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02 Oct 2017 | 23:04 UTC — Insight Blog
Featuring Wes Swift
The US biodiesel industry just can’t seem to catch a break. Already plagued by poor blending economics – despite recent improvements brought on by rising ULSD costs – that have stymied the market, the industry now faces a possible drop in demand thanks to the feds.
The US biodiesel industry in August scored a victory when the US Department of Commerce imposed stiff duties on biodiesel imports from Argentina and Indonesia. Domestic producers had long complained that the prices of those imports were unfairly low and hurt the US industry.
But the celebrations didn’t last long. In a twist, the US Environmental Protection Agency on Tuesday announced it would consider cutting the biodiesel blending mandate for 2018 by as much as 15%. And one of the major factors the agency cited was the impact imports have on prices.
“We also expect the price of biodiesel used in the U.S. could increase further following a recent preliminary determination by the Department of Commerce that it would be appropriate to place countervailing duties … on imports of biodiesel from Argentina and Indonesia. Such duties could also affect import volumes.”
And looming in the background is the biodiesel tax credit. The $1/gal credit for blenders expired in 2016. Many blame the lack of the credit for some of the market’s current woes. Add in the $1 credit, they say, and the blending economics take a turn for the better, spurring some action.
And while reinstating the tax credit could be a panacea for all that ails the industry, no one should hold their breath waiting for its return. A bill introduced by Senator Chuck Grassley, Republican-Iowa, in April that would reinstate the credit and change it to a producers credit is stuck in the Senate Finance Committee. And Congress has so far shown itself to be incapable of doing much this session. Lawmakers seem to be focused now on tax reform, and it’s unknown whether the tax credit will be part of any reform package, or if Congress will consider Grassley’s bill on its own.
So what next? With Argentinian and Indonesian imports curtailed due to the duties, US producers would be forced to fulfill the biodiesel blending mandate by themselves. That’s 2.1 billion gallons of biodiesel (assuming the mandate doesn’t change). According to US Energy Information Administration data, domestic biodiesel production peaked at 1.568 billion gallons in 2016. Current capacity is 2.313 billion gallons, according to the EIA.
However, despite the peak of domestic production in 2016, imports also surged that year, with Argentina representing almost 70% of the total biodiesel entering in the US, according to US Department of Agriculture data. In total, over 700 million gallons were imported last year, or 37% of the mandated volume of 1.9 billion gallons for 2016. Overall, combining the volume produced domestically with imports, the US had almost 2.3 billion gallons of biodiesel available to be used by consumers in 2016. The EIA data put consumption at 2.06 billion gallons last year.
Looking at the scenario so far this year, prior to the imposition of duties, imports from Argentina until July had already accounted for 86% of the 276 million gallons coming into the country in total. This means that until July, the US had already imported a volume equivalent to almost 14% of the mandate of 2 billion gallons.
Kingsman, the agricultural analysis unit of S&P Global Platts, estimates that imports in 2017 should reach around 355 million gallons, or almost 18% of the total mandate volume for the year. Production in 2017 is estimated at 1.72 billion gallons, an 11% increase from last year. So a total of 2.08 billion gallons would be available for consumers, without considering the carry-over stocks from last year. With consumption estimated at 2.11 billion gallons (up 3% year on year), it is easy to see that without imports, the industry will need to ramp up production rates next year to be able to meet the mandate.
The industry has had an excess of D4 biodiesel RINs generation during recent years. But without imports, a larger share of D4 RINs will likely be used to satisfy the “other advanced,” or D5, mandate each year. That would seem to indicate that the market will get tight going forward.
The higher prices brought on by a lack of imports could bring some idle capacity back online. Current estimates by the EIA show that utilization of existing biodiesel facilities was 70% from 2014-2016. Biofuel groups have argued that raising blending mandates can act as a catalyst to make biofuels producers expand their facilities to meet the mandate – sort of pull the industry forward, so to speak.
Now, high prices may just spur the EPA to cut the amount of biodiesel blending and push the US biodiesel industry backward.