Trade changes, policy barriers reshape Asia’s traditional UCO market dynamics

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Aditya Kay:

Hello and welcome to this Commodities Focus podcast from S&P Global Commodity Insights. Today we are diving into the fascinating topic of used cooking oil or Yuko. Once an unwanted waste found in every kitchen, Yuko has seen a meteoric rise over the past five years as a key ingredient for biofuels. From biodiesel to sustainable aviation fuel and even marine bunker fuel, the renewable sector can't get enough of it. So what's driving this surge? For starters, biofuels made from Yuko have some of the best lifecycle carbon reduction rates compared to other feedstocks. Plus around the globe, policymakers are rolling out solid incentives to encourage the conversion of Yuko into biofuels.

A prime example of this is the 2022 Inflation Reduction Act in the US. This really shows how policy can shape markets. After it was enacted, the US overtook the EU to become the world's largest importer of Yuko in 2023 and 2024. But this year, the status quo has been upended. The Trump administration has rolled many of the Biden-era incentives for biofuels back. On top of that, there are some serious allegations of fraud concerning Chinese Yuko from both US and EU trade groups. Not to mention that the ongoing tariff tensions are making everything even more complicated. So what does this all mean for the Yuko market moving forward?

I'm Aditya Kay, Senior Editor Agriculture News. To get some insights. I'll be chatting with Iris Leung, our Associate Price Editor for Biofuels and Feedstocks who's joining us from Singapore. And Vasu Tripathi, an analyst for the oils and fats division coming in from Poland. To kick things off, Vasu, can you give us a big picture of how Yuko trade flows have changed in 2025 and what are your expectations for 2026?

Vasu Tripathi:

Hey Aditya. So we have seen a lot of change going into the market in this year, and the big theme which is emerging is that end users in the US are trying to diversify away from Chinese Yuko, just to give some contacts. The year to date us, Yuko imports are up about 21% year over year. So it shows that end importers in the US are still buying at a record base, but they're just not buying from China because Chinese Yuko exports to the US are down by about 53%. And what's shaping the trend this year is straight tensions between the US and China.

Aditya Kay:

So when you're saying that the straight tensions between China and the US, who is absorbing these Yuko flows that's coming out from Asia?

Vasu Tripathi:

So far, EU has been able to absorb some of that. But what we see in the data is that the Chinese Yuko exports are also are down year over year. So some of that Yuko is a sting within the China. This is the story for this year. The next year is turning to a bit different story just because of the policy we see coming out of the US.

Aditya K:

I see. Iris, I think we are seeing an interesting divergence between Yuko prices within Asia. While Yuko that's coming out of Malaysia or the Straits, Yuko, the upside has been capped, Chinese Yuko prices have surged. Why do you think that is?

Iris Leung:

Yeah, that's a very interesting question, Aditya. So there's definitely something interesting that we are seeing on the current spot market now. So some of the demand drivers for China Yuko and Straits Yuko have changed. It used to be a lot of the volumes going to the EU from both China and Straits or Malaysia. But now the local Chinese demand for Yuko has gone up given that the SAEF arbitrage window is open between Asia and Europe and also a lot of the Chinese sustainable aviation fuel or SAEF plants have started operations.

So the demand for Yuko domestically has gone up quite a fair bit since the second quarter of this year. Given that a lot of these SAEF plants in China are currently procuring at feedstock, that's also pushed up the local domestic demand. And a lot of this translates into higher FOB prices in China. And that's where we start to see the divergence between Straits Yuko FOB prices and China Yuko FOB prices. So while the buying interest from the EU has been tepid so far, but the local demand in China is what's driving the prices there.

Aditya K:

All right, earlier in the year we heard that some Chinese producers of SAP were unhappy that policy was not moving faster. Do you see that sort of coming on track now? Is there more upside for Chinese Yuko prices this year?

