Price trend

This week, the main asphalt futures contract surged, with the spot market following suit. The high-end price of heavy-duty asphalt in East China climbed to 3,300 RMB/ton, while low-priced resources continued to tighten, and refineries showed strong sentiment to maintain prices. Despite the traditional off-season for demand, the core driving force behind this strong market performance points directly to the cost side, with crude oil prices rising by 6.5% this week. According to data monitored by SunSirs, on January 25th, the ex-factory price of Jingbo #70 heavy-duty asphalt in Shandong province was 3,133 RMB/ton, and on January 28th, the ex-factory price in Shandong province was 3,233 RMB/ton, a slight increase of 4.47% during the week.

Market ananlysis

This price increase was not due to an improvement in supply and demand fundamentals, but rather to a combination of favorable factors on the cost side, with geopolitical conflicts and raw material disruptions being the core factors. The correlation between asphalt and crude oil prices is as high as 0.9, providing strong cost support. More importantly, the US has intensified restrictions on Venezuelan crude oil exports, causing the discount of Venezuelan heavy crude oil (a core raw material for asphalt) to Brent crude to narrow rapidly from -$13/barrel to -$5/barrel. Domestic refineries rely on Venezuelan oil for 50%-70% of their supply, and alternative raw materials are priced higher, further reinforcing expectations of rising costs and contributing to the price increase.

Domestic asphalt refineries' operating rates have fallen to 26.8%, a low level for this time of year. January's expected production is 2 million tons, a decrease of 7.3% month-on-month and 12.1% year-on-year. Spot supply is tightening, low-priced resources are disappearing, and the focus of spot prices is shifting upwards.

The current market is characterized by a "strong cost, weak demand" pattern, with bullish and bearish forces focusing on the sustainability of costs and the pace of demand recovery. Demand remains weak due to the off-season, with construction halted in the north and only intermittent construction in the south. Downstream buyers are purchasing only as needed, and the operating rate for road asphalt is only 14%. The growth in infrastructure investment is weak, making a significant improvement in short-term demand unlikely.

Market outlook

In the short term, geopolitical tensions and oil prices are the key variables. An escalation of the conflict would lead to continued increases in oil prices and stronger asphalt prices, while a de-escalation of tensions would create downward pressure. Domestic raw material inventories can support demand until the end of February, but the sustainability of costs needs to be verified after the holiday. In the medium to long term, with the arrival of the spring construction season, demand may improve marginally, but increased OPEC production and a rebound in refinery operating rates may suppress valuations, potentially leading to a return to volatile downward trends.

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