Renewable fuels and their importance in the market have seen an uptick this year.
Our experts, Louise Burke and Jackie Reigle, discuss Argus’ 30 new daily US renewable feedstock assessments and give an overview of the renewables market.
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Louise: Hello. And welcome to Driving Discussions. In this series, we discuss forces that affect road fuels globally. We all drive around in cars, so I think it's relevant to many of us here that are listening. And in this episode, in particular, we will be discussing the recent launch of our U.S. renewable feedstock assessments. These are published daily for specific market locations and products, plus we have weekly commentary on factors affecting these markets.
We'll also be giving you an overview on the renewables market and its increasing importance. Driving Discussions is brought to you by Argus Media, which as many of you know is a leading independent provider of energy and commodity pricing information. My name is Louise Burke, Vice President, Business Development renewable products for Argus Media. And with me today is Jackie Reigle. She's our editor, [Argus] Americas Biofuels, and she covers these markets. So welcome, Jackie.
Jackie: Thank you, Louise. I'm excited to be here and to discuss our recent launch of us renewable feedstock assessments with you.
Louise: That's great, it's very exciting for Argus. And one of our key missions as a company is really to try to add value to the market. We know that the renewable market is increasingly important for companies, particularly as they review climate change regulations, and most recently, many Fortune 500 and companies adopt very specific environmental, social and corporate governance or ESG principles and they really help measure sustainability and really societal impact investments. What we know companies really need to do better is to evaluate their financial performance in the sector and one of the ways we can help is provide pricings. So we know renewable feedstocks are key for producing renewable fuels, such as renewable diesel, sustainable aviation fuel, etc. So, Jackie, could you provide us with an overview on what prices we are now publishing?
Jackie: Yes, so we are now publishing seven categories of renewable feedstocks, all of which can be used in the production of renewable diesel and biodiesel. The first category would be used cooking oil, and an acronym for used cooking oil is UCO, which basically is just fats and oils that originated from commercial or industrial food processing operations including restaurants that have been used for cooking or frying. Then you have bleached fancy tallow and this is the fat that's extracted from animal tissue in the rendering process. We also have yellow grease assessments; this feedstock is produced by rendering process and is typically comprised of used cooking oil and rendered low-quality animal fats like tallow, poultry, or lard. We have choice white grease, and this is a specific grade of mostly pork fat. We also have crude degummed soybean oil which is a pure and edible soybean oil produced from fair to average quality crude soybeans, and also distiller’s corn oil, which is a feedstock that's a byproduct from U.S. ethanol plants, and poultry fat, which is produced from recycled animal processing waste streams and is basically obtained as a byproduct from poultry rendering and processing.
Louise: Great. So we really cover a lot of individual products. And what about regional market locations here in the U.S? How do we go about choosing locations? And could you give us a perspective on that as well?
Jackie: Certainly, yes. You know, our assessments include locations across the entire U.S. They can mainly be distinguished between the production centers, locations that are mostly in the Midwest, and then the demand or export centers such as locations in the U.S. Gulf coast, New York Harbor, Southeast and California. The U.S. Gulf coast is currently the largest demand center for biodiesel and renewable diesel with Louisiana actually hosting 90pc of existing standalone renewable diesel capacity, and Texas hosting 15pc of biodiesel capacity.
But the U.S. renewable fuel supply environment is actually going to look very different by the end of 2024 if the announced capacity additions come online as scheduled. In the PADD 5 region, which has not as of yet been a major source of renewable diesel supply today, it's scheduled to be responsible for around 62pc of the country's new renewable diesel production as early as 2021. And you have several large facilities and expansions that had been announced to the PADD 5 region through 2024. And assuming they're all completed these projects would give the region about 2bn gallons/year of renewable diesel capacity or 53pc of total U.S. capacity.
PADD 5 has basically become a focus because at the regional level in California, renewable diesel qualifies for low carbon fuel standard credits. And Oregon has a similar program to California and more regulations are proposed in Washington state. And, you know, renewable diesel generates credits through these programs at a fairly high rate, since its carbon intensity is considerably lower than other biofuels like ethanol and far lower than petroleum-based diesel.
