Tight regional supply and higher biofuels blending mandates will help to support T2 European spot ethanol values in 2021, following a year of price volatility.
While movement restrictions remain in place, spot buying interest for ethanol in Europe is expected to remain relatively weak, especially over the next few months as winter is typically a period of low demand anyway as most gasoline blending takes place in the summer. But as Covid-19 vaccines are rolled out and restrictions are eased, the outlook for road fuel demand will improve. When road fuel consumption does return to pre-pandemic levels, Europe will once again have to look outside the region for ethanol supply, as biofuels blending mandates increase and the EU's recast Renewable Energy Directive (RED II) comes into effect in June. RED II will see renewables' share of transport fuels rise to a mandated 14pc.
The T2 prompt physical assessment reached record highs in August and again in September when it climbed to €847/m³. The sharp rise was prompted by an acute supply shortfall in the Amsterdam-Rotterdam-Antwerp (ARA) region due to low stocks, a lack of imports, production cuts related to lower road fuel demand, and suppliers diverting output to industrial ethanol to meet a growing need for disinfectants and hand sanitiser to battle the spread of the pandemic.
For European ethanol producers, strong grain prices in the latter part of 2020 squeezed production margins. The fourth quarter is usually a period when extra volumes of ethanol from the European sugar beet harvest enter the market until February, but this season has been challenging in some of the main producing countries within the EU, so not much of the harvest will be fed into ethanol production. Firm domestic sugar prices within Europe have also diverted feedstock away from ethanol.
Rain deficits and a spread of the yellowing virus have contributed to yield losses in France, one of Europe's main producers. The European Commission expects France's sugar beet yield will be 6.5pc below the five-year average, the same level as 2018, which was the lowest since 2006. The French agriculture ministry has an even more bearish outlook, estimating that the yield will be 26.5pc below the five-year average.
In terms of imports, the US — the world's largest ethanol producer and exporter — will remain a key supplier for Europe. Regular suppliers in South America such as Peru, Guatemala and Costa Rica could also help meet any increased demand in Europe. The arbitrage to bring Brazilian product into Europe opened up when prices hit record highs in August and September, but for that to happen again spot values would have to firm significantly compared with the last quarter of this year, when they averaged just €577/m³ as renewed lockdowns hampered European demand.
In November, the European Commission introduced new surveillance measures on imports of renewable ethanol to the EU from third countries. European renewable ethanol association ePure welcomed the move, saying Covid-19 market disturbances have created conditions that could accelerate flows of imports into the EU at unprecedented levels once the crisis abates. The measures will not restrict imports but will provide quicker monitoring and release of data.
European ethanol demand will get a further boost next year if the UK rolls out E10 — a gasoline blend containing up to 10pc ethanol — as the standard grade at filling stations in September, as expected. The UK has set its post-Brexit global tariff for ethanol at €19.20/hl, and following the end of the transition period on 31 December the country is likely to step up imports from the US, which are cheaper than European alternatives. If spot prices recover and the E10 switch is implemented, it could help pave the way for Vivergo to reopen its 330,000 t/yr plant in Hull — which was the second-largest producer of ethanol in Europe when it was operational. It has been mothballed since September 2018, with Vivergo citing delays in the UK government's introduction of E10 as a factor.
