This report provides a mid-year review and outlook for the asphalt (BU) market, analyzing price drivers, supply-demand dynamics, and future trends.
H1 Price Action Review: A Geopolitically-Driven 'M' Pattern
Asphalt prices in the first half of the year traced an 'M' shaped pattern, primarily driven by geopolitically-induced cost shocks and supply contraction. The average price center settled at 3,945 yuan/ton, a high level not seen in nearly three years.
From January to February, the market traded on tensions between the US and Venezuela. As Venezuelan oil is a high-quality feedstock for Chinese independent refineries producing asphalt, increased trade competition after the US legally took control of Venezuelan oil cargoes raised the premium for this crude, pushing asphalt prices steadily higher.
From late February through March, the focus shifted to US-Iran geopolitical tensions. The crisis over Middle Eastern crude supplies fueled expectations of asphalt feedstock shortages. Against this backdrop of escalating tensions, traders were reluctant to sell, propelling asphalt to a record high of 4,747 yuan/ton on March 26th, though this was a price with limited actual market activity.
From April to late May, following a temporary ceasefire announcement, unresolved core issues between Israel and its adversaries caused geopolitical risk premiums to rebound, leading to a 'V'-shaped recovery in asphalt prices.
From late May through June, expectations for US-Iran peace talks intensified, easing feedstock supply concerns and alleviating supply tightness. Asphalt prices followed the cost curve downward, giving back the earlier geopolitical premium and falling below the 4,000 yuan/ton mark.
Asphalt Spreads: Bullish Cracks Emerged Post-Mid-March
Asphalt's volatility relative to benchmarks like Brent, Shanghai Crude (SC), fuel oil (FU), and low-sulfur fuel oil (LU) was lower. As a higher-value-added, further downstream product, speculative trading interest was relatively subdued.
From January to February, the crack spreads for asphalt against Brent, SC, FU, and LU remained stable at high levels. The US-Venezuela situation directly benefited asphalt's price floor, but weak underlying demand limited the upside, preventing a significant widening of the cracks.
From March to late May, the BU-Brent crack spread trended lower. The US-Iran geopolitical flare-up directly widened the crude supply deficit, pushing oil prices above $100/barrel at one point, leading to a primarily downward trend in the crack spread. A short BU, long Brent strategy was highly effective. However, compared to spreads against domestic products like SC, FU, and LU, which showed a distinct 'V' pattern, the later rise was more due to insufficient catch-up by domestic products to international gains, constrained by capital flow dynamics. This led to a divergence in asphalt's crack performance against domestic and international benchmarks in the latter period.
From late May through June, the BU-Brent/SC/FU/LU crack spreads trended higher. As geopolitical tensions showed signs of easing and signals emerged about the Strait of Hormuz reopening, the geopolitical bubble accumulated in asphalt was smaller than in crude oil. While oil prices fell sharply below the $75/barrel mark, asphalt showed relative resilience due to expectations of continued supply contraction.
Spot Prices and Margins: Spot Outperforms Futures, Margins Recover
Spot asphalt prices were stronger than futures in H1, not incorporating as much geopolitical premium. The absolute price remained near a four-year high, with the basis (spot minus futures) staying positive and strengthening for an extended period. As of June 22nd, the cheapest deliverable spot price in Shandong, the pricing anchor for futures, was 4,450 yuan/ton, with a strong basis creating a spread of over 400 yuan/ton. The East China price was 4,980 yuan/ton, with a basis exceeding 800 yuan/ton. This was driven by shrinking spot supply and low inventory, reflecting a reality stronger than expectations.
Regarding margins, data shows asphalt production gross margins in Shandong were under pressure initially but began recovering upward after late May, moving into positive territory—a relatively rare occurrence in recent years. The primary reason was geopolitical events disrupting feedstock arrivals, forcing refinery operating rates to plunge to historical lows and drastically cutting asphalt output. Subsequently, as US-Iran negotiation expectations eased, the crack spread for primary products fell, prompting refineries to lower run rates. Asphalt, a by-product, saw its output reduced accordingly, supporting its margins. Looking ahead, as margins recover to a certain level, they may incentivize refineries to increase operating rates, potentially capping further margin upside.
Supply: Plunging Output, Record-Low Operating Rates
Output continued to contract. Intertwined geopolitical conflicts disrupted feedstock supply channels: Iranian exports to China plummeted (after the US re-imposed sanctions, Iranian fuel oil exports dropped sharply), and Venezuelan supplies fell to zero (after Venezuelan oil was legalized in January, shipments went to the US and India, with none to China). Coupled with surging crude prices eroding processing margins, domestic refinery operating loads fell to a historical trough, leading to a significant thinning of asphalt output. Production declines in major producing provinces commonly exceeded 50%. The annual operating rate hit a new low of around 12%.
