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Analysis: Could Chinese ethanol tariffs lead to oversupply of US corn?

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Analysis: Could Chinese ethanol tariffs lead to oversupply of US corn?

China Monday announced an additional duty of 15% on top of the existing 30% import duty on denatured fuel ethanol imports from the US, in response to a US failure to consider a Chinese request for consultation on US steel and aluminum tariffs imposed earlier by Washington.

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This has caused a fall in Asian fuel ethanol prices -- since the announcement of the possible hike on March 23, prices have dropped by $12/cu m to $492/cu m at the Asian close last Thursday, S&P Global Platts data showed. Chinese buyers of denatured ethanol from the US have already been heard renegotiating deals done for US ethanol earlier this year.

The USDA WASDE report, released late last week, showed a surprisingly large fall in US planted corn acres, which sent the US CBOT corn futures up by around 18 cents/bu from Thursday to Monday, and was generally held to be bullish for corn prices.

However, taking into account the latest Chinese decision on import duties, this development could be bearish for corn in the medium term, as the ethanol arbitrage into China should be quite firmly closed after the duty hike. China's fuel ethanol imports surged by 64% month on month to 197,652 cu m in February -- the highest in 21 months, data released last week by the General Administration of Customs showed.



Over January-February, China imported 280,317 cu m of denatured ethanol from the US -- exceeding earlier market expectations of 200,000 cu m of US ethanol fixed for delivery to China during the first quarter, market sources said.

The future of US ethanol imports into China, after the duty hike, is held to be fairly bleak by Asian importers, however.

While demand for US corn for the Asian feed industry has been robust during Q1, with Vietnamese buyers also buying 10-12 US Panamax cargoes, sources say there is still a lot of corn in storage in the US. US farmers have also been storing corn in silo bags on farms, which may be unreported to the USDA, adding to the corn potentially in storage in the US.

With a potentially large amount of corn held in storage and no outlet for US fuel ethanol exports into China, the reduced US corn acres may still be unable to keep the outlook bullish for US corn.

-- Samar Niazi, samar.niazi@spglobal.com

-- Edited by Kevin Saville, kevin.saville@spglobal.com