The fob-basis price spread between biofuels feedstock used cooking oil (UCO) from China and Malaysia has widened to a record high of almost $80/t, as UCO fob Strait of Malacca rose, while UCO fob China reached a nine-month low.
The UCO fob Strait of Malacca assessment trended upwards from late September onwards to reach a one-year high of $895/t on 14 October.
The increase in Strait of Malacca UCO has been fuelled by high palm oil prices and increasing export restrictions on palm oil residues and UCO from Indonesia, making collection costs higher.
Malaysian crude palm oil futures settled at their highest in over two years at the end of last week, driven by concerns over reduced output from the largest global producer Indonesia and a depreciating local currency. Palm oil prices are now well above values for waste oils, which tends to tighten supplies of UCO in southeast Asia as there is less incentive for restaurants and factories to sell their oil to collectors after minimal frying.
In contrast, the UCO fob China price fell to a nine-month low of $815/t on 15 October and remained at this level for over a week, before subsequently rising slightly. The fall widened its discount to the UCO fob Strait of Malacca to a record high, although this also takes into consideration the cheaper freight rate from Malaysia compared with China to Europe.
The EU's provisional anti-dumping duties (ADD) on Chinese biodiesel and hydrotreated vegetable oil (HVO) effective from 16 August have weighed on Chinese UCO prices, even though the feedstock is not subject to the duties. Some Chinese UCO methyl ester (Ucome) producers have ceased production in light of a closed arbitrage with their main buyers and have hence reduced feedstock collection activities, increasing UCO availability in China.
Furthermore, buying interest from the US market — which has become an even bigger export destination for China's UCO than Netherlands — has slowed down while biofuels producers there wait for pending guidance from the Environmental Protection Agency on the "45Z" producer tax credit, which could prevent biofuels made from imported feedstocks from receiving incentives from 2025.
Concerns have also emerged among some buyers over the new use of a process known as "glycerolysis" in China, which has made some buyers more cautious about buying China-origin UCO, in turn weighing on prices. Some market participants reported that glycerolysis has been used by some companies in China to lower the free fatty acids (FFA) of low-quality UCO artificially, while also destroying the triglycerides that are needed for good Ucome yields. Some buyers are now asking for a guarantee of minimum 85pc triglycerides for Chinese UCO cargoes to try to protect against this.
But a rise in demand from European biodiesel producers ahead of higher mandates next year and improving Ucome biodiesel production margins have driven firmer UCO buying interest from Europe over the past week. And the considerable price discount for Chinese UCO has caused buyers to purchase there instead of in Malaysia.
The UCO fob China price has since risen, and in the latest assessment on 25 October, regular bulk China UCO increased by $15/t to a midpoint of $830/t fob compared with the nine-month low, narrowing the spread to Strait of Malacca to $30/t.
