Policy will continue to be a key driver of the European biodiesel market through 2021, with the revised Renewable Energy Directive (REDII) setting the EU policy framework until 2030.
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Biofuel mandates and diesel demand recovery are set to fuel higher EU biodiesel consumption in 2021. S&P Global Platts Analytics projects 2020-21 EU biodiesel consumption will increase by 1.86 million mt on the year to 16.68 million mt.
Under REDII, the EU target for renewable energy consumption is raised to 32% by 2030, from 20% in 2020, with a 14% transport sub-target. Aviation and maritime fuels can opt in to contribute to the 14% transport target but are not subject to an obligation. The contribution of non-food renewable fuels supplied to these sectors, such as waste or residue based products, will count 1.2 times their energy content mandate contribution.
However, consumption patterns for specific products will likely change as RED II introduces a cap on crop-based biofuels at member states' 2020 levels, with a maximum of 7%, while used cooking oil (UCO) and tallow are capped at 1.7%. Blendwall limitations could also curb some of the increase. B7 has been the standard diesel blend available at the pump and, while a shift to B10 is being considered, without that, much of the higher requirement on renewables and emission reductions will likely be met through hydrotreated vegetable oil (HVO) which is a drop-in fuel and does not impact the diesel specification.
Furthermore, the European Green Deal, adopted in December 2019, has a 2030 target to increase GHG savings from biofuels from 40% to 55%, setting Europe on a path to become climate neutral by 2050. The 55% target by 2030 is likely to modify current directives across EU member states as they adjust mandates to fulfill these goals.
While some countries, such as Romania and Lithuania, had their mandates temporarily waived during the lockdown period of March-May, in 2021 member states are expected to maintain their mandates for the entirety of the year, helping biodiesel demand. The UK and the Netherlands announced higher mandates for 2021, while France is increasing its ethanol mandate only, with others yet to announce biofuels mandates for 2021.
"Biodiesel mandates are the only factor helping the biodiesel market. Looking at gasoil spreads, spreads are very high and there are negative margins -- it's very difficult without mandates to use biodiesel without programs," said Anilkumar Bagani, head of research at Sunvin Group. "As long as governments are okay with supporting mandates, you can expect a recovery in demand."
COVID-19 still presents a challenge to fuel demand in 2021 due to potential lockdown restrictions that may be imposed to counter outbreaks of cases. Eyes will be focused on the unrolling of vaccination programs across Europe and an effective vaccination campaign would increase optimism towards demand. EU countries have until end of June 2021 to transpose the REDII legislation but overall mandates, whether unchanged or higher, should continue to drive increased biofuel demand relative to 2020.
SME imports to increase replacing lower PME imports
PME imports in 2021 are expected to further decline due to high palm oil prices. Palm oil prices are expected to maintain their high levels due to a tight global oilseed supply through 2021. However, heavy rain conditions seen in Q3 and Q4 2020 could prove beneficial for palm yields through 2021 and a recovery in the labor force would also provide a boost to production.
SME imports from Argentina in 2021 are seen holding steady on the year or even increasing slightly, taking advantage of lower PME imports.
Lower bean crushing, tightness in Argentinian bean supply and Brazil's appetite for soybean oil could make it difficult for Argentina to export SME if Europe comes for Argentinian SME. "If there is a lower supply of soybean oil because of low crushing and Europe comes for SME then it will be a big challenge for Argentina in 2021," said one market participant.
French legislation to cap soy-derived biodiesel at 0.35% of the diesel mix passed its first reading in parliament. If it passes its second reading, the legislation is expected to stall or potentially decrease soybean oil consumption in 2021. The strategy aims to reduce import dependence on protein, steer away from GMO and unsustainable crops; leaving mainly rapeseed oil and sunflower oil as the main feedstocks for biodiesel in France should it pass.
UCO market to depend on restaurant collections
The opening of restaurants in 2021 will be a driver of the UCO market. A recovery in UCO collections in Europe should help supplies and the extent to which restaurant collections progress in China, a key supplier of UCO to Europe, will also be significant against the backdrop of restaurant closures through 2020 due to COVID-19 lockdowns.
Sustainable aviation fuel to come into focus
As part of the European Green Deal, the European Commission is set to propose a framework in early 2021 to boost the production of sustainable aviation fuels, to meet Paris Agreement climate change targets in tackling carbon emissions for the aviation industry. Production of these sustainable aviation fuels remain low in Europe and so action is set to be taken in the year ahead in stimulating this market through a series of policy options to achieve cost reductions, higher production and feedstock availability.