Viewpoint: Unlikely biodiesel goal, huge RIN draw ahead

US government assumptions for 2018 may be overly optimistic when it comes to demand for biomass-based and renewable diesel, given a number of international trade barriers now going into effect.

When the US Environmental Protection Agency (EPA) released the final 2018 renewable obligations in late November, it nudged up the total obligation by just 10mn USG to 19.29bn USG, while trimming the percentage standards in each category — except biomass-based diesel which rose 4.2pc to 1.74pc.

The EPA judgement may appear to be backed up by the US Energy Information Administration's (EIA) estimates that diesel consumption and projected volumes for renewables in diesel will rise 3pc and 11pc in 2018, respectively, to 54.76bn USG and 2.53bn USG. But saying the US marketplace can absorb an additional 11pc of biomass-based and renewable diesel this year may prove a tall order with hefty countervailing duties finalized on Argentinian and Indonesian biodiesel exports this month.

This year may also see a huge draw from the ever-growing bank of RIN credits — the largest draw since 2013 — after two consecutive years of modest builds principally on the back of surplus biodiesel credits. Market participants expect a 400mn-600mn draw, representing 18-27pc of the freshly-revised bank, or 2.1-3.1pc of the total mandate, with a roughly 50/50 split between advanced and renewable credit shortfall.

An Argus analysis of available data favors the lower end of this range and found that as much as two thirds of the draw could come in the form of Renewable D6 RINs. Though this may point to moderate short-term tightness in the D6 category, as already shown by a narrowing B17/E17 spread, 2018 holds the potential for a particularly volatile D4 market to the upside.

The US is sure to turn more heavily to marginal suppliers such as Canada and Europe to fill some of the gap as higher-priced US product will require stronger D4 prices to encourage blend economics. This is particularly true because of a lack of clarity on the fate of the blenders tax credit (BTC) and with what appears to be optimistic EIA forecast guiding policy.

The market spent much of the year operating under the assumption that EPA director Scott Pruitt would shift in the point of obligation for RINs retirement from refiners to blenders. That effort failed as the administration failed to anticipate the strength of the corn ethanol lobby to push back.

Lobbyists' efforts will best be spent attacking the trade angle this year, building on the success of the new tariffs. But the pendulum swings both ways on trade, and 2018 is likely to see challenges to current policy possibly reach the World Trade Organization and the probable implementation of counter measures.