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FEATURE: Brexit brought proof of origin documentation to European ethanol market

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FEATURE: Brexit brought proof of origin documentation to European ethanol market

Highlights

Complexity added to fungibility of UK, EU ethanol product

Proof or origin documentation needed to determine ethanol duty requirements

The recent tightening of supply in the European ethanol market has resulted in a greater reliance on imports. This could force the market to once again scrutinize the implications of Brexit because imports into the UK via the EU could face a second tariff.

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Market participants disagree on the implications of the end of the Brexit transition period, completed Jan. 1, and its impact on liquidity, with some issues such as commingling not yet fully resolved. As tender season hits the ethanol market in November it remains to be seen to what extent proof of origin documentation will come into play as participants look to clarify the remaining questions.

While the the Trade and Cooperation Agreement between the EU and the UK allows for ethanol produced in the EU to be fungible into the UK, and vice versa, the agreement has brought about a number of complications around what counts as EU or UK ethanol, and how ethanol from third countries is treated when it is transferred between the two entities. The rules differ for Northern Ireland, treated separately from UK.

This raises the question of whether ethanol not liable for further UK import duty can be commingled in tank with ethanol which it is, and HMRC was not immediately able to give a definitive answer on this point. When claiming preference however, the onus is on the company seeking exemption from duty to demonstrate the origin of the material, which may be complicated once it has been commingled, particularly if this takes place more than once.

Imports of EU origin ethanol into the UK

Under the TCA, ethanol produced in the EU can be sold into the UK without the payment of further import duties through the process of "claiming preference." Her Majesty's Revenue & Customs has told S&P Global Platts that the onus is on the importer to demonstrate the origin of the product reported as having preference as described by the TCA.

According to the customs agency, or HMRC, this can be done using a what is called a EStatement on Origin provided by the EU exporter, a document which can cover multiple shipments over a 12-month period, or by having other forms of evidence showing that the product meets the requirements, a type of evidence known as "importers knowledge. However, sources in the market have highlighted difficulties in acquiring proof of origin documents especially when volumes contracted are not obtained directly through producers which is understood to be the current market trend.

"Most producers are sold out or saying they don't have volumes, and traders are not as flexible as producers," said a source.

This approach, which combines a focus on the physical origin of the ethanol itself with an understanding of the customs status of this physical material at any moment in time, overlays an additional layer of complexity onto a market used to operating a mass balancing system in which the primary concern is the level of carbon intensity and whether or not it is customs cleared into the EU.

"The [EU] market is fragmented at the moment, most buyers are asking for extra special conditions, whether it is proof of origin or sustainability or calculating on a certain fuel comparator, making it difficult to know the exact price of FOB Rotterdam in the last month," said another source.

Imports of non-EU origin ethanol into the UK

Once EU import duty has been paid on ethanol entering the 27-country bloc, it can circulate freely among all member states, including until the end of 2020 the UK. Under the TCA, however, this has changed and ethanol imported from third countries into the EU is now liable for a UK import duty if reexported there.

The UK has a number of free trade agreements with third countries, such as Peru, which allow those countries to export products to the UK, paying either a preferential rate of import duty or no import duty at all. However, under the TCA, this does not appear to apply to goods routed to the UK via the EU.

The HMRC told Platts that if third country ethanol enters what is known as "free circulation" in the EU via the payment of EU import duty, the ethanol will have lost its preferential status and customs duty at the normal rate will be due when moved from the EU to the UK. This would only be avoided if the ethanol remained under customs control within the EU as T1 material, before being reexported.

Operational issues

The increased focus on origin under the TCA brings up a further complication, as the mass balancing system in the EU has historically meant there was little need for companies to keep track of exactly where specific T2 ethanol molecules originated.

Ethanol in hubs such as Rotterdam is typically stored in shore tanks, where T2 material of various origins can commingle, while the proof of sustainability documentation which originally accompanied the ethanol can be mixed and matched according to the requirements of buyer and seller.