Commodities 2021: RINs remain in driver's seat for US biodiesel

New York — US biodiesel producers will continue to face challenges from high feedstock prices and rising competition from renewable diesel production in early 2021, with D4 renewable identification numbers driving margins.

Since last summer soybean oil futures have steadily marched higher to multi-year highs, compressing biodiesel production margins. The front-month CBOT soybean oil futures contract settled at 44.39 cents/lb on Jan. 6, its highest level since August 2013.

Much of the support over the latter months of 2020 stemmed from lower-than-expected soybean yields and unfavorable weather in South America, along with a strike in Argentina that disrupted soybean shipments from that country.

The rally in soybean oil prices pushed D4 RINs to multi-year highs, offsetting some of the pressure on producers' margins.

S&P Global Platts assessed D4 RINs for 2020 compliance at $1.1475/RIN Jan. 6, their highest level since 2017.

Biodiesel producers separate D4 RINs and sell them separately to offer physical product at a discount to ULSD futures; the more expensive the RIN, the larger the potential discount to ULSD futures.

Other drivers, such as policy decisions, can shift RIN pricing and could bolster or cut into margins.

EPA remains quiet on RVOs

The new year came and went with no announcement from the Environmental Protection Agency on 2021 renewable volume obligations. A fall schedule from the White House Office of Management and Budget had signaled a proposal would be public by the end of December, but the agency had not released anything by Jan. 6.

Both the biofuel and oil industries have criticized the agency's failure to meet a statutory Nov. 30 deadline to finalize 2021 blending mandates. After the volumes are proposed, which many market participants expect could be after the Biden administration takes office, the proposal would be followed by a multi-month comment period.

The 2021 blending mandates may not be finalized until summer 2021.

RIN traders positioned amid the uncertainty as obligated parties tried to cover what their obligations may be without overbuying.

Though the overall mandates have not been announced, the EPA did finalize the D4 – biomass-based diesel – volume as part of the 2020 mandates, setting it at 2.43 billion gallons.

EPA administrator Andrew Wheeler in December said the agency was still trying to get a better grasp on the effects of the coronavirus pandemic on transportation fuel demand in 2021 before setting the mandates.

US biomass diesel demand is expected to reach 200,000 b/d in 2021, with renewable diesel (RD) demand making up about one-third, according to Platts Analytics.

RD represents challenge

Though most of the biomass-based diesel portion of the annual Renewable Fuel Standard mandates has been met by biodiesel, increasing RD production represents a headache for legacy biodiesel plants.

US refiners including Phillips 66, Marathon and HollyFrontier have announced plans to convert conventional refining capacity to RD production, joining Valero and BP who already have operational plants.

Though RD also generates D4 RINs, it offers refiners an opportunity to integrate renewables production into their own supply chain and limit their exposure to RIN markets.

RD is also produced from soybean oil and other biodiesel feedstocks, creating competition in the feedstock supply chain that will increase in the coming years.