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APPEC: US ethanol exports slow as producers diversify away from China

Singapore — US ethanol exports are forecast to fall around 100 million gallons year on year to 1.5 billion gallons in 2019 as trade flows redirects away from China toward Southeast Asia and India, according to industry executive in an interview at the S&P Global Platts Asia Pacific Petroleum Conference in Singapore Wednesday.

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"Having a 70% import duty on the US essentially stops US shipments to China. We haven't been able to ship any ethanol in that direction this year," Ethanol Group President at The Andersons Inc. Jim Pirolli said, adding: "If that wasn't in place, [US ethanol would] definitely be economically viable."

China raised the tariffs on US denatured ethanol to 70% in July 2018, as trade tensions heated up.

Producers are actively exploring new markets to diversify away from China, according to the US Grains Council.

"We are marketing product into Japan, the Philippines and we see our big growth targets in Indonesia and Vietnam in particular, and there will hopefully be some additional growth in [other parts of] Southeast Asia," said Tim Tierney, the US Grains Council's regional director for strategic marketing of ethanol.

India was another potentially attractive market for industrial ethanol, he added.

While each country has its own farming lobby and entry barriers for ethanol, Tierney sees a place for US cargoes in meeting demand that cannot be satisfied domestically. In the longer term, China's ethanol demand will continue to grow apace as blending policies tighten, hopefully reopening the case for increased US imports, he said.

"Time and time again [we ask] the commitment level in China for their E10 mandate and unequivocally they say it's for real. [They] want to diversify the supply of energy and [they] want ethanol to be a part of that energy solution," Tierney said.

US ethanol crush margins

SMALL REFINERY EXEMPTIONS ADD TO US DEMAND WOES

In the short term, US ethanol producers are stuck between the rock of falling margins and the hard place of sluggish domestic demand.

"We've got 24 months now of really weak margins and so the less economic producers are under a lot of pressure. And [the situation is] going to continue into the new crop unless we can figure out a way to rationalize that supply and demand balance," Pirolli said, adding that recent US policy had curbed demand further.

Demand for US ethanol so far, across Southeast Asia, was uninspiring, despite the economic resupply advantage of US ethanol.

The Philippines domestic bioethanol reference price stayed at Pesos 59.74/liter ($1,150/cu m) in August. By comparison, the average imported fuel ethanol price for August was $478.21/cu m CIF Philippines, Platts data showed, which was less than half domestically produced ethanol prices.

While Philippines market participants were willing to import US ethanol due to price differences, local monthly allocations had to be fulfilled first before they are able to turn to foreign imports.

Philippines' LMAs have been climbing so far in 2019, with 370,550 cu m of LMAs declared for 2019 versus 367,686 cu m for 2018.

Although some domestic ethanol producers are reportedly having difficulty producing sufficient ethanol to meet LMA in the fourth quarter, no fresh tender so far was seen this week. A market participant on Wednesday is still awaiting certifications from domestic ethanol producers confirming their inability to supply ethanol in the fourth quarter to import fuel ethanol.

Over in Vietnam, although some cargoes were spotted arriving in the country, no fresh trade or tender for October cargoes was reported yet with market sources expecting possible tenders opening up for November or December.

"In the US, we're facing some uphill battles policy-wise with small refinery exemptions creating a glut of RINs on the market and then overseas we're locked out of [China]," Pirolli said. "So we're just trying to find ways to get our product out there [to] the market," he adds.

The US Environmental Protection Agency issues RINs to track renewable fuel use in the supply chain.

Refiners typically have the option to buy physical renewable products or to buy RINs to satisfy government mandates.

Smaller refineries with a capacity less than 75,000 b/d can file for exemptions with the EPA if they could demonstrate "economic hardship" if they were to comply with the mandated blending requirements.

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

-- Yi-Jeng Huang, yi.jeng.huang@spglobal.com

-- Edited by Jonathan Dart, jonathan.dart@spglobal.com