This week, the main asphalt contract has risen strongly, and the spot market has also risen in sync. The high-end price of East China Heavy Duty Asphalt has climbed to 3300 yuan/ton, and low-priced resources continue to tighten, with strong sentiment among refineries to raise prices. In the traditional off-season of demand, the core driving force of this strong market is directly at the cost end, with crude oil rising by 6.5% this week. According to monitoring data from Shengyi Society, the ex factory price of heavy-duty asphalt Jingbo # 70 in Shandong Province was 3133 yuan/ton on January 25th, and the ex factory price in Shandong Province was 3233 yuan/ton on January 28th, with a slight increase of 4.47% during the week.
This price increase is not due to an improvement in supply and demand fundamentals, but rather a combination of favorable factors on the cost side, with geopolitical conflicts and raw material disturbances as the core factors. The correlation between asphalt and crude oil prices is as high as 0.9, which directly maximizes cost support. More importantly, the United States has increased restrictions on Venezuela’s crude oil exports, and the Brent premium for Murray Heavy Oil (a core asphalt raw material) has rapidly narrowed from -13 US dollars per barrel to -5 US dollars per barrel. Domestic refineries have a 50% -70% dependence on Venezuela’s oil, and alternative raw materials are priced higher, further strengthening the expectation of cost increases and boosting the growth rate.
The operating rate of domestic asphalt refineries has dropped to 26.8%, which is at a low level during the same period. Expected production in January is 2 million tons, a month on month decrease of 7.3% and a year-on-year decrease of 12.1%. The spot supply is tightening, low-priced resources are disappearing, and the focus of spot goods is shifting upwards.
The current market presents a pattern of “strong cost, weak demand”, and the long short game focuses on the sustainability of costs and the pace of demand recovery. The demand side is still in the off-season, construction in the north is stagnant, construction in the south is only intermittent, downstream purchases are made on demand, and the construction rate of road asphalt is only 14%. The growth rate of infrastructure investment is weak, and short-term demand is difficult to break through.
In the short term, geopolitical situation and oil prices are the core variables. If conflicts escalate, oil prices will continue to rise and asphalt will become stronger. If risks ease, there will be pressure for a correction. Domestic raw material inventories can be supported until the end of February, and the sustainability of costs will be verified after the holiday. In the medium to long term, with the arrival of the peak season for spring construction, demand may improve marginally, but OPEC’s production increase and refinery operation recovery may suppress valuations or return to a volatile downward trend.
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