European biodiesel spot markets face the prospect of continued price volatility through the first quarter of 2023 as diesel supply is tightened by the EU's upcoming ban on Russian-origin oil products and demand is squeezed by an economic slowdown across the region.
Prompt physical prices for crop- and waste-based biodiesel have fallen steadily since the end of the third quarter of 2022. European benchmark price assessments for blended Fame 0°C CFPP (Fame 0), rapeseed oil methyl ester (RME) and used cooking oil methyl ester (Ucome) all edged towards 19-month lows through November as buying interest thinned and rising supplies of imported Ucome from China arrived in the Amsterdam-Rotterdam-Antwerp (ARA) area.
The recent drop in biodiesel prices followed a broad increase in values earlier in the year as the underlying Ice gasoil swap firmed in the wake of Russia's invasion of Ukraine. Spot trade was relatively robust throughout the second and third quarters, despite a wave of RME purchases widening the price differential between winter-grade RME and blended Fame 0 to a vast and unexpected seasonal spread of $888/t on 19 July.
Fuel suppliers are well-stocked with biofuels for blending over the rest of the compliance year. Brokers and traders active in the northwest European market suggest discussions on term contracts for biodiesel in 2023 are limited to date, with buyers choosing to wait and purchase spot volumes if needed. Accordingly, demand for biodiesel is a fraction of what it was at the same point last year, according to one European biodiesel broker.
Not all grades will follow the same trajectory and, despite seasonal demand for RME in the first quarter, the spread between RME and Fame 0 could narrow further from January as a change to requirements for proof of sustainability (PoS) will support Fame 0 barge prices to some extent.
Shallow feedstock pool
From 1 January, palm oil PoS will be excluded from Argus' Fame 0 benchmark price process. Palm oil — which is generally cheaper than other biodiesel feedstocks such as rapeseed or soybean oil — has effectively been banned for use in biofuels production in France, a major consumer of crop-based biofuels, since 2019. Other EU member states are following suit. Most notably, Germany will ban palm oil use in 2023 ahead of the EU's total phase-out of biofuels that risk indirect land-use change (ILUC) by 2030.
One of the key impacts of the Russia-Ukraine war on the European biofuels market has been a renewed focus on the use of crops to make biofuels more generally. This has spurred several proposals at EU member state level to limit consumption, adding a further layer of uncertainty over the outlook for supply and demand. Parliamentary discussions in Germany on a proposed cut to its crop cap has already affected physical trading.
The EU's Renewable Energy Directive already limits the use of crop-based biofuels and the market is waiting for a revised list of what is considered an 'advanced' feedstock under Annex IX of the legislation. Given that nearly all freely traded advanced biodiesel, classified under the directive's Annex IX part A, is derived from palm oil mill effluent (Pome) or brown grease, the changes could raise costs as there is a lack of adequate supply of alternative feedstocks.
European blenders have historically been over-reliant on Annex IX part B feedstocks — which are capped — such as used cooking oil (UCO). The spot price for end product Ucome fob ARA range hit its highest since the assessment was launched in 2013 in June, as EU countries adjusted their biofuel mandates and freight rates from China rose.
One relative certainty is that spot trade in waste-based biofuels will continue to grow in 2023. But without an advanced alternative — or a viable non-crop cold-weather grade — Annex IX biodiesel at large will struggle to take significant market share from crop-based counterparts.
