<article><p class="lead">More Chinese trading companies are gearing up to enter the biodiesel feedstock market, with more heated competition likely to pressure seller margins.</p><p>In June-July, 29 China-based companies became certified for the first time as traders under the International Sustainability &amp; Carbon Certification (ISCC) system, the highest number in a two-month period. ISCC is designed to ensure sustainability of raw materials, and is the main body that accredits biofuels and feedstocks entering the EU market. </p><p>Established traders may be looking to diversify their portfolios beyond petroleum products given China's recent efforts to <a href="https://direct.argusmedia.com/newsandanalysis/article/2232903">stamp out diesel consumption tax fraud</a> and close loopholes that enabled traders to profit from tax-exempt blendstocks. Waste-based biodiesel used cooking oil methyl ester (Ucome) and its feedstock used cooking oil (UCO) appear to offer a lucrative opportunity, with significant growth in value to-date and demand set to rise alongside <a href="https://www.argusmedia.com/en/news/2234249-eu-plans-tougher-renewables-co2-targets-for-road-fuels">intensifying biofuels blend mandates across key consumer centres in Europe</a>. </p><p>Prices ex-China remain sharply above values in previous years, though they have softened from early June's all-time highs alongside counterparts at the Amsterdam-Rotterdam-Antwerp (ARA) hub. <i>Argus</i> last assessed bulk UCO fob southeast China at $1,190/t, more than 50pc above its level at the same time last year and 89pc higher than two years earlier.</p><h2>Bumpy road ahead?</h2><p class="lead">An end to double counting for all advanced feedstocks envisioned under the EU's "Fit for 55" legal proposals that was unveiled this month, may reign in Ucome's remaining premium over Fame biodiesel and weigh on UCO prices once the legislation is passed, due no later than December 2024. </p><p>The drafts also suggest keeping a 1.7pc soft cap on biodiesel produced from feedstocks like UCO listed under Annex IX Part B, on <a href="https://direct.argusmedia.com/newsandanalysis/article/2207491">concerns that unchecked demand might incentivise fraud</a>. It is unclear whether a current RED II policy provision giving member states discretion to supersede this will make it into the final version of the new law. </p><p>Pressure is mounting on Chinese policymakers to end tax advantages that have been boosting UCO export margins. Sellers currently enjoy a full rebate of the 13pc value-added tax paid on domestic UCO transactions when they retail overseas. This has ensured profits, even with mounting China-side collection costs, which have at times been growing out of step with the biodiesel market on demand from competing domestic plasticizer and animal feed industries. </p><p>But China's biodiesel producers have been lobbying for several years to end the rebate, which only applies to exports while they receive no relief from the full tariff. The association has so far lacked the political clout to push change, but their influence may be growing with the industry's size and export value. Chinese biodiesel sales during the first half of this year surpassed $696mn in value, eclipsing the $453mn and $221mn earned in January-June 2020 and 2019, respectively, according to GTT customs data. </p><p>Robust pricing for Chinese UCO has squeezed producer margins for its methyl ester abroad as well as at home, directing some European buyers towards cheaper southeastern Asian UCO which bulks and ships from Malaysia. </p><p>Over the past year, direct Chinese UCO exports have dwindled to the Netherlands, which was historically the main buyer and hub for re-exports across Europe. </p><p>Spain has emerged as the new primary destination for Chinese UCO, lending support from an expanding domestic Ucome sector spurred by the country's relatively <a href="https://direct.argusmedia.com/newsandanalysis/article/2236358">recent addition of double counting</a>, and a shift by Spanish HVO producers to [substitute waste feedstocks such as UCO for palm oil]( https://direct.argusmedia.com/newsandanalysis/article/2235125) after the latter was banned by key buyer France in 2020. </p><p>Sales for August-loading UCO from China have been sluggish, with many bulk suppliers unwilling to nudge offers below $1,200/t fob levels upheld for weeks. Buyers are reluctant to pay over $1,150/t, pointing to volatile Ucome at ARA and revitalized European UCO supplies across a continent that has shed movement restrictions and emerged enthused into the summer peak season for the food and beverage industry. </p><p>Some China-based suppliers admitted to meeting buyers' price levels to secure deals for the coming month, evidence perhaps that budding supplies may already be forcing profit expectations downwards. </p><p class="bylines">By Lauren Moffitt</p><p><div class="picture"><div><span class="pic_title">China's UCO exports to the Netherlands, Spain</span> <span class="units">t</span></div><img src="https://argus-public-assets.s3.amazonaws.com/2021/07/30/chinaucoexportstonl,china30072021074959.jpg"></div></p><p><div class="picture"><div><span class="pic_title">Ucome, Fame & China UCO price growth</span> <span class="units">$/t</span></div><img src="https://argus-public-assets.s3.amazonaws.com/2021/07/30/mychart7_30_2021(1)30072021074925.jpeg"></div></p></article>
