Join the latest Driving Discussions podcast for coverage of the European HVO and biofuel markets amidst the Covid-19 pandemic.
Tune in to our Driving Discussions podcast with host, Josefine Alströhm, VP - Business Development, and resident Argus experts, John Houghton-Brown, Editor - Biofuels, and Giulia Squadrin, Senior Reporter. This episode focuses on the European HVO and biofuels markets.
John: Hi, Josefine.
Josefine: Welcome to both of you. My first question is really around to what extent lockdowns across the EU member states have affected the domestic biodiesel market in terms of traded prices and consumptions? What do you see in the market on this, John?
John: So, lockdowns across the EU have seen a dramatic decline in road fuels demand, which in turn has limited the demand for biofuels blending. Following this, biodiesel spot prices were set at record lows through March. That theme has continued somewhat through April. The industry benchmark, biodiesel benchmark, FAME 0, hit lows in late March, not recorded since Argus began assessing the product in 2011, pricing it around the mid $500 a ton. The grade's price has never fallen below the $700 a ton mark before the middle of that month, just to give a bit of an idea. Another Argus benchmark, rapeseed oil methyl ester, or RME, which is largely produced in Europe, slipped below its feedstock price for the first time ever. Now, negative production margins for RME and FAME 0, of course, the slowdown in EU biodiesel production in April as some major producers have shut down output altogether.
On the fossil side, while prices have declined significantly as well, gas oil markets in North Sea Dated have been reasonably strong for the most part during the crisis, even spiking to the highest since 2018 at the end of March. Consumers are stocking up on heating oil while the outright price is low, and road diesel demand has fared much better than gasoline, especially in Germany. Suppliers estimate local filling station diesel demand is down by only 10% to 40% there because of the crisis, a considerable amount, but this is compared to 50% to 80% for gasoline with industrial vehicles that run on diesel more likely to still be moving around. And biodiesel markets are seeing less of an impact than ethanol markets because of this.
Josefine: So, John, then why have prompt feedstock prices at times surpassed and sort of have been actually higher than the value of the actual end biofuels product?
John: Well, it's really an unprecedented situation. While prompt rapeseed oil prices hosted strong losses, these were more measured than those for RME, and feedstock price surpassed the value of the final product in several trading sessions. EU imports of rapeseed fell significantly in late March and early April, which drove an increase in RSO prices. With thinner feedstock demand from the biodiesel complex, European rapeseed crushers and mill operators are now switching their feedstocks to soybeans to produce soybean meal that can be sold as compound feed to livestock farmers, which is reducing European RSO output.
Beyond the short-term, harvest forecasts for this are uncertain as dry April weather in countries in the Black Sea region, which including Ukraine, which is the EU's largest rapeseed supplier for the current season, may hamper yields. But waste biodiesel grades are incentivized by EU Transport Renewables legislation, and spot prices remain relatively high compared with the other biodiesel grades with production margins still positive. Biodiesel made from used cooking oil, or better known as UCOME, has been supported by a tight supply of a limited waste collection and major exporting countries such as China as well as locally.
Josefine: So, John, when it comes to assessing these markets, I mean, we have seen biodiesel spot trade continue at a greater pace, now, here in March, April than it did the year before despite the current lockdowns [inaudible 00:04:33] due to the corona situation, what's your view on that? What's the explanation for this high market activity?
John: Well, in such circumstances, you could expect trading activity to slow down completely, but there are many market participants with large positions to reduce or they were during March, and this snowballed into April. At the same time, large stock volumes have maintained liquidity albeit at record low prices. Commitments via term contracts as well as those for associated products such as glycerin have also supported trade. Biodiesel spot trade on Argus Open Markets for FAME 0, RME, and UCOME totaled 128,000 tons in March, only slightly lower than the 179,000 tons traded in February and compared with 147,000 tons in January. These high and transparent volumes set the Argus benchmark price assessments as a weighted average ensuring our assessments are robust even in times of volatility.
More broadly, we're in an environment of the higher mandated blending targets in all EU member states as we approach the conclusion the original EU Renewable Energy Directive, or RED. With diesel use reasonable in the context of a crash in gasoline demand and lockdowns expected to ease in a number of countries in May, the FAME 0 price will be supported with much of what is sold at current value, likely cheaper product being brought into the EU from abroad, and volumes of imports generally limited. Spot trade tends to pick up in the third and fourth quarter as obligated parties move more quickly to meet their yearly target. In the context of lower EU member state blending targets in 2019, trade of FAME 0, and RME, and UCOME on Argus Open Markets totaled 483,000 tons and 594,000 tons respectively. And I think we can expect a big pickup come the third and fourth quarters here in 2020.
Josefine: Thanks, John. That's very interesting. And I mean, it's a matter close to our hearts and it's great to see this big liquidity for these important assessments. So, switching over to ethanol from the biodiesel, how has the ethanol market reacted to the current crisis environment that we're in?
John: Well, as I mentioned earlier, the ethanol market has seen a much more severe impact than the biodiesel market based on diesel and gasoline use in Europe. Regional demand fuel ethanol has dropped with the lower gasoline consumption, up to as high as 90% in the case of Italy, and more broadly in line with declines in Germany. Prices for Argus Eurobob Oxy gasoline are now around record lows through April, gasoline margins to crude, some to discounts in Northwest Europe. Prices for 50% to 60% greenhouse gas savings ethanol dropped to €349 a cubic meter on 24th of March. That's the lowest level since Argus began assessing it in July 2011 with no demand for higher greenhouse gas savings products either as exemplified by flat price with the Argus 68% greenhouse gas savings assessment. The collapse in prices led to production cuts by major European producers including Alcogroup, Cristalco, and Vertex. There'll be some extra demand for ethanol for hand sanitizer production, but the increased demand in industrial grade doesn't come close to compensating for the drop in demand for fuel ethanol, normally constituting around 80% of EU output.
