SAF Insights: SAF Book & Claim 101

Author  Argus

Learn the benefits of the first real-time, electronic price discovery platform for SAF with Argus experts Alfonso Berrocal and Giulia Squadrin. They discuss the successful debut of fob ARA range SAF on Argus Open Markets (AOM), as well as recent market trends and expectations for the coming months.



Alfonso: Hello and welcome to SAF Insights. In this series, we'll discuss the forces that affect the sustainable aviation fuel market globally. On the 11th of April, Argus launched the Argus Open Market SAF, a real-time electronic price discovery platform for sustainable aviation fuel in the Amsterdam Rotterdam Antwerp, the so-called ARA Hub in Europe. Argus Open Market, or AOM SAF for simplicity, is the first pricing platform where participants can post orders for physical SAF and it sets a milestone in the growth of pricing liquidity of sustainable aviation fuels. My name is Alfonso Berrocal and I work for Argus in the business development department, and my role is pricing middle distillates and sustainable aviation fuels. And to discuss this topic today with us, we have here Giulia Squadrin, associate editor of Biofuels at Argus Media. Hi, Giulia, and welcome to the podcast.

Giulia: Hey. Hi, Alfonso. Thank you very much.

Alfonso: Thanks to you. Giulia, let's start giving a bit of background. What is Argus Open Market? And what is the history of this tool within the biofuels pricing portfolio of Argus till Argus launched the AOM SAF on the last 11th of April?

Giulia: Yeah, so Argus Open Market, or AOM in short, it's an electronic price discovery platform where registered market participants can post bids, offers, and initiate spot deals for a number of commodities. And in general, it helps bring transparency to the market and participants are able to see developments unfold in real time. We have AOM for a number of commodities, not just in the biofuel space. So we have commodities like gasoline, diesel, LPG, and, of course, biofuels. It's quite big. We first launched biodiesel on AOM a few years ago. I think it was 2016, but it's definitely been a number of years that we've had biodiesel on there. And we've since gradually introduced more products, including HVO, used cooking oil, the feedstock both in Asia and in Europe, UCOME in Asia as well. And now we have SAF in the ARA market. And it's been really quite successful in the biofuel space.

So across all biofuels product on the European AOM, we had last year over 2.2 million tonnes of trade initiated and nearly 650,000 tonnes of trade initiated in the first quarter of 2024 alone. The majority of this is on the biodiesel market, where AOM is really well established. But HVO is growing as well. Just so for context, and I mean, if anyone listening is not familiar with HVO, HVO is renewable diesel, Hydro-treated Vegetable Oil. And it's quite close to the HEFA market in the sense that HVO and HEFA, they have a very similar production pathway. So there is a correlation between these two products. But yeah, I mean, as I was saying, HVO is growing in terms of size of the market and the volumes of trade initiated on AOM were more than double in 2023 versus 2022. And so far this year, we have already surpassed 2022 volumes. And we have actually moved to a daily window for HVO this year. So I mean, in general, AOM is a key tool for transparent price discovery and it complements all the other data that Argus obtains from the market for price assessments.

Alfonso: Okay, that's great, Giulia. Has the AOM SAF, the specific stack for SAF, registered any activity in these two weeks since launch?

Giulia: Yeah. It was actually a great start for SAF. We've had posters, offers posted in the first session and since then, we've had five trades initiated. And just to contextualize and explain a bit better what actually is happening in the case of SAF, the trades that are initiated on AOM are for 1,000 tons barges of red compliant used cooking oil-based NEAT, FISPK, meeting ASTM D7566 specs with a minimum 80% greenhouse gas savings, fob ARA range and loading seven to 28 day ahead of the day of the assessment. And for all products on AOM, there is a publicly available methodology that outlines specs, loading periods, and all the other details. And these methodologies are built with the support of market participants and we adapt them always upon public consultation to follow evolving market practices. Given the size of the SAF market, especially compared to more mature FAME or HVO, it is very encouraging to see activity from the start. And I think it really speaks to the market's push for transparent pricing. AOM is open daily from 4 to 4.30 London time and offers this real-time view of the market. But we also continue to monitor market trends and pricing outside the window, speaking with various counterparties across the entire supply chain and in all regions.

Alfonso: Okay. So I think five trades, that's a good start. What do these trades tell us of where the SAF market is at the moment in Europe?

Giulia: I think these trades really fit in the context of downward trending prices in Northwest Europe for SAF. So in general, SAF is still seen and it still is actually a very expensive commodity. But values have really been pressured since the start of the year, extending trends that we had started to see in the fourth quarter of last year. And the pressure is really coming from growing supply. So the demand is generally trending higher, but supply has grown more rapidly than consumption so far this year. And we have seen more volumes becoming available from east of Suez and also production in Europe growing as well.