Iris Leung:

I think that at this point, without any official statement from the Chinese government, a lot of it is still expectations, but there are supportive policies already in place. So we see that there are some... There's a pilot program where some of the Chinese airports are taking SAEF now and also China released its first SAEF export quota of 270,000 metric ton. And this was awarded to [inaudible 00:05:17] Energy at the end of April. So Jia'ao also exported its first compliant shipment of SAEF on 7th May this year with a volume of 30.4 KT. Other Chinese SAEF producers are also expected to receive these export quotas in future. But as I mentioned, there has been no official announcement yet. But definitely all of these potential supportive policies for SAEF is a bullish signal for the feedstock market. And we do see that a lot of Chinese players are interested to enter this market.

I've heard market sources mentioned to me that the Chinese Yuko market is becoming more saturated now. There are a lot of new collectors, small collectors coming in and that has also led to the Chinese Yuko market becoming more transparent and prices are also becoming more competitive. So I think it's also interesting that some of the markets sources mentioned that prices are getting more sticky for the domestic China prices and it's very easily influenced by the international finished product prices like SAEF and HVO. When the prices for these finished products go up, the feedstock prices go up very quickly as well. But at the same time when the finished product prices go down, offers tend to hold. So prices are quite sticky now given how saturated the market is. And also as you mentioned, I think definitely quite a fair bit of upside to Chinese Yuko prices according to the market feedback that we're hearing.

Aditya K:

All right, that's very interesting, especially because right now with EU still investigating Chinese Yuko imports, Vasu, do you think if there is an increase in Chinese Yuko prices, do they still have a ready market in the EU?

Vasu Tripathi:

Things look pretty bullish on the EU side right now, given the proposal that have come out in the last month as the countries are transposing the red three legislation into their local legislations. The big one is the elimination of double counting. So certain feedstocks in different countries, they were generating two tickets instead of one. But with the mandate being the same and higher requirement for the tickets and physical biofuse, it is going to lead to some higher feedstock demand in the EU.

Aditya K:

OK. So it's of course important to stress that Asian feedstock costs are still competitive right now. So when we turned to the US, which was the largest buyer of Yuko, especially Chinese Yuko in the last year, last month, the EPA proposed a substantially large RVO or a renewable volume obligation for biomass based diesel mandates 2026 and 27. This was much larger than the trade expectation of 5 billion gallons, which is around 19 million kilometers in metric terms. So could you take us through how these rules will influence the biodiesel market in the US and also the Asian Yuko market?

Vasu Tripathi:

This is very interesting what EPA proposed because historically EPA used to propose the biomass based diesel mandates in the volume obligation as you highlighted, that for 2025, the obligation is 3.35 billion gallons of biomass based diesel. But what EPA is proposing for 26 and 27 is not a specific volume. EPA used the 5.61 billion for 26 as an example, but they're proposing a range of 7 billion.

And why they're proposing that is because their EPA is proposing to slash the value of rings generated by imported biofuels or US-made produced biofuels, which are made from imported feedstocks by 50%. So if this year you are importing Chinese Yuko or Brazilian tallow, you are still generating a full ring based on that. But from 2026 that would just be 50%. And this coupled with the recent proposal, what was passed in the US House and Senate on 45C, that feedstocks imported out of North America will not be eligible for the 45C credit. It is creating a more protectionist North America based policy. So domestic biofuel producer in the US, they will try to source as much domestic feedstocks they can and ultimately it is going to fail on the demand of foreign feedstocks including Chinese Yuko.

Iris Leung:

On this point Vasu actually, I thought that it would be quite interesting for me to bring out that as I speak to market participants in the China Yuko market, they're actually still observing buying insurers from USF producers. I think it seems a bit contradictory given that the new 45C credit policy and the new EPA policy seems to discourage imported feedstocks. But at the same time I think there is some potential viability for them to use imported feedstocks for their production there. What some of my market sources have mentioned is that these plants could be located in a foreign trade zone and they could be taking these foreign feedstocks without technically importing it to produce SAF that would then be exported to Europe where the arbitrage window is still open given that SAF prices have gone up a bit recently and you're seeing more flows to Europe as well.

