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US exports to China unviable even if tariffs return to pre-tension levels

Philippines' fuel ethanol imports to fall further

South Korea's imports from Pakistan to dry up in Q1

Singapore — An easing of trade tensions between the US and China could pave the way for a resumption China's imports of US ethanol in 2020 -- although this is currently unviable even if tariffs are lowered -- while rising ethanol production in the Philippines in 2020 is set to reduce its requirements for imports further in the year.

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Commodities 2020 | S&P Global Platts

In addition, one of South Korea's two major suppliers of Grade B industrial ethanol, Pakistan, is expected to raise prices for Q3 of 2020 as output declines, likely reducing cargo arrivals into Ulsan.

In the Philippines, the volume of monthly local allocations or LMAs that gasoline blenders must fulfill before turning to imports has been on an uptrend since 2018 and is set to continue rising in 2020, with the first quarter 2020 LMA set at 95,400 cu m, up 4.84% from Q1 2019.

The rising LMA requirement is increasing costs for gasoline blenders, with the domestic price of ethanol rising to average Pesos 62.88/liter in November 2019 from Pesos 53.93/liter a year earlier, while the higher volume requirement reduces their consumption of cheaper imports.

The Asian fuel ethanol marker averaged $482.67/cu m over the first 11 months of 2019, compared with $464.49/cu m in the same period a year earlier, S&P Global Platts data showed. Imports are typically less than half the price of domestic supply

The Philippines' gasoline blenders have historically met close to 50% of their requirements through imports, but moves by the country's Department of Energy to require greater domestic ethanol consumption before turning to overseas options is resulting in a steady decline in ethanol imports, and this downtrend is expected to continue into 2020.

RETURN OF US ETHANOL TO CHINA?

US ethanol exports to China all but ground to a halt in 2019 after China imposed a 70% import duty on denatured ethanol from the US amid escalating US-China trade tensions.

Prior to the tension, China's imports of US denatured ethanol totaled 424,437 cu m over January-March 2018 and accounted for 99% of its total denatured ethanol imports in the period.

With phrase one of the US-China trade agreement now slated to be inked in early 2020, a resumption of US ethanol exports to China is a possibility.

However, even if China's import tariff on US ethanol was to return to pre-trade tension levels, US ethanol exports to China are unviable at current prices.

It is possible -- but unlikely -- that the Chinese government will allow cheaper US ethanol imports to surge into the country by lowering the tariff back below 30%, as this would destroy its fledgling domestic ethanol industry.

What could happen instead is the introduction of a quota system -- similar to that for US soybeans -- under which a set volume of ethanol from the US would be allowed in "at a preferred tariff" level, a market source said. Equally, there could be an increase in the fuel blending mandate to accommodate "additional" US ethanol.

Either way, ethanol is expected to be included in the phase one US-China trade agreement in order for China to reach its required $40 billion-$50 billion of purchases under the deal.

However, China may not have the blending infrastructure to take in a large volume of imported ethanol. The maximum volume of fuel ethanol from the US it could absorb in 2020 would be somewhere between 1 million and 3 million mt, one fuel ethanol trader said.

China is planning to implement a nationwide E10 blending mandate, commencing the rollout in 2020 in 15 provinces across the Beijing-Tianjin-Hebei region and in northeast provinces such as Heilongjiang and Jilin.

In order to increase its ethanol production to meet the E10 blending mandate, China would have to construct new plants. In addition, corn stocks have been declining as demand outpaces output. To reach 10%, China would need to boost its production capacity to approximately 15.2 million mt, or 19.2 billion liters, according to Platts Analytics. It forecasts China's ethanol production for 2020 significantly lower at 5.926 million mt.

The annual corn output-demand gap was 17.08 million mt, according to the China Agricultural and Demand Estimate released in December, which means any ramp-up in ethanol production would need to covered by corn imports for use as feedstock.

PAKISTANI GRADE B ETHANOL PRICED OUT OF ULSAN

Pakistani ENA is currently priced indicatively around $720-$735/mt FOB Karachi, much higher than 2018 levels at $680s/mt FOB Karachi, and could rise further in 2020 given the sugar harvest in Pakistan is down an estimated 20% year on year.

The high price of Pakistani ENA landing in Ulsan at $640s/cu m CFR will likely result in much of Pakistan's output being sold in Europe instead.

Brazilian ethanol at around $620-$630/cu m ex-tank would probably be the main supply to buyers in Japan and South Korea in the first half of 2020.

Japanese buyers have already secured Brazilian supplies for Q1 and part of Q2, and South Korean buyers Brazilian supply for Q1, which would leave little requirement for Pakistani cargoes in Ulsan.

Brazilian ethanol from fresh crops will ship at end May/early June and enter Ulsan in Q3, and are also likely to be priced lower than Pakistani ENA cargoes.

Commodities 2020 | S&P Global Platts

-- Donavan Lim, d.lim@spglobal.com

-- Edited by Wendy Wells, newsdesk@spglobal.com