London — European ethanol crush margins have come under severe pressure as producers grapple with lower prices on a significant drop in demand due to coronavirus-related led mobility restrictions, as well as rallying feedstock prices.
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Simple ethanol crush margins from wheat and corn have slumped to levels last seen during the fist lockdown in March 2020; hovering near six-and-a-half year lows since the end of December.
Ethanol corn crush margins dropped to minus Eur233/cu m on Dec. 31; below the previous low of minus Eur183/cu m hit on March 25, while wheat crush margins stood at minus Eur369/cu m on Jan. 19; equaling the previous low of March 25.
S&P Global Platts T2 ethanol prices dropped 41% since hitting all time-highs on Sept. 16, to Eur500/cu m as of Jan. 21, while Euronext's corn and wheat futures front-month contracts rallied 27% and 23% to Eur213.50/mt and Eur231.50/mt, respectively, over the same period.
Perfect storm for EU ethanol producers
The start of a second wave of COVID-19 across the Continent, and the gradual tightening of lockdown restrictions since October on spiraling infection rates and death tolls due to a new virus variant, led to a slump in gasoline consumption and in turn ethanol demand and prices.
S&P Global Platts Analytics estimates EU gasoline and distillate demand in the region for December was down 570,000 b/d year on year due to lockdowns and restrictions on movement.
Economic mobility in Europe's biggest economies in early January slumped to the lowest levels since mid-May, with average mobility indexes in France, Germany, Italy, Spain and the UK recorded at 43% below pre-pandemic levels as of Jan. 17, Google data showed.
In contrast, the pandemic had the opposite effect on global grain prices, as major importing countries hurried to increase strategic reserves to ensure food security, while major exporting countries introduced export restrictions to ensure stability of domestic supply and prices.
Grain prices were also supported by unfavorable weather conditions in grain exporting countries, coupled with China ramping up agricultural imports in 2020-21 to offset lower domestic yields and repopulate its hog population following the culling of an estimated 50% of its population due to African Swine Flu.
While animal feed ethanol by-product dried distillers' grains with solubles (DDGS) tracked wheat and corn prices higher and helped partly offset the drop in ethanol prices producers faced, European natural gas prices saw a significant rally on the back of a more than three-fold increase in Platts JKM Asian spot LNG prices to $32.50/MMBtu in January on tight supply and strong Asian demand.
"DDGS are helping a bit with crush margins, but they are still negative with wheat worse than corn," a France-based source said. "Natural gas [prices] went up a lot too, so we may see a decrease in capacity like in March-April."
Demand uncertainty fueling price volatility
T2 ethanol prices fluctuated between all-time highs and all-time lows in 2020. As lockdown measures intensified across the EU, prices dropped to Eur340/cu m in March, but by September had rallied 140% to Eur840/cu m as supply shortages amid a demand bounce following the removal of mobility restrictions took the market by surprise. The introduction of a second wave of lockdowns across the continent and the associated slump in demand have put T2 prices back under pressure since September, falling Eur340/cu m since then to Eur500/cu m as of Jan. 21.
In March Alco Group reduced its capacity by 30% as ethanol prices and margins came under pressure, it said in a statement at the time.
A broker said Jan. 21: "We are currently at all-time low margins; they are lower now than they were in April 2020."
A Germany-based source said producers are now wondering whether to cut run rates in the second quarter since earlier optimism has faded. "Where will the demand come from if all countries are under lockdown?" the source said.
Mirroring the volatility in prices, the market structure between the physical prompt and second-month futures spread had also swung from all-time highs to all-time lows as a lack of demand clarity took market participants by surprise.
A trader said that 2020 "broke every backwardation and contango record seen in T2 prices. The cash versus M2 paper spread is normally a good indication of defining the strength in the market."
Physical prompt versus Platts second-month futures dropped to minus Eur77/cu m on Jan. 4, as aggressive selling gripped the physical market to make space for incoming imported volumes amid a stock build-up in the Amsterdam-Rotterdam-Antwerp hub, market sources said.
Buyers with storage space still available returned to the market as the carry was deemed too attractive; reducing the contango structure to minus Eur19/cu m as of Jan. 21.
Moreover, optimism on a demand bounce in H2 2021 as the COVID-19 vaccine roll-out gains pace and mobility restrictions are removed are keeping Q3 2021 paper values at "reasonable levels," with a closed US arbitrage and expectations of lower producer run rates seen as bullish factors given the structurally short nature of the EU ethanol market, market sources said.
S&P Global Platts Analytics estimates EU 2021 ethanol consumption will increase 32% year on year, with the market needing 1.37 billion liters in imports.