Chemical Conversations: Crude Tall Oil and Biofuels Markets

Biofuels expert Giulia Squadrin talks to pine chemicals expert Leonardo Siqueira about the crude tall oil (CTO) and biofuels markets.

This includes: 

• Market fundamentals for biofuels and the impact on demand for HVO feedstocks 
• CTO demand in the year ahead 
• Legislation impacts on CTO usage into biofuels 
  
  

This podcast is delivered by Argus’ pine chemicals and biofuels experts using data and insight from Argus Pine Chemicals,Argus Biofuelsand Argus Biofuels Outlook services.

Giulia: Hi Leonardo. Thank you. It's good to be here.

Leonardo: The biofuels market is a key end market for crude tall oil, or CTO, a byproduct of the softwood kraft pulping process. Tall oil fatty acids, or TOFA, one of the main CTO fractions, and crude fatty acid, CFA, can also be used into biofuels.  

With the growing interest of CTO and CTO derivatives like TOFA into biofuels in recent years, many are looking to the recent blending rate discussions in Europe. Member states in Europe have adopted different approaches over their biofuel mandates, with countries like Sweden and Finland reducing their obligations, while other countries are proposing an increase in their mixing in biofuels from renewable sources.  

Giulia, can you please elaborate a little bit on the current market fundamentals for biofuels and how these revisions can affect demand for HVO feedstocks? 

Giulia: The biofuels market is really strictly correlated to the legislative framework. So any changes to EU-wide, but also national obligations can have a big impact on price trends and can shift supply and demand fundamentals for biofuels. So if we look at the European market, the overarching legislation that sets targets for the use of renewables in the transport sector is the so-called renewable energy directive. Currently, the legislation in place is Red 2, but the EU Council recently adopted Red 3, which is going to introduce even more ambitious targets to reduce emissions from transport. So if we look at Red 2, you have these feedstocks that are listed in Annex 9, Part A and B, and they are incentivised, especially advanced feedstocks which are listed in the Part A. And that comprises a pretty long list of raw material, which includes tall oil pitch, biomass fraction of waste and residue from forestry and forest-based industries, nutshells, bagasse, and several others. Whereas waste feedstocks are primarily used cooking oil and category one and two tallow, and they are listed in Annex 9, Part B. These are capped at 1.7%, but are eligible for double counting, and member states can request to be able to surpass this limit. 

And then you have crop feedstocks in Europe. These are capped under Red, but also several member states have already introduced much tighter caps on the use of palm oil specifically and sometimes soybean oil-derived biofuels. So Red 2 is transposed at the national level by each member state. And generally, the trend that we have seen in the past had been that of a yearly increase in these obligations to either increase the share of renewables in the fuel mix or to reduce emissions. But more recently, we have seen some member states move in a slightly different direction. They have been reducing or freezing the obligations, primarily to reduce the price of fuels at the pump. 

So as you said, Leonardo, Sweden has proposed to cut its greenhouse gas emissions reduction quota mandate for diesel and gasoline to 6% for the 2024-2026 period. And Finland has proposed to freeze its mandate for next year at 2023 levels, having already cut its 2022 and 2023 targets quite significantly. On the other hand, we have member states that are looking to increase the obligations. So, for example, the Dutch government has proposed to increase its mandate for next year and to reduce the multiplier for biofuels in shipping. And in Germany, HVO 100 sales are expected to be allowed at the pump from next year, and Italy is also introducing incentives for the use of pure biofuels as well. 

Market dynamics are changing, and we could see new patterns emerge in terms of biofuels and HVO flow specifically, but also in terms of feedstocks demand for HVO production next year. For example, Sweden, if this proposed mandate is just transposed into legislation, that could see the share of HVO really drop dramatically in the fuel mix, and that could free up volumes of HVO that will need to find a new home. And in Sweden, one of the main feedstocks used has historically been category 3 tallow. So we could potentially see an impact on demand for that feedstock, but also possibly on some of the other advanced feedstocks as well. 

