Tighter Chinese UCO supplies support price recovery

Tighter used cooking oil (UCO) supplies in China are expected by market participants to lift export prices in the near future, adding to the list of challenges affecting European biodiesel producers.

The price recovery has been steady for the waste-derived biodiesel feedstock following steep losses in March during the Covid-19 pandemic. UCO closed last week at $730/t fob China for flexitanks and at $782.50/t delivered to the Amsterdam-Rotterdam-Antwerp trading hub in northwest Europe, the former at its highest level since 27 March and the latter at its highest since 20 March. The rebound has been supported by firm demand from European biodiesel and hydrotreated vegetable oil (HVO) producers still striving to fulfil increased transport fuel blending mandates for 2020.

UCO methyl ester (Ucome) producers in Europe have increased production since May in line with a recovery in post-Covid-19 lockdown transport fuel demand. But sluggish domestic UCO supplies have driven a heavy reliance on feedstock imports from China, where movement restrictions eased and restaurant collections resumed one to two months ahead of Europe.

China exported 69,900t of UCO to the 27 EU member states in April, according to customs data, higher from 38,100t in March and 48,300t a year earlier.

But even in China UCO supplies are limited with collections still subdued at around 70pc of volumes prior to the pandemic. Reinstated coronavirus restrictions in Beijing will further cut supplies, with the city's many restaurants usually providing around 3,000 t/month of UCO.

Traders point to large-scale buyers sourcing large volumes directly in the Chinese market exacerbating the supply tightness. Finnish HVO producer Neste is acting to bolster sourcing in the country to meet growing feedstock requirements as its Singapore plant expands. The expansion will raise HVO production from a current 1mn t/yr capacity up to 2.3mn t/yr by its planned completion in 2022.

Chinese Ucome producers are mounting further pressure on feedstock supplies and derailing product earmarked for export, with most now back on line and running near full capacity. Chinese plants resumed in May in tandem with those in Europe and began offering Ucome this month as its price strengthened. Ucome fob China was valued in bulk at $985/t at last week's 19 June assessment, its highest level since 13 March and a rise of $122.50/t from the weekly assessment of $862.50/t on 15 May.

A shortfall in availability of the lower quality "gutter oil" typically employed as feedstock by biodiesel producers in China has forced some to turn to dearer export-grade UCO following the pandemic. Domestic feedstock UCO currently delivers for around 5,400-5,500 yuan/t ($762-776/t) including 13pc value-added tax refundable on export compared with around Yn4,800/t for gutter oil, according to suppliers and biodiesel producers.

Rising demand from domestic and overseas buyers has paired with constricted supplies to support UCO price gains in the export market, with the uptrend set to continue. UCO now trades 25pc higher fob China compared with a year earlier and 26pc above cif ARA. The grades have recovered 92pc and 94pc respectively of their value from the first quarter, when UCO flatlined at previously unseen heights averaging $809/t on a fob China basis and $852/t cif ARA until the pandemic sparked a downturn beginning on 6 March.

But the UCO supply shortage in the short term will make it increasingly difficult for China to capitalise on the sought after feedstock that boasts high value-added potential for European buyers.

By Lauren Moffitt