Viewpoint: EU scrambles to meet 2020 biofuels targets

Biodiesel spot prices in northwest Europe will find support in 2020 across multiple fronts, with EU duties likely to restrict imports from Argentina and Indonesia, and higher blending mandates in member states driving up the cost of compliance.

Prompt prices for cold-weather rapeseed-based biodiesel (RME) have been slightly lower since the start of the fourth quarter compared with a year earlier when Rhine water levels hit record lows. And producer margins are being squeezed by high feedstock values. But Fame 0 has bucked its usual winter trend, climbing considerably in the Amsterdam-Rotterdam-Antwerp (ARA) hub. And waste biodiesel Ucome, also more difficult to blend in high volumes in winter, has hit record levels over the underlying gasoil contract and could rise above $1,350/t on an outright basis.

Based on the most recent customs data, EU imports of soybean oil-based biodiesel (SME) from Argentina more than halved to 630,000t in the first nine months of 2019 following EU minimum price legislation on Argentinian biodiesel producers agreed after the implementation of EU anti-subsidy duties (ASDs).

EU arrivals of biodiesel from Indonesia, another major supply hub, rose to 768,000t in the first nine months of 2019 from 639,000t over the same period of 2018, weighing on the price of domestic product.

But in August the EU implemented ASDs on Indonesia as well, and volumes halved on the year in the quarter. Five-year definitive ASD duties were confirmed in December and will lend support to other crop-based biodiesel prices in Europe with reduced availability of cheaper and more efficient palm-based biodiesel (PME). Major consumer France will cease to offer legislative support to palm-based biofuels in January.

EU Renewable Energy Directive (RED) and Fuel Quality Directive (FQD) legislation in 2020 will drive higher demand in member states generally, with a 10pc renewables share of road transport fuels determined by RED and a 6pc greenhouse gas (GHG) reduction target from 2010 encouraged by the FQD.

With limited, albeit increasing, implementation of a higher ethanol blend for gasoline sales in member states, biodiesel will largely drive the attainment of EU targets with increased demand for double counting grades with high GHG savings.

In Germany, which moved away from a volumetric mandate for renewable fuels in 2015 and favoured aligning with the FQD instead, there is now an expectation that road fuel sellers will be unable to reach the 2020 6pc GHG reduction target.

While upstream emissions reductions (UERs) will offer an alternative albeit limited means to meet a two-percentage point gain over 2019 and a deeper pool of hydrotreated vegetable oil (HVO) will be available to suppliers, the cost of compliance in general will rise significantly.

Non-compliance with the GHG target results in a penalty buyout of €470/t ($527/t) CO2 equivalent. German GHG tickets, used to meet 2020 compliance targets and tradeable in case of an excess or shortfall, increased in value to €425-430/t CO2e, roughly double the 2019 ticket price.

And to meet 2020 RED obligations, at least 21 member states will increase their blending mandates at the turn of the year, with close to that number now implementing a double counting system for biofuels made from RED Annex IX feedstocks.

Markets such as the UK, which legislates for RED and FQD targets domestically and where the vast majority of biodiesel sales are double-counted Ucome, will struggle to comply on both counts.

Without a higher E10 ethanol-gasoline blend and unless there is availability of UERs the UK is limited by the biodiesel blend wall for B7 diesel, this considering an already established double counting market share.

Supply of waste-based biodiesels such as Ucome and tallow OME has tightened in general, with some producers in the EU having already sold out into the first quarter on higher demand and lower imports from countries such as China. Although expensive and in relatively tight supply, HVO might allow blenders to surpass constraints of a regular biodiesel.

But it will also compete for Ucome feedstock used cooking oil. November prices for HVO were reported at around a $1,259-1,316/t fob ARA premium over gasoil for product eligible for double counting and will continue to be strong in 2020 with several suppliers already sold out to March.

By Giulia Squadrin