Josefine: Okay, thanks. Thanks. That's useful to know on the ethanol side. But over to, I mean, the renewable diesel side, Giulia, can you please explain for our listeners, what is it that you are covering on HVO, the so-called hydrotreated vegetable oil? What is it that you're doing there?
Giulia: Yeah. So, HVO is a drop-in renewable fuel that, when compared with the more conventional biofuels, has the advantage of not being subject to the 7% blend rule when blended for diesel. In Europe, blending targets do surpass conventional blend rules, and this has supported demand for HVO. Before the COVID outbreak, the expectation was that demand for HVO would increase rapidly in the coming months and years as blending targets rose further. And with strong demand and limited capacity, HVO is usually priced at a significant premium to biodiesel. What we do? We publish a monthly commentary on EU HVO prices. We focus on Northwest European markets and include a variety of feedstocks, mainly used cooking oil, animal fats, and palm oil. And every month, we speak to a wide range of key players in the market including producers, traders, brokers, and end-users.
Josefine: That's useful to know. So then, how has this very popular product been affected by the coronavirus situation?
Giulia: During March and April, HVO prices have declined somewhat. And this has mostly been driven by declines to diesel prices. But compared with the wider biofuels complex, HVO's price's reaction to the coronavirus crisis was somewhat delayed, especially for HVO produced from waste. With European biodiesel plants closing or reducing production, I mean, negative margins, rapeseed oil has been seen by HVO producer as a viable feedstock whereas previously this had been considered too expensive given high production costs of HVO, in general, and lower prices for other vegetable oils like palm oil. So, this is still likely to be only a temporary switch.
The HVO spot market is usually pretty liquid with most volumes moved on a term basis, and prompt activity has slowed down further since the outbreak of the coronavirus. Uncertainty about when road fuel demand might pick up again has even affected negotiations for contracts in third and fourth quarters, and buyers are reluctant to take positions as they wait for prices to drop further.
Josefine: So, Giulia, then looking further ahead here then, what's your view on meeting the mandated target this year that's set out by the Renewable Energy Directive John mentioned before, also known as the RED? Wouldn't it be easier with now less demand and hence less volume of biofuels needed to meet those targets?
Giulia: Well, as things stand, there is a 10% transport renewables target for 2020 under the RED legislation. And this is a significant increase for the majority of EU countries compared to last year. And this is especially true considering that some countries failed to reach their targets already in 2019. The less fuel demand following the pandemic will bring down the volumes of biofuels required to meet the targets, but at the same time, most member states will still have to work hard regardless given the wider context. We had so far seen decent spot liquidity for biodiesel through March and April with the FAME 0 having a daily record of 25,000 tons of trade in one session. This was just last Friday, and this is likely because many in the market do anticipate a strong increase in consumption once lockdown restrictions across Europe are eased and have moved to store products when values are around historic lows.
Josefine: And, John, also looking further ahead here, I mean, the other question I have is, what do you think is the mindset of the European Union on decarbonization once it's come out of the corona emergency situation? Do you think it's possible that the pressure for decarbonization will accelerate further, or that the regulators may even turn a bit of a blind eye to fulfill targets while they're trying to get the sort of badly hit economies back on the feet? What's your view on that?
John: Well, I think the broader view is that generally, a recession would put climate concerns on the back-burner. But that said, given the pace at which targets have increased, as Giulia just said, to meet the EU's RED 10% target in 2020, it could well be full steam ahead once we emerge from the current situation. With any return to economic growth, meaning oil demand growth, in this context that should mean more biofuels blending. The industry is now well established, and supply chains are developed. And there'll be a strong pressure from the biofuel sectors as well as other sectors such as agriculture to maintain the momentum of the past few years. Further to that, reducing emissions is now more commonplace discussion within EU member states in 2020. And I can see a lot of resistance to countries reneging on their mandated renewables targets in the future. In fact, I think there may be widespread encouragement to accelerate current progress given the relatively slow progress previously of transport decarbonization when you're comparing it with other sectors of the economy.
Josefine: So, even further ahead here, I mean, and the plans for the EU on decarbonization, so how are we here at Argus looking at RED II, so the next step in the legislation? And what pricing solutions are you and your team putting in place, for example, for the waste feedstocks?
Josefine: So, RED II, which runs to 2030, maintains support for crop-based biofuels and waste-based ones under Annex IX, Part B, the waste biofuels, including used cooking methyl ester or UCOME, but it ramps up the requirement to blend advanced biofuels from a wide array of feedstocks under Part A of Annex IX. We've begun to price a number of these feedstocks listed in Part A. These include wastes from palm oil production, one such price being the palm oil mill effluent price. These prices will only grow in relevance through the decade while pricing for the already established grades biodiesel will continue to underpin the market.
Josefine: Thanks, John and Giulia, for this very useful update on the European biofuels market. And for anyone wanting to follow the market with more information like we discussed today on RED II, corona impact, and so on, we can recommend the Argus Biofuels Report, which we publish on a daily basis. And if you, in particular, want to track the immediate fallout from the coronavirus on the commodity markets like biofuels, then we have our dedicated hub page on the Argus Media website, which is www.argusmedia.com/coronavirus. Many thanks, John and Giulia. And thanks everybody for listening.
John: Thank you.
Giulia: Thank you, Josefine.