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RED FAME 0 biodiesel premiums at record high as lack of supply bites

London — FAME 0 biodiesel compliant with the Renewable Energy Directive rose to a record premium over ICE gasoil futures at $401/mt FOB ARA Tuesday as a lack of supply combined with low underlying energy prices, sources said.

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Platts assessments for RED-compliant biodiesel began in February, 2012.

Premiums for non-RED FAME 0, which typically prices below RED material, reached higher levels on a number of occasions and were last stronger on September 23, 2011, at $410.50/mt. The record value was $566.25/mt, on January 6, 2011.

Inventories of biodiesel in the ARA region have been increasingly drawn down since the end of the second quarter amid falling European production rates due to poor forward margins and an absence of viable external resupply options.

Demand has been as expected for the time of year, picking up for the summer period but not reaching spectacular levels, sources said.

Even with buying interest peaking seasonally, overall demand in Europe is depressed due to falling German consumption after the country changed its biofuel mandate rules this year.

Meanwhile, ICE gasoil futures have fallen toward levels last seen at the beginning of the year, with the front-month contract closing in the $460-$470/mt range in the past week.

Biodiesel production rates dipped in recent months after producers took a decision to slow down due to low profitability for forward months.

Although anecdotal evidence points to better run rates in the past few weeks since prompt margins picked up due to the rise in biodiesel prices and lower feedstock costs, the Northwest European market remained dry at prompt dates, sources said.

Even with greater production around Europe, a move towards greater inland trade in the past year has reduced flows into the ARA region.

Germany, Europe's biggest producer and second-largest consumer, has been mainly supplying its own end-users, reducing the potential for filling tanks up again in ARA, one source said.

"Germany has been running for Germany for a while. These guys have been fairly well sold into local outlets, so not much buffer [in ARA] has been built up."

Germany is set to produce 22% of Europe's biodiesel, at 2.68 million mt, in 2015, according to Platts agricultural analysis unit, Kingsman. Meanwhile, Germany was forecast to consume 2.05 million mt, second only to France.

As a result of the increase in prices on the prompt market, the biodiesel market moved into an even more heavily backwardated structure, with increases on September paper in the past two sessions relatively modest compared with cash.

The backwardation was the "big question", a source said, with the market consensus being that resupply would likely occur in coming weeks and prices would weaken.

"At a point, it runs out of steam," said the first source. "Getting long at $300/mt is something, getting long at $400/mt is something else."

Widening spreads between RED RME and RED FAME 0 paper for September onwards reflected better availability of PME and SME blendstocks, sources said, as well as the start of a shift to winter specification biodiesel.

There have been opportunities on paper to bring Asian PME into Europe and there were reports of a number of fixtures taken out by European buyers. The product is set to arrive in the coming weeks through to the end of September.

Nevertheless, even if the biodiesel structure flattened out somewhat, the backwardation in biodiesel overall would probably roll forward through to the end of the year, especially with poor forward margins compared with prompt, giving little incentive for producers to lock in production now, said sources.

Bids for Q4 physical were sitting below replacement cost and paper values, they said.

"Forward margins are not really that nice, but get a lot better the closer the month comes," a third source said, adding margins on paper were a good buy for producers. "[I] imagine now that more and more producers are doing that."

--Sean Bartlett,
--Edited by Dan Lalor,