Viewpoint: Ethanol producers face higher costs in 2025

Market: Biofuels
24/12/24

European ethanol producers may face rising output costs in 2025 as a poorer harvest season will push feedstock prices up, while other factors such as greenhouse gas (GHG) emission values could affect the price of finished products.

Unfavourable weather conditions have led to a poor 2024-25 harvest, particularly for wheat. In Ukraine, Europe's largest wheat exporter excluding Russia, Argus forecasts wheat production will drop to 22.3mn t during 2024-25, down from a five-year average of 24.7mn t. Corn supply from the country for 2024-25 is projected to fall to 22.9mn t, down from 31.5mn t in the previous season, according to Argus data.

France — Europe's largest producer of ethanol — has cut its wheat production outlook for 2024-25 because of wet weather. And rainfall in other parts of Europe has affected corn toxin levels, potentially leading to poorer quality ethanol. This will likely weigh on ethanol output in 2025 as it will strain feedstock supplies, push production costs up and squeeze margins for producers.

Nuts 2

It comes as markets are still waiting for an update on level 2 in the nomenclature of territorial units for statistics greenhouse gas (GHG) emission values — the so called Nuts 2 values.

To determine the GHG emissions from growing crops in the EU, the bloc's Renewable Energy Directive (RED) allows the use of typical units that represent the average GHG value in a specific area. On the back of the implementation of the recast of RED (RED II), the European Commission requested an update of the Nuts 2 GHG values.

Member states have to prepare new crop reports to be assessed by the commission. But reports have been slow to emerge, while those that have been submitted face a lengthy review. Producers rely on GHG values to calculate the GHG savings of end-products, but default RED values currently in place are significantly lower than the typical GHG values from Nuts 2. While this is unlikely to have long-term effects beyond 2025, in the current context finding values that meet market participants' criteria has been difficult for some, which may support prices.

Rising demand

Demand for waste-based and ethanol with higher GHG savings should increase in 2025 as a result of policy changes, after lower renewable fuel ticket prices in key European markets kept buying interest in check in 2024. Tickets are generated by companies supplying biofuels for transport. They are tradeable and can help obligated parties meet renewables mandates.

The decline in prices for GHG tickets in Germany — the main demand centre for minimum 90pc GHG savings ethanol — weighed on ethanol consumption in 2024, squeezing the differential to product with lower GHG savings. The premium averaged around €17/m³ ($17.7/m³) from 1 January-1 December 2024, down from around €43/m³ during the same period in 2023.

But an increase in Germany's GHG quota in 2025, coupled with Germany's decision to pause the use of GHG certificates carried forward from previous compliance years towards the 2025 and 2026 blending mandate, should increase physical blending and lift premiums for ethanol with high GHG savings, according to market participants.

Meanwhile, the Netherlands' ministry of infrastructure and water management's plan to reduce the amount of Dutch tickets that obligated companies will be able to carry forward to 2025 to 10pc from 25pc may have little effect on Dutch double-counting ethanol premiums in 2025. Participants expect steady premiums, despite slightly higher overall blending targets.

The Argus double-counting ethanol fob ARA premium to crop-based ethanol fob ARA averaged €193/m³ from 1 February-1 December 2024.

Biomethanol slows

Lower ticket prices in the UK have kept a lid on demand for alternative waste-based gasoline blendstock biomethanol.

The Argus cif UK biomethanol price averaged $1,089/t from 1 Jauary-1 December, compared with $1,229/t during the same period of 2023.

The European Commission's proposal to exclude automatic certification of biomethane and biomethane-based fuels, if relying on gas that has been transported through grids outside the EU, continues to slow negotiations for 2025 imports of biomethanol of US origin into the EU.

But demand for biomethanol and e-methanol could be supported by growing interest from the maritime sector as shipowners seek to reduce emissions after the EU's FuelEU maritime regulation comes into effect.

Shipping giant Maersk has signed several letters of intent for the procurement of biomethanol and e-methanol from producers such as Equinor, Proman and OCI Global.

By Evelina Lungu

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