There's also been some market chatter that some of these US SAF producers are able to apply for some form of tax subsidy and that will allow them to maintain their margins for using imported feedstock even with the additional tariffs now for the US. So it's quite interesting that China is still seeing flows to the US and still seeing buying insurers from the US despite all of the policies discouraging the use of imported foreign feedstocks. I think also as you mentioned because the policies are a bit more protectionist now, so there's a lot of emphasis on using domestic feedstocks, but locally in the US they may not have enough supply to actually produce making the volumes. So they have to resort to importing feedstocks regardless.

Vasu Tripathi:

Right, exactly. I mean what we think is that US does not have enough domestic feedstock supply to ensure this mandate. So they will be importing some volumes of these feedstocks going forward. What I think could be happening in 2025 right now is that there could be a push to front run as much foreign feed stocks as you can just because till the end of 2025 you can still generate a full drain and you can carry over about 20% of your written obligation into the next year. So you can use foreign feed stocks this year, generate a full drain and use it to meet the 2026 mandate.

Aditya K:

And these are both interesting points. And do you think Iris, if there is front running of front loading of imported stocks, that is something the market is waiting to price in the coming six months?

Iris Leung:

I would say that based on what I'm hearing on the market, it doesn't seem that the demand from the US is as significant as what the EU is buying and also what the domestic staff producers are buying. So I would say that currently for the spot market, the main price drivers are still the domestic demand and the demand from EU.

Aditya K:

Right. So just for perspective for our listeners of in 2024, the industry used 7.4 billion pounds of QCO, of which 4.7 billion pounds were imported. All right, so now with the EPA mandates, Vasu, do you see that the tariff talks with China, how are they going to affect the market and all the buyers in the US who are still buying Chinese Yuko?

Vasu Tripathi:

I think these trade talks are going to be important just because we can already see the market reaction to that. And this year, despite importing record volumes of used cooking oil throughout so far in between 2025, the US producers have been frank to diversify away from China. And this is just an anticipation of the tariffs in the first few months. And with the latest tariffs in place, that has deteriorated some of the trade between US and China just because in the latest data point for May, we saw almost about Yuko exports to the US from China. So this is definitely going to shape the market. The price is going to be a big point just because given how the economics stands right now, the biomass based diesel production margins are still not very good in the US. So buyers are going to be sensitive to the price in order to generate positive margins.

Aditya K:

So now with the new EPA announcements, what does this mean for the vegetable oil markets? Obviously, they're all very closely looking at each other. Could you give us a perspective on how these markets are reacting to the US announcements for biofuels?

Vasu Tripathi:

It's been very, very bullish for the domestic biofuels and we definitely saw that in the market on the tape and when the proposal came out, soybean oil futures traded limit up on the Friday and also close to limit up on the following trade session. From the analytics side, what we have done is we have increased our forecast for soybean oil used into biofuels by about a billion pounds than what was it before? So for the marketing year 25, 26, we are estimating that about 16 billion pounds of soybean oil would be used in the biofuels given the strong incentives. And for context in the current marketing year, our forecast is at 12.5 billion pounds, so that would be a 3.5 billion pound increase year over year, which is a significantly large difference. And in order to do that, the U.S. have to stop exporting any soybean oil as it did in this marketing year.

Aditya K:

Right. And this is something that we are seeing on the Asia side as well because palm oil prices and especially palm oil waste prices are going up. The Malaysian palm oil mill effluent market price, which is for me, it hit a three-month high in July. And that also has to do with the fact that Indonesia, which is the world's largest palm oil producer, they stopped exporting Yuko and Pomi from January this year. So there is a very tight supply situation for vegetable oils and vegetable oil waste in Asia as well. You cover bunker markets as well. So is there something which you're seeing in terms of supply tightness in the Asian markets?

