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Rollin' on the river — or not, for global biofuels

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Rollin' on the river — or not, for global biofuels

The essential role rivers play in the transportation of biofuels across Europe and the United States becomes only too apparent when water levels hit extreme highs or lows as they have done this year.

Severe droughts have plagued Europe over the summer and the lack of rain has resulted in drastically low water levels along the length of the Rhine. Similarly, the largest river system in the United States, and North America, the Mississippi, has also experienced low water levels making barging difficult for buyers and sellers. Platts US and European biofuels team look at the impact this is having on biofuel markets in the region.

Europe

Persistent low water levels on the Rhine is causing barge delays and increased freight costs with the impact being felt by ethanol and biodiesel participants across Europe. Biofuels traders are using up to three barges to transport just 1,000 mt of product along the Rhine, to avoid boats from grounding on the river bed. The German Waterways  and Shipping Administration (WSV) tracks Rhine levels, and by November 14, recorded that  the depth of the river was at just 53 cm in Dusseldorf.

The levels were causing “huge problems” for refineries on the Rhine and anyone else who has sold product to be delivered to the Rhine, one European biofuel producer said. The inevitable result of the low levels and the need to spread product over multiple barges is that the cost of freight in Europe was soaring.

“You pay four times as much for freight costs” one broker reported, and another source explained to Platts that “the cost of bringing barges down is monumentally expensive.” Costs were heard hitting Eur100/cu m on the Rhine if there was no prior barge agreement according to one source.

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The river levels and resulting high transportation costs were exacerbating the tightness of supply of ethanol and rapeseed methyl ester (RME) in Rotterdam and the wider northwest European area. Difficulties were reported getting feedstocks to mills and RME production sites along the Rhine, which was limiting the supply of spot RME volumes, traders said. Rapeseed oil (RSO) was pricing at year highs, according to sources, and a greater shortness of both RSO and RME was looming.

“The Rhine is an absolute disaster; everything’s slowed down in the upper-Rhine and above and that’s why you see the strong backwardation now in the biodiesel market,” one trader said.

Another trader expected the low Rhine levels to continue into the middle of December, which would cause a knock-on effect on RME supply in a month’s time. RME producers along the river typically buy their feedstock and take delivery a month in advance.

In a European ethanol market which has seen limited supplies from around the start of the second quarter to the present day, any glitches in the already tight supply chain have applied upwards pressure on prices. With fewer than usual barges able to navigate the Rhine, the price of T2 ethanol moved to a two-and-a-half-year high on November 18 of Eur661.25/cu m. The exceptionally high prices of European ethanol were opening up arbitrage opportunities between the US and Europe, a rare situation. But despite US prices coming under pressure, the world’s most efficient ethanol producer has experienced its own river problems at the same time as Europe.

United States

The Mississippi River system, which includes its namesake river as well as the Missouri and Illinois rivers, is the key inland traffic pathway for the US grain and corn market. Sixty percent of the grain exported from the United States is transported via barge down the Mississippi River to New Orleans.

The nation’s inland waterway system is key to keeping US agricultural products attractive to foreign buyers. A study conducted by the Illinois Section of the American Society of Civil Engineers estimated that the waterway system made shipping soybeans from Iowa to Shanghai 40% cheaper than shipping from Brazil to the same destination.

The US Army Corps of Engineers maintains a 9-foot depth along the river from Baton Rouge, Louisiana, to Minneapolis, Minnesota.

But barge traffic is subject to the whims of nature on the river. In late October this year, low water levels along the upper portion of the river made barges unloadable. In response, dried distillers grains customers in New Orleans feverishly sought product to load their vessels before the low water levels reached Louisiana.

Consequently, bids for New Orleans CIF product rose $2-$4 per short ton for a couple of days. That set off a domino effect in the industry, as product normally headed to Chicago could be shipped economically to New Orleans. That created a void in Chicago that was filled by product from Indiana and Ohio, which would normally be shipped via rail to Savannah, Georgia.

Sources said low water issues affect Mississippi barge traffic two to three times per year. The 2012 drought brought the river to near-record lows and imperiled shipping traffic.

But low water isn’t the only challenge posed by Mother Nature.

The Mississippi River is subject to flooding during periods of heavy rainfall. In July 2014, heavy rainfall forced the Upper Mississippi to flood its banks. When the floodwaters subsided, the silt and sediment that remained made portions of the Upper Mississippi impassible to heavily loaded barges for several days.

Outlook

Over recent weeks, there have been growing talks that some parts of Europe could be about to face the worst winter in 100 years with freezing temperatures, strong winds and snow said to be on their way. The much-anticipated El Niño could bring about further logistical difficulties for barging along Europe’s rivers.

One European source summarized the situation, “if it’s freezing cold, there’s no rain; river levels don’t go up. If it snows, snow stays on the mountains and rivers don’t fill up until March or April […] so they want a mild winter that will bring rain and I don’t know if they’ll get that, it’s too soon to tell.”