Supply side factors indicate a weaker European ethanol market in 2015 although consumption is expected to keep growing at a modest rate, led by strengthening demand in Germany, France and the UK.
Market participants are assessing the impact of record feedstock yields, record production levels, weak crude and gasoline prices, and continuing policy uncertainty over EU policy on advanced biofuels.
Strengthening consumption in Europe is unlikely to offset thin demand levels and weak prices on a Rotterdam marketplace depressed by expectations of a bumper 2014/15 European wheat crop. Weak prices are likely to contribute to a reduction in European output as producers confront an increasingly challenging economic environment in 2015 as weak market prices and lacklustre demand levels take a heavy toll on producer margins. Between 1 January and 24 December 2014, the Argus daily price assessment for RED-certified T2 ethanol averaged €482/m³. In contrast, the same product averaged a daily price of €606/m³ between 1 January and 24 December 2013, 25pc higher than average daily value in 2014.
European producers are feeling the financial pinch. In 2014, some leading European producers voiced concerns over weak prices and slow demand growth. In the first half of its 2014/15 financial year, Germany-based Crop Energies reported an operating loss of €8.9mn ($10.8mn), down from profit of €10.7mn during the same period a year earlier. Similarly, Germany-based biofuel producer, Verbio reported a 26pc slump in bioethanol revenues during the July-September quarter, to €52.2mn. European ethanol producers expect fresh financial pressure in 2015 with several prominent facilities at risk of temporary or even permanent closure.
In late 2014, production halts at several major European ethanol refineries and evidence of fresh export demand accounted for a period of sharp price volatility on the T2 ethanol market. European T2 ethanol prices soared to €586/m³ on 9 September, the highest level since October 2013, as a series of large export cargoes took the Rotterdam marketplace by surprise. Prices subsequently fell away sharply, dipping to as low as €435/m³ on 1 December before rebounding to 470/m³ by 24 December. Looking ahead, discussion across the T2 ethanol paper swaps curve is thin. A bumper US and European grain crop and weakening ethanol production costs remain the primary variables in price discussion. Current discussion has 2015 European ethanol priced pegged between €430/m³ and €450/m³, a range that is likely to cause discomfort for European ethanol producers already coping with swollen inventories. At the same time, plummeting gasoline prices continue to widen the ethanol premium over gasoline.
The European ethanol market was rocked by allegations of price manipulation dating back to as far as 2007 when price reporting agency Platts first introduced the market-on-close (MOC) methodology for ethanol in Europe. The European Commission made unannounced inspections on 7 October at unnamed ethanol production, distribution and trading companies in two EU countries. Sweden-based ethanol producer Lantmannen-Agroetanol later confirmed that its offices in Norrkoping, Sweden, were inspected. The fresh inspections followed those undertaken by the Commission and Norwegian authorities in May 2013 at several companies, including BP, Shell, Norway's state-controlled Statoil and Netherlands-based trading firm Argos Energies, as well as Platts, to investigate alleged collusion to manipulate published prices for crude, oil products and biofuels. Ethanol traders expressed scepticism about the allegations and the pool of MOC subscribers expanded during the latter part of 2014.
The anticipated introduction of a GHG quota in Germany adds a further layer of uncertainty to the 2015 price outlook. Germany is the first country within the EU to introduce a GHG reduction quota, which will come into effect in January 2015. Under the new rules passed by Germany's federal parliament in November, the GHG emissions of road transport fuel must be on average 3.5pc lower than the average current GHG emissions of gasoline and diesel, which are set at 83.8 gCO2e/MJ. Germany currently requires road transport fuel suppliers to meet a 6.25pc biofuel blending target by energy content, with biofuels already expected to achieve a 35pc GHG saving relative to the fossil fuels they are substituting. Germany's biofuels sector has warned that the reduction quota will cut demand in domestic biofuels and lift imports of ethanol made from sugar cane.
In addition, in December EU energy ministers agreed to support a 7pc cap on the share of food-based biofuels in the European transport sector. The European Commission originally proposed reform, including a limit on food-based biofuels of 5pc, back in October 2012. In a first reading, the European Parliament opted for a 6pc cap. But Bulgaria, the Czech Republic, Estonia, France, Spain, Hungary, Poland, Romania and Slovakia say a 7pc share is the "lowest acceptable" and would block a lower cap in negotiations over the final legislation with the parliament. Current EU legislation sets a mandatory target for EU member states to achieve a share of 10pc renewable energy in transport by 2020.
European ethanol producers have responded in a variety of ways. Lantmannen Agroetanol has started operations at a new facility designed to capture and purify carbon dioxide emissions sourced from the company's 210,000m³/yr ethanol refinery at Norrköping, Sweden. The addition of the new facility places the company in a much stronger position ahead of an anticipated shift in towards GHG emissions-savings credentials as a new price-driving factor in the European biofuels market. Similarly, Hungary-based ethanol producer, Ethanol Europe, has signed an initial agreement with the government of Macedonia aimed at facilitating the construction of a commercial-scale cellulosic ethanol refinery.
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