For next year, there is also going to be more HVO and SAF production coming online in Europe, and especially in these Scandinavian markets. So the ST1 refinery should be coming online later this year, and PRIM is also expanding its co-processing capacity. And this could, in theory, attract some more advanced feedstocks, but it will also depend on whether the end market is ready to absorb these volumes. And of course, we can discuss in more detail, but the large wave of advanced biodiesel from China that we have seen earlier this year not only had a significant impact on biodiesel prices, but also reduced demand for some of these feedstocks as well within Europe. So that's an overview of the biofuels trends and how legislation does affect demand for the end fuels and, of course, can have a knock-on impact on feedstock as well. But maybe this is one area for you to expand on, Leonardo, a little bit. How is CTO demand looking this year? 

Leonardo: Demand for CTO into both fractionation and biofuels this year is reduced after EOS CTO spot prices reached higher price levels late last year and early this year. Both price and demand for CTO are trending lower. Fatty acids and rosin are the biggest streams fractionators get when distilling CTO. With higher price CTO, as seen earlier this year, soft rosin demand and elevated rosin stocks in Europe, CTO fractionators have not been willing to take any more CTO material, as this would result in additional rosin volumes at a time rosin demand is depressed. This situation has led to lower CTO fractionation rates this year. This meant European fractionators have purchased less CTO, both locally from the European portmills and from the U.S. 

CTO fractionation is still the major end market for CTO. But looking to the trade data we can see that U.S. CTO export volumes this year are down from the levels seen last year. From January throughout August this year, the U.S. exported about 46,000 tons less CTO compared to the same period of 2022, which represents about a 24% decline year over year. So this year, demand for rosin is depressed across the downstream markets like printing inks, paper sizing, and adhesives. The rosin demand outlook remains uncertain looking into the first quarter of 2024, as there are no signs the demand would pick up. 

Looking to the CTO markets, higher fractionation rates depend on feedstock pricing as well on the TOFA-TOR balance. But the persisting downward price pressure on rosin high stock levels and weaker downstream demand will likely continue constraining fractionators from getting more CTO volumes. Looking into biofuels, buyers argue CTO economics at this point are not competitive into biofuels. TOFA and crude fatty acids, CFA, prices are considered higher compared to other feedstocks, and TOFA supply is not long because of reduced fractionation rates this year. The recent influx of material produced from NX9A feedstocks, under the Red too, is also believed to have been impacting CTO usage into biofuels, as it has pressured European Union renewable fuels prices since the start of the year. Can you comment on that? 

Giulia: It has been a complex situation this year with this large wave of imports. In March, some allegations were made of mislabeling of some biodiesel imports following a sharp increase year on year of flows from China. The allegations have been centered primarily around German imports of biodiesel from sludge, from food production waste, acid oils from soap stocks, and palm oil mill effluent oil. And in Germany, these advanced biofuels can be used to meet the national advanced quota and are eligible for double counting, except those produced from POME oil, once the minimum advanced target is met. So following the allegations, the commission said that they were aware that these allegations were made. And then ISCC, Germany, and the Netherlands launched separate investigations on the matter. And then, in August, the commission also launched an investigation on the possible circumvention of trade measures against Indonesia biodiesel by imports through China and the UK. 

So while the results of these investigations are still pending, the effect of this large wave of imports has been to pressure biodiesel and biofuels prices in general in the European market, and it has squeezed margins for European producers. This, in turn, led to a reduction in price for biofuels tickets, which are tradable certificates that can be used to meet a national obligation in some of the member states. And we have seen this impact on greenhouse gas tickets prices in the German market. So, imports and low tickets values have weighed on overall demand for these biofuels, including for HVO, because of the availability of cheaper compliance options. The impact on demand for advanced biodiesel and HVO is that interest from the German market has weakened following this large wave of imports. And in general, demand in Europe has been limited also because of lower diesel consumption in key markets. 

At the moment, there is still a lot of legislative uncertainty in Europe. The investigations are still open, and some of these proposed cuts or increases at the national level have yet to be translated into legislation. All of these changes, proposed changes, allegations, and investigations, have all had a significant impact on the European biodiesel and feedstocks markets. We have seen a lot of pressure on prices this year. 

This podcast is delivered by Argus’ pine chemicals and biofuels experts using data and insight from Argus Pine Chemicals, Argus Biofuels and Argus Biofuels Outlook services.