German UERs upset European biodiesel markets

The recent approval of several upstream emission reduction (UER) projects in Germany has caused uncertainty among European biodiesel traders, with the effect of the additional CO2-savings on the market unclear.

Prompt physical liquidity in the European biodiesel market has slowed this month. Around 116,000t traded on Argus Open Markets (AOM) between 1-17 September, down by around 65pc from the same period in August, on a combination of Covid-19 and Berlin's approval of five UERs in August and September.

It is likely that prices for physical biodiesel and for German greenhouse gas (GHG) emission reduction certificates will be pressured by the additional CO2-savings in the German market, leaving traders reluctant to take on large positions.

Prices for German GHG credits have fallen steadily in the past few months, from around €400/t CO2e in mid-June to €330/t CO2e in the week of 7 September, because of low demand from road fuel suppliers. They will probably continue to drop with demand unlikely to pick up in the coming weeks.

Waste-based biodiesel fob ARA Ucome prices, which are generally used to calculate underlying blending costs, have risen since the start of September, when they have averaged $1,255/t, but they remain below the average of $1,340/t in the same period last month. Ucome has been further pressured by France's amendment of its mandate for the incorporation into road fuels of biodiesel with cold filter plugging point (CFPP) of -10°C — mostly used during winter months —until the end of the year. This increases tax incentives for the incorporation of Fame -10°C CFPP in road fuels and raises its energy share in fuels by 20pc, making products eligible for double counting, like Ucome, less attractive for buyers because of their higher costs.

The additional 2.18mn t of CO2e that will be generated by the 10 UERs that have been approved could also have an effect on term contract negotiations for 2021, which many market participants have started. With more GHG certificates available, German fuel suppliers might primarily ask to lower the amount of hydrotreated vegetable oil (HVO), which is popular as it can be blended above the 7pc blend wall but is generally significantly more expensive than conventional biodiesel grades, in their 2021 supply contracts. With the majority of HVO produced in Europe usually committed under term contracts, a reduction in the share of term volumes could result in an increase in spot trading for the product in the first half of next year.

German road fuel suppliers have to fulfil a 6pc GHG emissions reduction obligation in 2020, either by physically blending renewable fuels into their fuel mix or by buying GHG credits. UERs are an additional instrument to achieve the necessary CO2 savings. Up to 1.2pc of the German blending mandate can be covered by offsetting emissions reductions in the stages before feedstock reaches a refinery or storage facility.

By Giulia Squadrin and Sophie Barthel