Mandates to boost demand for T2 ethanol in 2020

Rising demand will be the main driver for the T2 ethanol market in 2020 as blending mandates increase while domestic production, bar the UK, has already been maximized.

Historically high prices and tight market fundamentals -- a feature of the market in the last two months of 2019 -- were expected to continue at least for the first half of the new year.

However, reliance on imports has been leaving the spot market exposed to volatility.

POLICY DRIVING STRONG DEMAND

Mandates to cut emissions in transport across Europe are on the rise and next year marks the beginning of a revised Renewable Energy Directive(RED II) running through to 2030, which will see biofuel mandates rise year after year.

Also next year, the Fuel Quality Directive setting a 6% greenhouse gas reduction target compared with 2010 is due for completion.

But implementation of such EU wide directives are typically subject to individual member state enforcement, resulting in a plethora of different approaches and a complex operating environment for market players.

Most countries will see increases to their blending mandates from 2019 to 2020, with the Netherlands -- at the center of the Amsterdam-Rotterdam-Antwerp trading hub -- increasing its biofuels mandate to 16.4% on an energy basis, from 12.5%.

Germany, the biggest biofuel consumer in Europe, has a GHG-based mandate setting a higher reduction target, to 6% from 4%.

The UK introduced in 2019 a dual mandate both on a volume and a GHG basis, increasing to 9.75% and 6% from 7.25% and 4%, respectively.

Other countries with GHG-based mandates include the Czech Republic and Sweden, but all other countries have either a volume or energy-based mandate.

A key uncertainty is the enforcement of the FQD given the lack of clarity as to how and whether it will be enforced across Europe, especially in countries that do not meet it by default through their national blending mandates.

Countries that already have GHG-based national mandates, such as Germany, have already been incentivizing end-users to blend higher GHG material.

But other countries, like France and Spain that have volume or energy-based mandates, typically operate within a lower GHG spectrum. Unless there are high penalties for not meeting a 6% GHG reduction target, it is unlikely that blenders will want to pay higher premiums for such product.

Having said that, the European Commission announced recently it intended to propose more ambitious binding targets for cutting carbon emissions as part of its Green Deal.

That includes a CO2 reduction of at least 50% from 40% by 2030 compared with 1990 levels, which could add more pressure. The EC will also propose making the 2050 net-zero carbon goal binding in a draft European Climate Law in March.

Not only will higher mandates be driving increased demand, but 2020 consumption will set the cap for crop-based biofuels going forward with a maximum of 7%, as per RED II.

That is perhaps why several European countries, such as the Czech Republic, Hungary, Poland, Romania, and Slovakia, have expressed their intention to introduce E10 fuel blends which would allow higher blending.

SUPPLY SIDE RELYING ON IMPORTS

From a supply-side perspective, high production margins have meant domestic run rates have been maximized for some time, and imports were expected to be required to meet European demand.

The only prospect of domestic production increasing would come from the UK, where Vivergo has been offline for over a year.

Brexit has been been a critical factor in the plant's restart. But while Prime Minister Boris Johnson, who won a big majority in the December 12 election, no longer has any obstacles in parliament to Brexit, the shape and size of any UK trade deal with the EU after the transition period has remained vague.

Market participants said that without the protection of tariffs that would have been implemented under a no-deal scenario and without any indication that E10 will be introduced, they were increasingly doubting a Vivergo restart.

"At present we have no firm date/plan for a restart of the plant but continually monitor the market," a company source said.

All that meant, the European market will continue to need imports next year and the bulk of this was expected to come from the US, so participants have been monitoring the China-US trade talks.

A trade agreement could mean US exporters have greater opportunities in China than Europe, reducing the incentive to try and obtain ISCC certification.

Meanwhile, except for the US, import prospects into Europe remained limited from Central America and South America. Not only will Europe have to compete with California, but high molasses prices will also present competition to ethanol production.

Peruvian exports were also expected to fall in Q1 due to one major producer crushing less for fuel ethanol production. Some market participants are eyeing fuel ethanol imports from Brazil if T2 prices remain this high, perhaps when the new cane crop arrives in April, but for now the arb is far off.

The tight market supply has been further accentuated by reduced beet-based ethanol production, so Q1 will likely not see the stock build-up that has been observed in previous years after the sugarbeet crop.

Reduced sugarbeet acreage to be planted next year should see this trend continue and will impact the incentive of sugar producers to produce ethanol despite high prices.

Sugar producers will likely opt to store more sugar in anticipation of lower production next year, especially as storage costs are low.

-- Chrysa Glystra, chrysa.glystra@spglobal.com

-- Edited by Daniel Lalor, newsdesk@spglobal.com