Higher biofuels targets in some EU member states should support hydrotreated vegetable oil (HVO) spot prices in 2023, but an erosion of diesel demand joins expectations of tight supply as an EU ban on Russian product bites, clouding the outlook.
Growth in HVO capacity and the UK's recent opening to HVO imports from the US and Canada should ease current market tightness. Global HVO capacity will increase by nearly 4mn t in 2023 to around 20.5mn t, with European production likely to increase to more than 5.1mn t/yr.
Obligated parties are reluctant to lock in annual contracts for 2023 because of uncertain road fuel demand and expectations of further rises in diesel prices following the ban on Russian oil products from February. But this could see HVO spot trade pick up later in the year as fuel suppliers assess their progress towards renewable mandates in transport.
A factor in such considerations will be the results of domestic policy proposals since Russia's invasion of Ukraine. Sweden and Finland have frozen and cut their respective mandates for 2022 and 2023 in response to rising fuel prices in 2022. By contrast, the Netherlands has proposed cutting multipliers for certain biofuels from 2023 to reduce dependence on Russian oil and increase the share of physical renewable fuels in transport.
France has proposed increasing its tax in case of non-compliance from 2023, which should support physical biofuels blending, while an increase in the German greenhouse gas (GHG) quota to 8pc will incentivise HVO consumption as the drop-in product allows it to surpass the European 7pc technical blend wall for biodiesel.
The European benchmark HVO (Class II), produced from used cooking oil, averaged $3,092/t fob ARA range in 2022 up until 14 December. This compares with a $2,342/t average in 2021. The Class II price has fallen by around 22pc in recent months from the second-highest on record of $3,571/t in June, but values have been well supported throughout the year by firm demand and rising feedstock costs. The Argus cif ARA UCO price hit a record $1,885/t in June, compared with a high of $1,395/t in June 2021.
Mandates, incentives and voluntary targets will support the SAF market
Concerns around the economic outlook will have a lesser impact on sustainable aviation fuel (SAF) consumption, of which market interest currently centres on synthetic paraffinic kerosene produced using hydroprocessed esters and fatty acids (HEFA-SPK).
SAF demand increased in 2022 as a 1pc blending mandate came into force in France. This followed Norway and Sweden, the first European countries to introduce SAF mandates in 2020 and 2021, respectively. The Swedish GHG emissions reduction mandate will grow to 2.6pc in 2023 from 1.7pc this year.
Incentives in the US market will support global demand, and an SAF tax credit that will be introduced in the US in 2023 should encourage growth in supply. But voluntary and corporate demand as well as airlines' commitments to increase the share of SAF in their fuel mix will also remain large consumption drivers in 2023.
With new and rising demand for SAF, global production capacity is likely to rise to close to 5mn t by the end of 2023 — if planned projects are completed on schedule and operate at full capacity — up significantly from 1mn-1.5mn t in 2022.
The Argus fob ARA range HEFA-SPK SAF price averaged $3,523/t from 1 January to 14 December 2022, up from an average of $2,631/t in 2021 and equating to an average premium of $2,415/t to fossil jet fuel.