On the demand side, we have three mandated markets in Europe at this stage, Sweden, Norway, and France. And voluntary demand is mainly focused on markets with incentives in place. So for example, the UK or the Netherlands, where renewable fuel tickets can be generated when supplying SAF and consuming SAF in those markets. Or there's airports incentive schemes that are trying to boost SAF consumption, for example, in Heathrow. So this is the demand side. But so far, the wider EU SAF mandate and the UK mandates will come into effect next year. So, so far in 2024, we've seen a faster growth in the supply side than in the consumption side. So the level of the trades that have been initiated in AOM, it fits within the trends that we've seen in the wider market and highlights the pressure we've seen on SAF prices this year.

Alfonso: Okay. So it looks like we are at the earliest stages of the market from a demand perspective. So what should we expect in the coming months as the market participants, airlines, and producers prepare for the European Union mandate to start on the 1st of January 2025?

Giulia: Indeed, we have this 2% EU-wide SAF mandate starting in 2025 and expect it to increase to 70% by 2050. And the UK is also introducing a 2% mandate from next year, targeting 10% in 2030 and 22% by 2040. So we are starting to see discussions for fuel tenders now going into 2025 already. But especially if we look at the EU picture, and assume it's the same in the UK, but the final mandate there was really announced very, very recently. So still need to do some bit of a more investigation on that market. But if we focus on the EU, the lack of clarity around some bits of the legislation is slowing discussions for 2025 tenders. So the industry is really waiting to get some clarifications around things like penalties calculations or around the 20 million free EU ETS that have been set aside to boost SAF uptake, and just other details around the practical implementation of the mandate.

This said, the obligation will kick in in around eight months or so. So we could see some obligated parties slowly start to build up stocks later this year. And this should go in tandem with the further growth in capacity. More projects are expected to come online later this year across the world. But as we have seen in the past, delays are always possible. And that's something that we are seeing a big focus on is the development of storage capacity and improvement on logistics. And this will be key to ensure that SAF can reach all the airports where it's needed, including, for example, some of the more remote ones, where the pot of the 20 million EU ETS can be used to cover a larger share of the bio premium. So really a lot of moving parts still. And, yeah, so focus on clarity around the legislation and improvement of logistics and, of course, pricing plays a key part in this.

Alfonso: Okay. So it seems that production capacity and storage availability grows in Europe, obviously driving upwards the liquidity as well. AOM SAF can be instrumental to have a transparent, reliable price. We have seen this already happening with HVO in the last couple of years. How long do you think it will take for SAF to reach the liquidity of the HVO, which actually has reached a stage that it has taken the HVO to be listed and actually currently it has a swap?

Giulia: Yeah, I mean, this is the million-dollar question. I think the European HVO market has seen a gradual growth in liquidity on the physical side, and we are now starting to see paper trade for Class II HVO, which is the UCO-based HVO pickup as well. If we think of the road market, there's a number of compliance options that can be used to meet the obligation. So biodiesel, tickets, ethanol, HVO, etc. But if we look instead at the aviation sector, there is really only SAF that can be used to meet the upcoming targets. And, of course, there's a number of SAF pathways that have been approved so far, but realistically at this stage, HEFA is the dominant one. And based on announced projects, it should account for nearly 80% of global production by the end of the decade.

Of course, co-processing, the share of co-processed SAF could grow, especially because now it's under discussion to increase the share of bio content in co-processing to 30% from 5%. So there's a lot of pathways, but, yeah, realistically HEFA for the time being is the largest one. Well, this said, whether it's HEFA or whether it's co-processed SAF doesn't really have to compete with other compliance options. And liquidity in the SAF market, therefore, could grow more rapidly than what we have seen for HVO, especially if capacity scales up at the pace it's expected to in the next couple of years. And really having trades initiated in the first couple of weeks since the launch of AOM is definitely a promising sign. And when it comes to listing, that's really up to the exchanges and to the market. So what we can do on our side is to build robust methodology to price the spot market and then let the industry do the rest.

Alfonso: Thank you very much, Giulia, for sharing your knowledge and your insights of this fascinating and growing market, which is SAF. Thank you.

Giulia: Thanks, Alfonso.

Alfonso: And thank you all for tuning in to this podcast and for more information on Argus, Biofuels, and SAF coverage, please visit the Argus SAF Hub in our website. Stay safe and see you next time.