023 is 0.87, indicating a highly linear correlation. From the comparison between the bitumen prices and the international crude oil prices since 2019, the bitumen prices have been mainly hovering around the crude oil prices most of the time. In the long cycle, the price trend of bitumen is basically in line with that of crude oil.
In recent fives, the spot bitumen price fluctuated notably in 2020 and 2022. At the beginning of 2020, Saudi Arabia announced increasing daily production of crude oil by over 1,000 barrels, as OPEC+ failed to reach an agreement to cut production. Moreover, the demand for crude oil was tepid in 2020. Thus, the international crude oil price crashed, and rare “negative oil prices” occurred, dragging the spot bitumen price to a recent five-year low. Affected by the international situation in 2022, the international crude oil price trended up. The price of Brent and WTI once hit $130/bbl, lending strong support for the spot bitumen price. In March 2022, the bitumen price rose strongly. Although international crude oil prices fell several times in H1, 2023, they rebounded quickly after falling. The overall international crude oil price fluctuated within the range of $70-90/bbl. Compared with 2022, the fluctuation range of spot bitumen prices obviously narrowed in 2023.
Overall, although there are periodic differences between the fluctuation ranges of the spot bitumen price and the international crude oil price, the cost logic plays an important role in the overall bitumen price trend. The bitumen price basically trends in line with the international crude oil price.
Source: NYMEX, ICE, SCI
The supply-demand logic returns in stages, and the cost logic shifts to the supply-demand logic.
Although the cost logic plays a guiding role in the bitumen price trend, the bitumen price may return to be led by the supply-demand logic in stages affected by seasonality. Supply and price mainly show a negative correlation. The tight supply may drive up the spot bitumen price, while the ample supply may drag down it. Demand is positively correlated with the bitumen price. Improved demand may boost the spot bitumen price, while the tepid demand may weigh on it. At the same time, expectations of the demand for bitumen may also have an impact on players’ sentiments of the bitumen market.
Generally, however, the supply side and the demand side jointly affect the bitumen price. Due to the rapid growth in the bitumen capacity and output in recent years, the entry threshold for the bitumen industry has been relatively low. A large amount of bitumen floods into the market during the peak season. Therefore, the bitumen supply in the peak season is ample. The demand peak season does not mean high prices. Similarly, weak demand may also weaken the support from the tight supply to a certain extent. Thus, the supply-demand logic affects the bitumen price mainly through the gap between supply and demand.
Since the end demand for bitumen is widely dispersed, we usually use inventory as an important manifestation of the gap between supply and demand. When supply is strong and demand is weak, inventory increases, dragging down prices. When supply is weak and demand is strong, inventory decreases, driving up prices.
Taking the monthly supply-demand gap and price trends in the recent five years as an example, the international crude oil price showed an uptrend, causing a Y-O-Y rise in the spot bitumen price on the cost side in 2021. However, as 2021 was the first year of the "14th Five-Year Plan", most road projects were in the early planning stage, and the end funds were not in place, so the rigid demand for bitumen declined. Thus, the bitumen industry saw an oversupply, and the inventory increased somewhat. The weak fundamentals constrained the increment in the spot bitumen price to some extent. In 2021, the spot bitumen price mainly hovered at lows. In Q1, 2022, the bitumen price and inventory rose together affected by the high international oil prices. However, due to the low operating rate of the bitumen units in H1, 2022, the bitumen supply was relatively tight. After Q1, the inventory began to decrease more rapidly. In Q3-Q4, the bitumen inventory fell to lows, strongly bolstering the high spot bitumen prices in 2022.
Overall, the bitumen price is mainly the result of the tug of war between cost logic and supply-demand logic. The leading factors affecting the bitumen price at different stages are also different. In addition to cost logic and supply-demand logic directly affecting the bitumen price, the macro environment may also influence the price trend by changing demand expectations.
Macro environment logic indirectly affects the bitumen price and players’ sentiments in the bitumen market
The macro environment logic affected the bitumen market mainly by two aspects: economic trends and government planning. In terms of economic trends, although China’s economic growth rate fell back Q-O-Q in Q2, 2023, China’s economy began to recover moderately in H2, 2023, showing an uptrend on the whole. The continued recovery trend of China’s economy provided path dependence for commodities, which boosted the bitumen market to some extent. Speculative demand for bitumen moderately improved in H2, 2023.
In addition to economic trends, as bitumen is mainly used in road construction, the government's planning of road projects and the progress of road construction may also affect the demand for bitumen to a certain extent, and then they are likely to affect the spot bitumen price. As seen from China’s consumption of bitumen from 2019 to 2023, although the bitumen consumption is expected to increase in 2023, the increment may be still less than that in 2020. 2020 is the last year of the “13th Five-Year Plan”. With the “13th Five-Year Plan” coming to an end, a large number of road projects were completed, driving the bitumen consumption in 2020 to a five-year high, which boosted players’ sentiments in the bitumen market.
When judging the spot bitumen price trend and evaluating the bitumen price, players need to consider that the bitumen futures market may also have a certain impact on the spot bitumen price besides the macro environment, cost and supply-demand relations. On the one hand, the rises and falls in the bitumen futures market may have an influence on players’ sentiments of the spot market. On the other hand, players may use futures instruments for trading. Refineries may ensure profits by locking in crude oil and pre-selling forward contracts, while traders may conduct basis trading for arbitrage.
Therefore, when the basis trends up, traders may sell spot contracts intensively to make profits, which has a certain impact on the spot price in the short term. When the basis slid, however, traders may show high interest in buying spot contracts, bolstering the spot bitumen market price somewhat.
Overall, since the logical framework of the bitumen market is relatively complicated, the spot bitumen price trend is not entirely guided by only one factor. When players judge the spot bitumen price trend, they should analyze multiple factors including cost, supply-demand relations, and the macro environment. Meanwhile, players should also pay attention to the price trend of the bitumen futures to better understand players’ sentiments of the bitumen market.
All information provided by SCI is for reference only, which shall not be reproduced without permission.
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