FEATURE: NWE 50 ppm diesel tightens as Belgian CO2 rule change on 10 ppm shifts buying patterns

Changes to the calculation of CO2 reductions required from the sale of red-dyed 10 ppm sulfur diesel in Belgium from April 1 have seen consumers in the country turn to 50 ppm gasoil as an alternative, in turn tightening the 50 ppm barge market across Northwest Europe, according to market sources.

Red-dyed 10 ppm can be used for heating or as an off-road and agricultural fuel in Belgium. For off-road or agricultural uses, proof of an accompanying CO2 reduction of 6% of the equivalent energy is required.

On April 1, a Royal Decree came into force requiring fuel dealers in Belgium to declare how much total red-dyed 10 ppm they have in stock, of which the government now assumes 15.3% will end up being used as off-road fuel, and is therefore subject to a 6% CO2 reduction, either through purchase of EU Certified Emission Reductions (CERs) or blending of bio-components.

Prior to the new legislation, the use of the fuel was declared by the dealer upon its sale. The new system of calculation has increased the proportion of dealers' red-dyed 10 ppm diesel stocks for which CO2 offsets are required, making it more expensive to blend and sell by around $11.21-$15.28/mt, sources said.

"For example, if you were selling 10 million liters, of that 10 million the government may assume say 15% is used for off-road, and that decides the quantity you need to prove your bio-components and CO2 reductions for. It can end up being a higher amount than before and you don't get credits from the government as before," a dealer said.

"It's an additional cost for us on 10 ppm red-dyed -- we pass it on to the customer, making it expensive compared to 50 ppm which we don't have to buy bio-components for. What we see now is a switch to 50 ppm. If the regulation stays as it is, we will not sell 10 ppm red-dyed and just go for 50 ppm. We are passing increased CO2 costs on to customers for any 10 ppm red-dyed sold, regardless of what it is ultimately used for, as we have to declare total volumes for CO2 requirements to the government before we sell it or know what our client is going to use it for. Also, our customers find it easier to have one product in our truck, it's easier to just have 50 ppm now. I don't know if government are aware that they are forcing people to buy and sell products with higher sulfur," the dealer added.

Since all 50 ppm in Belgium is assumed to be used as heating oil, it is not subject to CO2 offset costs. As a result of the additional costs, heating consumers have opted to switch from using 10 ppm red-dyed to 50 ppm gasoil where possible, stimulating a surge in demand for the higher sulfur product.

"This fee [for the surcharge] is around $12.29/mt. Therefore, in Belgium we now see a shift from 10 ppm red-dyed as there is this huge price difference," a second source said.

While the regulation change only affects product in Belgium, the increased prompt buying from Belgian buyers has soaked up supply of 50 ppm barges in the wider Amsterdam-Rotterdam-Antwerp region, meaning there is lower availability for other countries in the region, sources said.

Belgium buying spree leaves NWE tighter

"There is almost no 50 ppm in the market on offer, a lot of product is staying in Belgium. The end-consumer is taking 50 ppm instead of 10 ppm red dye to avoid the charges," a Germany-based source said.

The shorter supply of 50 ppm barges has seen them trading at parity and briefly even a premium to the higher quality 10 ppm barges in April, Platts data showed.

On April 1, 50 ppm FOB ARA barges were assessed at $4.75/mt below their 10 ppm equivalent, but reached 25 cents/mt above 10 ppm barges on April 16 before hovering around parity, according to Platts data.

Sources in Belgium said that the final version of the legislation change was published at the end of March but they had been aware of the upcoming change for some time. However, many Northwest European market participants outside the Belgian market were unaware of the change.

The higher demand for 50 ppm in Belgium comes amid an already-tightening 50 ppm market in Northwest Europe, where low refinery run rates have meant relatively small amounts of the product is being produced and unexpectedly cold weather in April has kept consumption for heating supported.

Furthermore, the seasonal switch from winter specification 10 ppm to summer specification from April 1 was also tightening 50 ppm supply because it was more difficult for producers to co-produce this spec with 50 ppm, while poorer cold properties of the summer specification 10 ppm meant it could not be substituted as a heating oil, unlike the winter specification, sources said.

Physical differentials on 50 ppm gasoil barges have risen from $6.50/mt discount to the front-month ICE LSGO futures contract at the start of April to reach a $2/mt discount by April 27.