European ethanol prices are likely to recover at the beginning of 2023 after a flood of imports from the US and South America kept a ceiling on T2 ethanol values since the end of summer.
The Argus prompt physical assessment for T2 ethanol fob Amsterdam-Rotterdam-Antwerp (ARA) range reached its highest level for the year in June, at €1,384/m³ ($1,471/m³), during the height of the summer driving season in Europe. But an influx of imports that were booked to deal with demand has since put pressure on spot prices and has pushed the market into contango — where prompt prices are at a discount to forward values — indicating oversupply in Europe.
EU ethanol imports hit their highest in Argus records in August, which date back to 2012, at just below 138,000t. September shipments were 62pc higher on the year.
By November, spot prices fell so sharply that the spread between ethanol and Eurobob oxy grade gasoline narrowed to around €20/m³. This compares with a typical spread of €300-400/m³, which was observed in the first three quarters of 2022.The tight spread encouraged higher blending rates from gasoline suppliers. In France, demand hit a fresh record in August and the ethanol blend rate peaked at 9pc and remained around this level in September. Oversupply prevented these demand spikes causing steep price rises because sellers who had brought in imports had to sell promptly after arrival if the volumes were not already been allocated to an end-user. This was due to a lack of storage space in ARA, which pushed offers lower if no buyers emerged.
Price support
Despite ethanol imports consistently flowing in since the summer, large volumes are not currently scheduled to arrive further out than February, which could support prices if sufficient volumes have not been booked for arrival towards the end of the first quarter.
This would help European ethanol producers who have had to contend with low or negative margins in the latter part of 2022, partly because of higher gas prices, which have risen since Russia's invasion of Ukraine. But the war has also affected Ukraine's shipments of corn and wheat — typical ethanol feedstocks — to the rest of Europe.
Some producers in central and eastern Europe were forced to reduce or halt production in the autumn period because weak T2 ethanol spot prices meant they were operating at a loss. Not all countries provide support to producers, like there is in Germany and the UK, and as energy costs remain high, firmer spot prices will be essential to prevent operating losses. Prices could also get some support from rising mandates, which should keep demand strong.
Crop cap
Europe is typically a net importer of ethanol, with arrivals from outside the EU most regularly from North and South America. These volumes will remain essential to make up a shortfall in regional supply. The European Parliament voted to maintain the existing crop-cap level — the share of biofuels in transport produced from crop-based feedstocks — at 7pc, which should help to ease concern among European producers because they will remain essential to achieving overall renewable energy in transport targets set by each member state.
But there has been prolonged uncertainty within the market about some member states reducing their crop caps, particularly Germany. This dampened liquidity for higher GHG savings ethanol. Germany is notably the largest market for this product because of its GHG savings-based mandate. But demand for higher GHG savings ethanol is expected to pick back up once there is more certainty surrounding legislation.
The second-generation ethanol market remains relatively underdeveloped in terms of scale on a global basis but plants in Brazil and within Europe will offer more spot volumes into the market next year to help suppliers reach their advanced biofuels targets.