Iris Leung:

Actually before I go into that, I just wanted to pick up on the point where you mentioned that Indonesia imposed an export ban on waste feedstocks including Pomi and Yuko. So just wanted to bring up that actually this led to quite significant price trend in the first quarter of this year where we saw that supply in Malaysia tightened significantly. So previously, Indonesia exported quite a lot of Yuko to Malaysia for aggregation where a lot of it was in leadership to the EU and Indonesia is actually Asia's third-largest Yuko exporter after Malaysia and China. So because of this export ban, the supply tightened a lot in Malaysia and this pushed prices to a new high in March and this was actually the highest since September 2022 in fact. So I just wanted to highlight this interesting price trend since Aditya mentioned the Yuko export ban that Indonesia imposed from 8th of January.

But back to the topic, I would say that based on the current bio-bunkers market where a lot of the bio-feedstocks mainly use cooking on beta ester or Yukomi for Singapore bio-bunkers is actually coming China rather than the Straits or Malaysia. I would say that the Titan supply situation for Yuko in Malaysia bringing up feedstock prices in Malaysia may not be as relevant as the current situation where we see Yuko prices in China domestically growing up to new highs.

So I would say that now a lot of the Chinese Yuko producers are starting to report higher offers, citing higher feedstock prices that they're seeing. And although you might say that the demand is not so related between Yukomi and SAF since they're looking for Yuko of different specifications, but the Yuko pool is all the same. The collectors are now more focused on delivering volumes towards SAF demand. They are pre-treating the Yuko that they're collecting rather than producing regular Yuko that would be going to the Yukomi side. So overall the supply situation in China now is actually quite tight and that is pushing up feedstock prices for both Yukomi and SAF production in China overall. And in that sense for Singapore Biobunker blenders, that would also mean higher feedstock prices since they're buying a lot of the Yukomi from China.

Aditya K:

This is quite interesting because essentially means that it's not just the Yuko buyers in the US but also in Asia, like in China and Singapore, who will be squeezed further this year and they will be quite a fight for trusted Yuko supplies going forward.

Iris Leung:

Oh, yeah. So to give it a bit more context as to why Singapore Biobunker blenders are choosing to import Chinese Yukomi for blending now for B24, B30 blending now it's because since last August when Europe imposed anti dumping duties on Chinese biodiesel imports, Chinese Yukomi volumes have actually diverted to Singapore instead. So Singapore is the next biggest importer that can absorb some of the Chinese Yukomi volumes produced. And at the same time, with the current Chinese Yukomi prices going up, this could pose a risk for some of the Singapore bar bunker blenders who may have fixed B24, B30 terms prices based on their previous Yukomi costs. But with the increasing costs now they could see some risk to their feedstock costs now.

Aditya K:

All right, and given the supply tightness, Iris, what do you think? What's going to happen in the markets?

Iris Leung:

Yeah, so I think looking at the current spot market, it seems that the interest in SAEF has been driving quite a lot of the price increases now on top of the tight supply that we see in Asia. But there is concern from the market about how long will the arbitrage window between Asia and Europe stay open for SAEF and how much volumes of SAEF can Europe absorb. At some point, Asia could potentially see an oversupply of SAEF as well. And what would that mean for the feedstock market when the finished product is not selling well?

Aditya K:

All right, so we are coming to the end of this conversation. Any last remark from Vasu or Iris?

Vasu Tripathi:

Yeah, so I can jump on this. We see a trend emerging in the last couple of months here, which is that the global mandates for biofuel production are increasing. We have seen US raising its mandate, we have seen recently Brazil and announcing going from a 14% bio diesel funding mandate to 15%. In May 25, Indonesia is also going from a 35% to 40% mandate. This is going to result in higher feedstock demand globally, which is going to turn everyone's attention to how much supply is there and in the market they'll be looking at major suppliers of oils and fats, especially Indonesia and Malaysia for palm oil, as it is one of the largest consumed oil worldwide, that if the supply is able to recover or if it remains constrained going forward.

Aditya K:

All right, sounds like exciting times ahead. The market has lots to look forward to and we will be following closely assessing prices and market trends. For more details on the Yuko market, you can refer to links in our show notes. This commodity focused podcast was produced by Shekhar Singh in Gurgaon. Thank you for joining us.