European policy changes will continue to drive Asia-Pacific biofuel feedstock markets in 2024, even though a set of new regulations to boost renewable fuel use across sectors are unlikely to take effect until the following year.
The European Council and Parliament formally adopted the third iteration of the Renewable Energy Directive (RED III), ReFuelEU Aviation and FuelEU Maritime in September 2023, will all three expected to apply from 2025. But more imminent European regulatory changes including revisions to individual member states' blending mandates and updated certification guidance for mills supplying palm oil residues should affect prices ahead of this.
Biofuels policy discussions also accelerated in Asia-Pacific during 2023, including in Malaysia, China and Indonesia. But timelines for implementing policies on second-generation biofuels and feedstocks within the region remain shaky, with European demand still playing a large part in driving prices for Asian waste and advanced feedstocks in 2024.
The biofuels complex in Europe and Asia-Pacific was under pressure for much of 2023. An influx of advanced biodiesel from China to Europe caused oversupplies of double-counted physical biodiesel and tradeable tickets, which have pressured renewable fuel prices in the EU and consequently Asia-Pacific (see charts 1 and 2).
The change in trade flows spurred several investigations across Europe. The EU's formal inquiry into China's potential involvement in circumventing import duties on Indonesian biodiesel is expected to conclude in early 2024, with the bloc likely to impose countermeasures that will hamper flows of Chinese used cooking oil (UCO) methyl ester to its main buyer if evidence of any malpractice is found. China's commitment to promote domestic biodiesel blending may appear a ray of hope, although market participants expect local government funding for the programme will be unlikely to support UCO prices at current levels.
Feedstock demand from renewable diesel and hydrotreated vegetable oil (HVO) producers in the US, Singapore and Europe has supported Asian UCO prices to some extent in 2023, as margins for hydrotreated biofuels have remained significantly higher than for their first-generation counterparts.
Changing flows
But a decision by one of Europe's biggest HVO consumers Sweden to drastically cut its greenhouse gas reduction mandate for 2024-26 will curtail short-term EU HVO demand. HVO demand across the bloc will now total roughly 3.9mn t in 2024, Argus Consulting forecasts, down from 4.5mn t before mandates were adjusted lower.
A weaker demand outlook, combined with higher interest rates, mean some standalone HVO and SAF refineries due to come on stream in the Asia-Pacific are considering reducing planned capacity or delaying start-ups. They may not begin buying significant UCO volumes in 2024 as many feedstock suppliers had hoped.
The flow of Asian UCO to the US established in 2023 will almost certainly continue, although it will unlikely provide the same price support. US, Asian and European UCO markets are now poised to move in parallel, having integrated after substantial imports of cheaper Chinese UCO drove sharp losses in US UCO prices (see chart 3).
But tighter supplies may support firmer prices for RED-certified palm oil mill effluent (Pome) oil in 2024.
Availability of the palm oil residue will likely fall as a new ISCC requirement for full upstream traceability applies market-wide. Collectors must ensure all mills they buy from are certified by their next annual audit after 1 August 2023. But some aggregators expect a sizeable portion of mills on their books will choose not to pay for certification, leaving them unable to supply the EU market.
