Asia hope for long-term oil demand

Oil demand in Asia Pacific might be expected to plunge 1.8m barrels per day (bpd) this year, but there are still strong prospects for growth over the coming two decades.

Tanker and product carrier owners need to look past the Covid-19 disruptions and the pessimistic economic outlook to see the bigger picture of oil demand promise from the Asia Pacific region.

Research from Wood Mackenzie anticipates that by 2040, the region’s oil demand is expected to rise by 25% (equal to 9 million bpd) to 44.8 million bpd compared with 2019.

Those with an interest in the crude and products sectors should position themselves to meet demand from a region that is expected to account for over half of global oil demand by 2040.

The long-term growth is underpinned by future demand for mobility and petrochemicals, according to Wood Mackenzie.

But to put the growth in perspective, it pales in comparison to demand growth recorded since 2000.

The analyst’s research director Sushant Gupta said: “Although demand continues to grow, the rate of growth in the next 20 years is less than half that of the past 20 years, primarily because of higher fuel efficiency, penetration of electric vehicles and displacement of oil in the transport sector.”

Feedstock demand

There is particular area of opportunity with petrochemical feedstock, which is expected to grow by over 5 million bpd from 2019 to 2040. In the region, China accounts for the bulk of this growth because of an expansion in steam cracking and growth in propane dehydrogenation and aromatics production capacities.

“So, the big challenge for refiners in Asia is to meet the growing deficit in petrochemical feedstocks. This year we will see close to 3 million bpd of feedstock shortage, but by 2027 this deficit could grow to 3.8 million bpd,” says Gupta.

Wood Mackenzie notes that the Middle East, a traditional exporter of petrochemical feedstocks to Asia, will not be able meet all of the shortage, leaving long haul trades to pick up the slack.

Gasoline is another area of interest. In its calculations, Wood Mackenzie predicts that gasoline demand will rise by close to 2 million bpd between 2019 and 2040.

In contrast, diesel/gasoil is expected to reach a surplus of 1.5 million bpd by 2027 as demand growth in China slows.

“Asia faces a dual challenge of meeting its shortages of light-products and finding export markets for its surplus middle-distillates,” Gupta said. This imbalance pairs neatly with Europe’s position as a light-distillate importer and middle-distillate exporter.

“There is a natural synergy, with the challenge being their geographical separation. But, deficits in Asia present opportunities for West to East trade to grow further and meet part of Asia’s growing demand.”

Commodity spotlight

In analysis of the impact of Covid-19 on other commodities, Wood Mackenzie sees 2020 as shaping up to be an “extraordinary year” for iron ore, although it anticipates that seaborne supply and demand will become more closely aligned from 2021.

“And as the current market tightness dissipates, supply will need to respond to weaker demand. Non-core ‘swing supply’ may be forced to withdraw from the market as prices cut into the seaborne cost curve,” said the analyst.

For aluminium, the demand forecast has been revised down by an average of 3.2 million tonnes per year for 2020-2040 as “a market surplus in the coming years looks unavoidable”.

Copper, meanwhile, reversed several years of deficit in 2020 with supply overwhelming demand.

Rebalancing will be gradual and heavily reliant on stimulus measures, said Wood Mackenzie.

Lead supply has been hit hard in 2020 as Covid-19 containment measures have restricted the flow of scrap and curtailed production in some key lead-mining countries. However, said the analyst, the resilient nature of lead markets means that a significant proportion of the impact will be “demand deferral, rather than demand destruction”.

Global nickel demand is expected to fall 6% in 2020, to 2.29 Mt, but will bounce back to 2.86 Mt in 2025. The growth will be largely driven by China.

For zinc, the medium-term outlook has been “transformed” by Covid-19 with mine output falling by around 10% globally. While a recovery is forecast for 2021, Wood Mackenzie does not expect consumption to surpass its pre-pandemic high of 14.2 million tonnes in 2017 until 2024.

Steel demand is also predicted to fall this year, by 8% year-on-year. This compares with a drop of 5% in demand during the global financial crisis. Production is not expected to return to 2019’s levels for two to three years and as that will co-incide with a decline in Chinese output global steel supply is expected to “plateau for some years”.

Thermal coal has had a hard time of it too with Covid-19 hitting at a time of brewing oversupply.

Wood Mackenzie expects that seaborne trade will fall by more than 60 million tonnes in 2020, and while the market will grow as global economies emerge from the crisis, “it won’t reach the 1 billion tonne mark again”.
Source: Baltic Exchange

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