Furthermore, the dual squeeze of high costs and poor margins exacerbated production cuts. Soaring feedstock premiums pushed up processing costs, worsening overall refining profitability, forcing both state-owned and independent refineries to cut runs simultaneously. The asphalt yield rate dropped to a multi-year low, further reinforcing expectations of supply contraction. Since late May, the BU-Brent crack spread has trended upward, reaching over +100 yuan/ton by June 20th.
Demand: High Prices Suppress Activity, Weak Stability Prevails
The substantial rise in spot asphalt prices in H1 severely suppressed end-user demand. Many road projects were delayed, waterproofing material companies resumed operations slower than expected, and the onset of the southern rainy season further constrained construction progress. Asphalt shipments remained at low levels seen in recent years, with demand showing a pattern of weak stability. Speculative demand was cautious, with traders mainly consuming existing inventory and showing weak restocking interest.
Additionally, funding shortages for infrastructure projects constrained demand release. As the first year of the 15th Five-Year Plan, the focus of infrastructure has shifted from new construction to maintenance of existing assets and filling gaps, unlike the rush to complete projects typical at the end of previous five-year plans. Fewer new large-scale projects have been initiated, leaving asphalt demand lacking incremental sources. Simultaneously, under pressure from prioritizing debt resolution and shrinking land sale revenues, local government spending on infrastructure has weakened significantly. Transportation fixed-asset investment has fallen to historical lows, with many high-quality reserve projects stalled due to funding constraints, preventing effective release of terminal procurement demand.
Inventory: Weak Supply and Demand Manifest in Low Stockpiles
Asphalt inventory followed its seasonal pattern in H1 but with varying intensity. The first quarter saw inventory accumulation. However, despite the total inventory increasing, it remained below the average level of recent years, with the year-on-year growth rate narrowing significantly, reflecting how supply contraction was offsetting weak seasonal demand. In the second quarter, following the US-Iran geopolitical outbreak, inventory shifted to a drawdown phase, with the pace of destocking accelerating rapidly. For the week of June 19th, combined social and refinery inventory fell below 1 million tons, a year-on-year decline of nearly 40%. Destocking was most pronounced in East China and Shandong.
Generally, inventory trends are relatively positively correlated with price movements. Inventory is a mirror of supply-demand outcomes. Currently, the weak supply-demand balance has led to destocking, which in turn weighs on asphalt prices. To some extent, as the geopolitical bubble deflated, causing a sharp correction in high asphalt prices, any future stabilization and rebound in prices should be preceded by a turning point in inventory signals, i.e., evidence of accumulation, which would validate a market recovery on both the supply and demand sides.
Additionally, it's worth noting that as spot prices were higher than futures, leading to a stronger basis, traders' willingness to register warehouse receipts weakened, keeping receipt volumes at relatively low levels.
H2 Outlook: Highs Followed by Lows, Average Below H1
The core drivers of H1's asphalt rally—geopolitical risk premium and panic over feedstock shortages—are gradually fading as US-Iran negotiations progress. Crude oil prices have retreated from their May highs, and forecasts suggest the average oil price will move lower in H2, weakening cost support for asphalt. In Q3, prices may maintain relative highs, supported by the reality of low supply and low inventory. However, entering Q4, as geopolitical agreements materialize and supply recovery expectations are realized, pressure from the cost side combined with seasonal demand weakness will likely push the price center towards the lower end of its range.
Current supply remains at historically low levels, with low operating rates and ongoing destocking providing a floor for nearby prices—one of the few bullish factors. However, high prices have significantly suppressed terminal demand, evident in delayed road projects and low trader restocking interest. Without effective support from the demand side, price increases sustained solely by supply contraction lack durability.
In summary, downward pressure from weakening cost support and the negative feedback from high prices are forming a combined downward force. While low supply may slow the decline, it is unlikely to drive a sustained uptrend. A downward shift in the price center is the most probable direction.
The outlook for H2 asphalt prices is: higher earlier, lower later, with the average price center lower than in H1.
Strategy considerations: For calendar spreads, consider buying the BU September-December spread on dips, focusing on the seasonal strength in September versus weakness in December.
For outright positions, the range is [3200, 4000] yuan/ton: consider buying below 3200 and selling above 4000, with opportunities for tactical trading.
Comments