Viewpoint: HVO capacity growth to test feedstock supply

Decarbonisation pledges have increased during a landmark year for global climate diplomacy with the UN's Cop 26 climate conference, with investment in biofuels positioned centre stage of many transition plans. Asia-Pacific in 2022 will see an intensifying scramble to buttress feedstock supply chains ahead of several hydrotreated vegetable oil (HVO) capacity additions the following year, although shifting regulations may constrict supplies.

Shell has announced plans for a 550,000 t/yr HVO and sustainable aviation fuel (SAF) plant as part of its rebranded Pulau Bukom site in Singapore.

The facility, if the investment is finalised, will join a host of others in the vicinity vying for regional waste feedstocks.

The plant will share a gateway with HVO indicator Finnish biofuels refiner Neste, which is on track to double its Singapore capacity to 2.6mn t/yr in the first quarter of 2023. South Korean biodiesel producer Dansuk is seeking a partner to invest in a second 300,000 t/yr domestic HVO and SAF plant in Gusan, on top of a similar 300,000 t/yr Daesan project already under way for a 2025 start-up.

Chinese producers are lining up sooner for expansions, although run rates have continued to lag well below capacity in 2021. ECO Environmental planned to add 100,000 t/yr of HVO and SAF capacity to its existing 250,000 t/yr plant in Jiangsu province in the fourth quarter of 2021. Beijing Sanju in 2022 expects to open its fourth HVO plant with 200,000 t/yr in Baoshun, Shandong province, while Zhongdiyou New Energy aims to increase its Shandong capacity up to its nameplate 400,000 t/yr.

An additional 200,000 t/yr of fatty acid methyl ester biodiesel capacity at Jiaao's Zhejiang plant will also increase feedstock demand in 2022.

Adding to the competition will be unrelenting policy-driven demand growth from European HVO and biodiesel producers. Their demand for used cooking oil (UCO) will grow by 260,000t from a year earlier to 4.94mn t in 2022, according to Argus Analytics and Consulting, while "other" feedstocks comprising mainly palm oil mill effluent (POME) will rise by 1.2mn t to 3.9mn t. POME is designated as advanced under Annex IX, Part A of the EU's Renewable Energy Directive II, a category that receives ratcheting sub-targets to 2030 under EU legislation.

Policy barriers, bridges

While many large-scale producers are eager to secure limited feedstock supply lines through acquiring upstream collection companies in China, no known acquisitions have emerged. Local government policies promoting "closed loop" systems might make this increasingly difficult.

South China's Guangzhou became the latest municipality to issue measures on food waste management at the end of October 2021, joining Shanghai in ruling that unprocessed waste oils cannot be shipped out and must be processed to boost value-added industries within the city. Other smaller municipalities will possibly be eyeing Guangzhou's policy, which is the most comprehensive released so far, when forming their own regulations.

Traction on a national level has grown behind proposals to rescind China's current value-added tax rebate for UCO exports submitted by domestic biodiesel producers. Continuing discussions between the customs administration and finance ministry have yet to deliver, which many market participants see as reflecting the UCO industry's relative unimportance to Beijing with exports to just surpass 1mn t in 2021. But if UCO tax benefits are revoked as participants expect in the medium term, it will benefit HVO plants' access to raw materials by squeezing smaller overseas UCO methyl ester plants out of China's feedstock market.

Southeast Asian expansion

Expansion in Southeast Asian UCO sourcing will possibly continue after exports from Malaysia, Indonesia, Thailand and Vietnam all reached new highs in 2021.

But it might only be a matter of time before more insular policies emerge in some of these countries as well, especially Indonesia as it pursues ever more ambitious domestic biodiesel policies of its own.

The promise of EU part A frontrunner POME to fill in feedstock supply gaps may be tempered by tightened audit regulations for mills producing the waste oil from 2022, spurring higher costs that could deter new suppliers from entering the market.

By Lauren Moffitt