Viewpoint: Asian biodiesel resurgence limited by costs

Rising blending mandates in Europe and an economic recovery from Covid-19 are set to fuel demand for Asian biodiesel and feedstocks, although liquidity could be neutered by high costs in the short term.

Third-month fob Bursa Malaysia crude palm oil (CPO) futures rose to their highest since May 2012 in December, at 3,470 ringgit/t ($852/t), on tight supply, labour shortages and adverse weather.

Jakarta increased export levies on palm products on 10 December to fund its ambitious yet burdensome domestic 30pc biodiesel mandate (B30) in transport fuel, as it looked to subsidise the price difference between domestic biodiesel and gasoil.

This could lower the cost of domestic CPO and biodiesel but sharply lift export prices and further jam the arbitrage window, which was already closed by a wide palm oil-gasoil (POGO) spread and 8-18pc countervailing duties imposed on Indonesian producers by the EU since August 2019.

Export volumes are already scarce as producers will need to run at 80-85pc capacity to meet the B30 target. An additional 3.6mn kl/yr of output is set to be added next year to mitigate this and prepare for an even higher B40 target for 2022.

POGO rose to a 10-year high of $454/t in November, draining Indonesia's coffers in propping up B30 and also shutting down buying interest from the major European and Chinese markets, where palm usually needs to be around $120/t cheaper than diesel to encourage discretionary blending.

Net biodiesel exports from Malaysia declined by 57pc to 185,000t in January-September from 430,000t during the same period in 2019. Indonesian sales suffered an even worse downturn over the same period, slumping by 98pc to 21,000t from 1mn t.

CPO and biodiesel demand may be suppressed until the new harvest and peak season begins for palm-based biofuel towards the summer.

Palm price fallout

High palm costs are also having a knock-on effect for waste feedstocks beyond the region. Palm oil mill effluent (POME) prices typically follow the trajectory of CPO and snowballed to $740-770/t fob Malaysia by December, the highest level since Argus began assessing values in February.

Prices will also receive fresh impetus from the buy side as advanced feedstocks become increasingly sought after under the EU's new Renewable Energy Directive (RED II), which member states must transpose into national law by 31 June 2021.

They will outline how to increase the renewable energy share in transport to 14pc by 2030 from 10pc in 2020 while capping high indirect land use change feedstocks — namely palm oil — at 7pc and eventually phased out.

Waste-based raw materials such as used cooking oil (UCO) and tallow will be capped at 1.7pc and a 3.5pc sub-target will be set for those considered advanced, such as POME, under Annex IX part A of RED II. Member states such as France, Germany and the Netherlands have already outlined plans going beyond these targets, further lubricating residue feedstock flows.

Asian UCO and Ucome exports to Europe will continue to thrive especially once freed from the spectre of Covid-19, which lowered collections by 50pc at the peak of the pandemic. Malaysia's January-September UCO exports bore the brunt of this, declining by 53pc to 55,000t from 118,000t a year earlier.

But Indonesian exports swelled to 195,000t in January-October from 124,000t a year earlier, despite the pandemic. Vietnamese exports in January-November rose to 46,000t from 33,000t a year earlier, aided by a free-trade agreement with the EU exempting them from the usual 2pc import duty.

Chinese UCO exports totalled 737,000t over 2019 even as shutdowns curtailed European demand and tightened domestic supplies early in the year. Exports of 779,000t in January-October this year have already exceeded levels for the entirety of 2019, thanks to a swift rebound from Covid-19 in China. China's Ucome sales stood at 752,000t in January-October compared with 662,000t over the whole of 2019.

Bulk UCO and Ucome prices peaked in January 2020 at $855/t and $1,245/t fob China respectively, before coronavirus sterilised the market and lowered prices to $645/t and $800/t in the second quarter of the year.

Post-Covid rebound

Values have yet to recover fully but fresh price records are a distinct possibility in 2021 depending on the pace and strength of the rebound in Europe.

The International Energy Agency has predicted a 13.5pc year-on-year plummet in European biodiesel production in 2020 to 13.6bn litres given coronavirus shutdowns, and a rebound to 15.8bn l next year mostly on higher output of hydrotreated vegetable oil.

But liquidity is bottlenecked by a shortage of containers that has seen flexitank freight rates between China and Europe triple since September to $150/t in December. Little respite is expected until at least after Christmas when demand from north America and Europe subsides, although a significant price reduction may not emerge until after the lunar new year in February.

By Amandeep Parmar