Viewpoint: Biodiesel prices may have found a new floor

Northwest European (NWE) biodiesel feedstock supply looks likely to remain tight in 2022, which should continue to support prices after repeated record highs in 2021. But demand levels are closely linked to the vagaries of Covid-19 restrictions.

The emergence of the new Omicron Covid-19 variant weighed on the wider crude complex and a fall in the gasoil price pulled biodiesel outright values lower, but premiums were broadly unaffected by the variant's discovery. Any potential downward effect would be delayed by the lack of stocks and low spot availability, market participants said, while rising blending targets in EU member states offer support.

While demand may be uncertain, feedstocks availability looks set to remain tight, with Canada's 2021-22 canola exports projected to halve on the year. High logistics costs and domestic limitations could hamper used cooking oil (UCO) exports from Asia-Pacific, while any restrictions on the hospitality sector in northwest Europe will affect domestic UCO collections.

Demand outstripped supply to support the prompt outright Argus fob ARA range fatty acid methyl ester (Fame) 0 benchmark at an average $1,522.99/t between 4 January and 29 December 2021, 81pc higher on the year and 86pc up on 2019 levels. Rapeseed oil methyl ester (RME) prices soared beyond this, to outright highs of $2,718/t in early November, with the added factor of seasonal demand for the winter grade.

But production margins are robust and could encourage output, as prices for finished biodiesel rapidly outpace feedstock costs. While prompt rapeseed oil (RSO) prices overtook those for RME at several points in April and May, the RME/RSO spread averaged $635.58/t in the fourth quarter to 29 December — a more than five-fold increase on the average spread for the January-September period. The used cooking oil methyl ester (Ucome)/UCO spread averaged $643.29/t from 1 October to 29 December, 74pc higher on the average than for the first three quarters of 2020.

Rising physical blend costs are aligned with the increased cost for biofuels tickets — or the cost of compliance — in key regional markets. German, Dutch and UK ticket prices hit recurring records in 2021 and the cost of compliance will further increase in 2022. Beyond biodiesel blending and ticket purchases, options for participants are limited, further supporting biodiesel prices. Hydrotreated vegetable oil (HVO) is in short supply, and costs have increased sharply in tandem with other biofuels in 2021.

Biodiesel prices moved to new highs in 2021

Prices reached records across all northwest European biodiesel grades in 2021, as several long-term and temporary factors combined to form a perfect storm.

Key vegetable oil feedstocks hit record values throughout the year, driven by strong demand — including keen Chinese purchasing — and thin supply. UCO values also hit fresh highs, with supply limited by restaurant closures caused by pandemic restrictions. A steep rise in freight rates, particularly from Asia-Pacific to Europe, added to costs.

Imports of finished product remained low, curbed partly by protectionist quotas like Argentina's 1.2mn t/yr cap on biodiesel exports to the EU. Imports to the EU from outside the bloc were just under 2mn t in the January-September period, lower by 19pc on the year and by 32pc on the same period of 2019. This made it difficult for participants to build up stocks, and a backwardated structure across biodiesel forward prices disincentivised storage for most of the year.

Force majeures issued in August by German chemicals firm BASF and in September by German chemical manufacturer Evonik — together encompassing around 80pc of Europe's catalyst supply — temporarily restrained European biodiesel production.

This tightly-supplied market was further exacerbated by low water levels on the river Rhine in October and November, forcing barges to short-load at 40-60pc of full capacity, and aggravating barge congestion in the Amsterdam-Rotterdam-Antwerp (ARA) hub. Demand for winter grades RME and Fame-10 — which is based mostly on rapeseed — picked up as these logistics issues hit key producing country Germany.

By Georgia Gratton

Argus fob ARA RME v fob NL RSO $/t

Fob ARA biodiesel outright prices $/t