The UK's new Renewable Transport Fuel Obligation (RTFO) came into effect Sunday and will act as a bullish factor for the European biodiesel market and add 350,000-400,000 mt/year to existing demand, underpinning the market's bullishness.
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The previous mandate was 4.75% on a volumetric basis for transport fuels. This has now risen to 7.25% to last until the end of the year, and 9.75% by 2020, effectively doubling the mandate in two-and-a-half years.
With used cooking oil (UCOME) and tallow-based biodiesel (TME) accounting for almost all of the biodiesel used in the UK, the increase in the mandate is expected to be focused on these waste-derived markets.
However, the future for UCOME in Europe is not as rosy as previously expected following this increase in demand. With FAME 0 still long on the prompt, owing to high stock levels and imports into Europe, premiums over gasoil are falling.
If the FAME 0 price does not rise, margins for UCOME production will remain under significant pressure, with the FAME 0 premium over gasoil providing a firm ceiling for this double counting product, as buyers will not pay more than double the FAME 0 premium for the product, regardless of quality.
"UK demand is increasing on the RTFO decision," said a source. "Even if everyone wants UCOME or TME, with FAME 0 so low, prices just can't rise -- it is madness."
The situation in the European biodiesel market looks unlikely to abate any time soon, with quantities of biodiesel still moving into Europe from Argentina and Indonesia.
These movements have moved the FAME 0 paper structure in Europe on a FOB ARA basis largely to flat as imports in the summer months are expected to outweigh seasonal demand increases.
On the ethanol front, however, the increased RTFO formed part of UK producer Vivergo's decision to restart following an extended maintenance shutdown that began in November.
However, many question how bullish the new RTFO is for ethanol demand, considering the cap on crop-based biofuels.
Vivergo is pushing for the government to introduce E10 in the UK market, a gasoline blend with 10% ethanol, but even so the prospects for significant increases to ethanol demand are likely limited.
"They talk about RTFO as the good move but in my opinion that's bearish for first generation ethanol and puts E10 under a big question mark," a source said. "Just looking at the first generation cap and E10 it does not work together."
Introducing E10 into the UK could in theory still increase ethanol consumption by removing some biodiesel market share. But this seems unlikely since it would have to compete with double counted biodiesels such as UCOME.