Interview: China to keep ethanol program steady, national blend rate seen at 4%: US Grains Council

China is expected to maintain a steady ethanol program despite a setback to its plans of implementing an E10 policy earlier this year, with the national ethanol blending rate seen reaching 4% in the long term, the US Grains Council's Southeast Asia director Manuel Sanchez told S&P Global Platts.

In September 2017, China announced a national mandate to use E10 fuel, which contains up to 10% mix of ethanol with gasoline, as part of its efforts to control air pollution.

However earlier this year, the country unofficially suspended this plan without citing any reasons. Nevertheless, analysts had attributed the move to the decline in domestic corn stocks and the limited global capacity to produce ethanol as gasoline demand plunged in light of the coronavirus pandemic.

"China has built ethanol plants and there was a big push for nationwide E10 blend. These are very concrete plans that were on the books. But this was prior to the [pandemic]," Sanchez said in a telephone interview during the week ended Sept. 25.

Before the pandemic struck the global economy, the market was bullish of China's ethanol consumption estimates given its E10 mandate. In last year's earnings call, top global agriculture trader Archer Daniels Midland's CEO Juan Luciano said that China's move to a 10% blend rate could mean 1 billion gallons of ethanol demand from the US.

"The council believes China will maintain that sort of policy in its ethanol program, maybe not at the same level they had originally anticipated," Sanchez said.

China's gasoline production and consumption dropped 30% on the year in the first quarter of 2020, as low oil prices -- in part due to the Saudi Arabia-Russia price war, and later pandemic-induced travel bans -- dampened industry efforts to blend ethanol with gasoline, the US Department of Agriculture said.

Analysts had also attributed China's E10 rollback to higher corn prices and low domestic stocks, which had raised the cost of producing fuel ethanol domestically.

These unfavorable market conditions are expected to pressure the production and consumption of China's fuel ethanol lower in 2020, the USDA said.

According to S&P Global Platts Analytics, China's fuel ethanol consumption in 2020 is expected to fall 5.6% year on year to 3.9 billion liters, while output will likely decline 6.4% year on year to 3.8 billion liters.

The USDA's Foreign Agriculture Service estimates the national average of China's ethanol blend rate to fall to 1.7% in 2020, down from 2.4% in 2019.

"We were going to see sort of a reduction in [China's] overall [ethanol] blending targets, but I do believe they will maintain an ethanol program looking forward," Sanchez said.

"Realistically, I don't see how they can meet a 10% blend at this moment," he added.

China's demand for US corn

China is reportedly building its strategic grain reserves to tackle shortages in the wake of trade disputes and the pandemic.

Given the state of its domestic corn crop and efforts to increase reserves indicate there is demand growth, but supply is insufficient, Sanchez said.

China recently lowered its 2020-21 corn production estimates by around 2 million mt after a series of typhoons in late August and early September flattened crops and flooded fields.

The country has been facing tight supplies as domestic corn prices have risen to record highs amid sold-out corn auctions from state reserves.

In the last two months, the US' flash corn sales to China have totaled 9.8 million mt as of Sept. 17, compared with only 60,000 mt a year ago.

"This is significant no matter how you slice it or dice it, it's a big number. The sales are on the books, so there's an intent to purchase," Sanchez said.

Southeast Asia's demand for US DDGS firm

The decline in the US' ethanol demand is not expected to impact the export of dried distillers grains with solubles, or DDGS, to Southeast Asia as 2020-21 shipments are likely to be steady, Sanchez said. DDGS, a byproduct of dry-milled ethanol produced from corn, is used as nutritious feed for livestock.

Not every single ethanol plant in the US is capable of producing DDGS as there are those that focus on commercializing wet distillers grain, Sanchez said.

"So there's not a one-size-fits-all model," Sanchez said, adding that these plants are strategically designed for exports, and most of them are up and running.

In the 2019-20 (September-August) marketing year, the US exported 3.4 million mt of DDGS to Southeast Asia as of July, the US Census Bureau data showed.

DDGS exports in 2020-21 will not exceed 2019-20 levels, but "should stay at least at par, if not, very close to the 3 million mt," Sanchez said.

Vietnam is expected to drive the US' DDGS exports to Southeast Asia in 2021 despite the pandemic impact, Sanchez said.

Vietnam emerged as the top buyer of US DDGS after it revoked a phytosanitary ban in September 2017, surpassing Indonesia and Thailand in the process.

As of July, Vietnam's overall imports of US DDGS in 2019-20 have topped 1 million mt, accounting for 34% of all shipments headed to Asia.

Vietnam, Indonesia and Thailand remain the three largest markets for US DDGS, and efforts are on to target Southeast Asia's aquaculture sector with the US' higher protein DDGS varieties, Sanchez said.