Louise: So that's really interesting. Definitely, we hear regularly in the news how clean energy programs continue to be advanced in various regions. So I'm curious, as we've seen new supply coming on stream and the current supply, what kind of market participants are really invested in this? I mean, do you see a traditional oil refinery, or is it mainly the agricultural commodity companies? Or would you just give us some perspective and elaborate on the kind of participants involved in this market right now?
Jackie: Yeah, of course, on you know, any speech stock markets you'll see demand from standalone renewable diesel and biodiesel plants that only use renewable biomass feedstock but you'll also see traditional refiners as well that are co-processing which means that they're hydrotreating renewable biomass feedstock in the presence of petroleum-based feedstocks like crude oil. So we're expecting to see increasing demand from traditional oil refiners as they convert some of their refineries to normal diesel production facilities.
Marathon, for example, has mentioned that it would consider the production of renewable diesel at its Martinez, California, refinery, while Phillips 66 has recently announced that they've started converting the Rodeo, California, refinery into a very large renewable diesel production facility. And these announcements follows similar decisions by HollyFrontier and CVR Energy on to also turn to producing renewable diesel. And then we also have the standalone where diesel plants like World Energy's plant in Paramount, California, and REG's plant in Geismar, Louisiana. You also have agricultural behemoths like Archer Daniels Midland and Cargill that not only produce biodiesel but also produce refined feedstocks for these fields.
Louise: Okay, sounds like there's a lot of opportunity for various companies in the marketplace. But I'm curious, we now have these feedstock prices, we have our renewable diesel pricing, we have LCFS as you mentioned if you could just give us a perspective on what market factors are important to these players in the market? Do they monitor different feedstocks to see the pricing spread relationships, or are locations important? You mentioned production and exports can you just give us an example on how a company would look at these places and use them?
Jackie: Yes, I think the most important thing about these feedstocks is that they're aren't related. And to give an example, at the height of the Covid-19 pandemic, REG's feedstock flexibility really allowed them to use lower-cost distiller’s corn oil and used cooking oil through most of the first quarter and then switch to the more advantageous soybean oil towards the end of the first quarter and into the second quarter, and REG is a producer of renewable diesel and biodiesel.
And for some contacts by the end of the second quarter, at the height of the pandemic, restaurant closures have resulted in around a 45pc reduction in the availability of used cooking oil. And you also saw sharply lower gasoline demand severely reducing the need for ethanol blending, which led to multiple ethanol plants shutting down and reducing the supply of the distiller's corn oil by an estimated 55pc, I believe. And rendering plants were also shrinking the supply of animal fats by an estimated 50pc.
On the other hand, you saw soybean crush levels increasing, which made more soybeans available in the second quarter and became basically the feedstock of choice for many plants. And to give another example on kind of in the context of plant maintenance and startups, the supply outlook in the U.S. for distiller’s corn oil is actually expected to tighten in the fourth quarter as some renewable diesel plans come back online from maintenance, and also in the first quarter of next year as Marathon is expected to begin production at its renewable diesel conversion of a refinery in Dickinson, North Dakota. So this outlook kind of has raised prices for distiller's corn oil on recent weeks as supply is expected to decline and this could actually prompt higher demand for alternative feedstocks like soybean oil.
Louise: Okay, great. That was really interesting. Let me ask you a question, I mean, North America has a lot of rules and regulations that lead to clean energy programs, so does your but what about global coverage? I mean, does Argus cover global markets and have specific feedstock prices that are relevant to the U.S. markets as well?
Jackie: Yeah, while our recent launch feedstock assessments are for U.S. markets, we also have offerings for some feedstocks in Latin America, Europe, and Asia that are key for making trading and arbitrage decisions. In Europe, we have daily and weekly pricing for used cooking oil, tallow, palm oil, and rapeseed oil. In Latin America, we have daily pricing for Argentinian soybean oil, and weekly Brazilian soybean oil, and tallow. And finally, in Asia, we had daily pricing for palm oil and rapeseed oil as well.
Louise: Wow, it sounds like we've got a lot of the market covered and hope that for those folks listening in that you can clearly see what there's opportunities both on the feedstock side, and on the demand side to be able to better evaluate the operational performance of your company. So thanks a lot, Jackie. That was great information. And if you enjoyed this podcast, please be sure to tune in for the other episodes in our series Driving Discussions. And for more information on Argus biofuels coverage and more information on our new renewable feedstock assessments, please visit www.argusmedia.com/biofuels.