Chinese biodiesel producers chase high-value feedstocks

Chinese biodiesel and feedstock suppliers are diversifying to get more value for their money with ever-evolving European legislation regarding waste feedstock incentives.

Brown grease is becoming increasingly fashionable among suppliers, of which 18 in China are now registered with the main International Sustainability and Carbon Certification body from just three prior to September last year.

But those betting on this raw material are far from guaranteed returns, with trading firms having been stung before gambling on the next big thing.

Under the new EU renewable energy directive (RED) II, which came into effect this year, advanced feedstocks made from waste and providing greater greenhouse gas (GHG) savings are double counted towards transport fuel mandates.

These Annex IX raw materials are split into Parts A and B, the latter of which includes used cooking oil (UCO) and tallow. These are capped at 1.7pc of the of the road transport mix by 2030, while having their double counting status stripped for marine fuels in the Netherlands this year.

Those listed under Part A, such as brown grease and palm oil mill effluent (POME), have a 2.2pc sub-target. They are consequently becoming increasingly sought after, with the resultant biodiesel commanding an increasingly hefty premium over UCO-based grades.

POME cost $950-1,030/t fob Malaysia/Indonesia at the end of last week compared with $1,170-1,190/t fob China for UCO. Biodiesel made from advanced feedstocks carried a $210/t premium over UCO methyl ester (Ucome) in northwest Europe at $2,007.50-2,017.50/t fob Amsterdam-Rotterdam-Antwerp (ARA).

But Chinese Ucome producers that tried pivoting towards POME methyl ester (POMEME) production using their existing infrastructure to take advantage of greater potential returns have so far been thwarted by the poor quality of the raw material.

Low yields, high moisture, impurities and unsaponifiable content, plus the need for more advanced heating tanks because of the poor cold weather properties of POME, all undermined their efforts. Producers also bemoaned the extra pre-treatment needed to stop pipelines getting clogged up with residues, as well as the "horrendous stink" of the waste product that has often been left fermenting in crude palm oil plantation ponds before being collected. Those using carbon steel storage tanks rather than stainless steel were likewise caught out by the high corrosive properties of POME leading to further dismay in using the feedstock.

Traders are also wary investing too heavily into any palm oil-based waste feedstocks in case they begin to fall out of favour with European legislators. Palm oil is already being phased out of the biofuels mix by 2030 under RED II because of sustainability and deforestation concerns. There are signs that similar disincentives are on the horizon for POME .

Germany's latest biofuels bill set out a 2.6pc sub-target for advanced biofuels by 2030, above which any Part A feedstocks used will be double counted towards its GHG reduction obligation except for POME. No other countries have yet announced any anti-POME measures, but should the tide of public opinion keep turning against palm oil cultivation suppliers fear they may follow in Germany's footsteps.

Grease is the word POME currently remains the most prominent advanced feedstock. But with enthusiasm losing steam and a structural shortage on the horizon for advanced feedstocks interest is turning to brown grease, even though it has not yet been explicitly listed under RED II Annex IX Part A.

The UK, Spain and the Netherlands have already said they will consider brown grease as advanced, with trading firms waiting on confirmation from other EU member states.

Brown grease avoids many of the problems plaguing POME as it is waste collected in grease traps rather than an offshoot of palm oil production. The quality also tends to be much more aligned with UCO with free fatty acid levels starting at 15-20pc, compared with 5-7pc for UCO and minimum 40pc for POME and maximum 2-3pc moisture and impurities.

While yields are lower than UCO, distillation and pre-treatment can bring them up to minimum European and US requirements and so can be processed through existing refinery infrastructure more readily and result in biodiesel with lower cold filter plugging point of 0-5°C instead of +13-15°C for POMEME.

Chinese Ucome producers have therefore rushed to get certified for brown grease even though many have been using it for some time anyway, or what they term "gutter oil" collected from sewage sludge, with it costing up to $100/t less than UCO.

Now the demand incentive is so much higher and the premium of advanced Fame 0 over Ucome widening in Europe they see an opportunity to charge a much higher price for effectively the same product.

Deals reported for brown grease methyl ester have only been around $50-100/t higher than Ucome out of China, much less than the +$200/t premium for advanced Fame 0 in the ARA region. But should more countries adopt it as a Part A contributor then biodiesel producers could reap even greater rewards.

Chinese UCO and biodiesel exports exhibited sharp growth year-on-year ( see chart ). The addition of brown grease to the mix could further lift sales.

Trading firms could also clamour for brown grease throughout southeast Asia should margins justify it, but this will take greater investment in infrastructure. Unlike in Europe, the US and even China, few outlets in the region outside of high-end hotels and restaurants have fat traps installed to capture the by-product that up until recently had limited value, a Malaysian trader said .

Some also warned of the care needed in tracing the feedstock origins of biodiesel sold given the incentive for offenders to mislabel product, given specifications of brown grease and UCO are so closely aligned and the price difference between the two.

But now with regulatory support, decent specifications and free of anti-palm oil backlash more could be willing to take a plunge in the sewage pool.

By Amandeep Parmar

China biodiesel, UCO exports (t)

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