COMMODITIES 2025: Regulations position Europe as SAF demand hub despite market obstacles

This is part of the COMMODITIES 2025 series where our reporters bring to you key themes that will drive commodities markets in 2025

Market participants are gearing up for the ReFuelEU mandates, set to take effect on Jan. 1, 2025, which will inject an additional 1.3 million mt of demand for sustainable aviation fuel (SAF) into the European market, data from S&P Global Commodity Insights showed.

As part of the EU's Fit for 55 program, aviation fuel suppliers must ensure a 2% SAF blend in the total aviation fuel pool provided at Union airports.

Consequently, according to S&P Global Commodity Insights data, European consumption of SAF in 2025 is projected to surge by 216% year-over-year to 1.9 million mt. Germany, France, and Spain are expected to account for 39% of total European consumption.

Under the regulation, fuel suppliers failing to meet their minimum SAF supply obligations face fines of at least double the cost difference between conventional aviation fuel and SAF per metric ton, multiplied by the shortfall in SAF compliance for the reporting period.

"There is nervousness in the industry, so I expect suppliers will act cautiously to avoid non-compliance. Many will aim to blend SAF early in the year to stay ahead of the curve," a source said.

This early blending demand in Q1 could drive an uptick in spot SAF prices.

Project financing hurdle proving existential

Biofuel producers across Europe have scaled back on production plans, with Shell, Chevron and BP all announcing delays or reductions. These setbacks have raised concerns about profitability, as many market players struggle to accrue capital to launch new projects.

"Financing is the biggest problem right now in the SAF sector. The risk profile just doesn't seem to be coming down into a bracket that would enable the financial institutions to spend money," a source said.

Paradoxically, regulatory risk has increased in Europe despite a more robust regulatory framework, as significant policy rollbacks have hurt market confidence, particularly in Sweden in 2023.

"Technology risk has reduced -- probably too slow for some -- but we are reducing technology uncertainty. If Gevo and Lanzajet succeed, then this risk significantly reduces," the source added.

Some of the additional challenges these e-SAF project developers face include high CAPEX costs for electrolyzers and finding access to a renewable grid that provides a consistent supply of renewable power.

"Final investment decision will be required on several e-SAF projects by the end of 2025 to meet the upcoming 1.2% volume mandate for synthetic aviation fuel by 2030," said George Duke, principal consultant, CI Consulting.

"Construction of these projects takes several years, and currently, no Europe project has yet reached FID due to high project costs and uncertainty over e-SAF pricing."

In 2025, European SAF production is expected to reach 1.5 million mt, with Sweden, France and Netherlands contributing the largest share, respectively, according to Commodity Insights data.

Chinese scale-up of SAF amid duties and mandate

On Aug. 16, 2024, the European Commission imposed antidumping duties on imports of Chinese hydro-treated vegetable oil (HVO) and advanced fatty acid methyl ester (FAME), with rates ranging from 12.8% to 36.4%.

In response, Chinese producers pivoted their hydroprocessed esters and fatty acids (HEFA) refineries to ramp up SAF production.

"The strategy of the Chinese is still the same; they don't want to export UCO, they want to export the finished biodiesel grade," a source said, adding, "They will be quite good at maximizing the SAF opportunity, so because of this, the fear is that we will see a significant SAF flow from China, in the order of 700,000 mt annually."

Speculation around a domestic SAF mandate in China intensified following the cancellation of export tax rebates for UCO, indicating a push for increased domestic SAF consumption.

A SAF producer noted, "China is definitely moving towards a SAF mandate, with volumes being taken at four or five airports." However, the Chinese Communist Party has not yet confirmed this mandate.

Despite these developments, producers may prefer to export to Europe, where demand is strong. The financial returns from European markets often surpass domestic incentives and uncertainty regarding penalties for non-compliance with a potential Chinese mandate adds to the confusion.

Concerns over supply chain readiness

With the European SAF market expected to be net-long until at least 2030, supply capacity is well covered; however, players note increasing concern over the readiness of the supply chain.

"In a lot of countries, the SAF is just simply not available. The supply chain hasn't been set up yet; the market hasn't been broken into," a supplier said.

However, due to the flexibility mechanism, fuel suppliers may supply the minimum share of SAF as a weighted average over all the aviation fuel supplied across Union airports until Dec. 31, 2034.

Major players are likely to comply in airports where it is cheapest and logistically easier to blend. Consequently, we shouldn't expect significant action in smaller Eastern European countries.