The European ethanol community gathered in Budapest over the first week of November to look at the current challenges and opportunities facing the ethanol, and wider biofuels, markets. As the dust settles and the excitement wanes, we take a look at the overarching messages and opinions coming from the biofuels, and in particular, ethanol industry.
Current market fundamentals left many in good cheer
In contrast to previous years, the overall sentiment of attendees at the industry event was positive, both in terms of the current situation and outlook for the future.
Ethanol prices are averaging nearly Eur60/cu m higher year-to-date for 2015 compared with the same period of 2014, supported by market fundamentals which have seen low supplies and sustained demand over the summer months and into the fourth quarter. Imports into Europe have been limited over the year so far compared with 2014, and with the UK’s Ensus plant being down since February, an element of supply-squeeze has applied upwards pressure on ethanol prices. Although low crude and gasoline prices have limited discretionary blending and demand for exports from Europe, driving levels across Europe have been encouraged by lower prices at the pumps which has helped sustain demand for ethanol.
With ethanol prices this week hitting fresh-highs almost every day, it was the supply-side that is driving prices rather than demand, according to traders. The winter months traditionally see lower demand for road fuels compared with the summer months, and as mid-November fast approaches, market participants were not expecting a significant uptick in buying. Although those producers with plants switched on should be running on “full whack,” according to one producer, uncertainty over the output of one Rotterdam-based plant was sustaining buying interest.
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All the positive talk might lead many to believe that the European ethanol market is paved with gold, but the year has not been one without difficulties.
Droughts across much of the continent have left the Rhine and Danubes at depleted levels, making moving barges around and into Rotterdam very difficult. Many attendees across the whole biofuels complex were struggling with deliveries and queues because of the low river levels.
The droughts have also affected crops across the region, resulting in quality issues of producers’ dried distillers grains solubles (DDGS). Extreme weather conditions can impact corn and wheat crops and leave them infected with mycotoxins that can affect animal health. In this situation, it is suggested that the amount of DDGS fed to livestock is reduced.
Alongside this is the memory, always lurking at the back of any producer’s mind, of the negative margins that plagued the market over the winter of 2014 and into the first quarter of 2015. Although times might be good now, the market can never quite escape from the shackles of darkness which hung over the industry for so many months.
The future’s bright, the future’s ethanol
The elevated prices created a positive backdrop for the biofuels event in Budapest and aside from conversations on the prompt market, talk also turned to the future of biofuels.
As has been the case for a number of years, the post-2020 environment holds many uncertainties for the biofuels industry. The European Union mandate is a 2020 goal post, with nothing in place, as yet, to tell the industry where they need to aim after that date has gone.
Despite the lack of clarity and direction, ethanol participants in Budapest, in the most part, believed they had a role to play in the fuel and road-transport mix after 2020. One European producer said that post-2020, second generation biofuels were not at the stage where they could adequately cover any space left by first generation. The same applied to electric cars: “They cannot deliver,” he said.
The producer added that, with the belief that alternative biofuels would be unable to fulfill any potential new quotas by themselves, first generation biofuels would continue as a constant. “I think crop-based ethanol will be there for quite some time,” he said.
Alongside this post-2020 European outlook, there was also bullish talk on demand for ethanol elsewhere. The high-octane properties of ethanol versus other fuel additives were cited by a number of people as a demand quality. One American producer in attendance told Platts that he expected the US to incrementally increase its demand for high-octane fuels by 2017, which would result in the US becoming net-short in ethanol. He did not expect that the US could meet domestic demand and would have to start looking further afield for product. With Brazil in a constant state of “feast or famine” with regards to its ethanol production and its ability to export, imports would have to come from further afield, potentially Europe.
One Europe-based trader was seeing a slight increased demand for blending in the United Arab Emirates. Despite gasoline levels being low compared with ethanol, and demand for discretionary blending being minimal, the trader was seeing a tangible call for higher octane fuels in the Arabian Peninsula.
Even with crude prices where they are, and even with little indication on the horizon that OPEC will reduce its barrel output any time soon, market participants were even optimistic that crude will eventually fall and demand for discretionary blending will increase in the near future. With Brent hovering around $45/barrel and ethanol in Europe at a two-year high, it’s possible this particular outlook was one to be taken with a pinch of salt.