Note: this article first appeared in Renewable Energy Focus September/October 2012. Click here for a free signup.
In part 1: The outlook for the European ethanol sector improved dramatically in 2012...
The short term
How US product can compete with European domestic ethanol will be the key battle, and perhaps in-part dependent on the findings of EU Commission investigation into whether US ethanol could, in the past, be regarded as having been dumped in Europe.
However, commercial concerns are more pressing. Recent US corn crop was expected to come in at record levels, with yields returning to trend levels and a record acreage. Under this promising scenario carry-out stocks were expected to double. However, weather has once again dominated the prospects for corn availability.
Temperatures in key corn growing regions in the US have been well above average, and as there has been a significant lack of rain, soil moisture is at critically low levels. The combination of drought and unseasonal heat during the silking (pollination) stage of the crop has inflicted irreversible damage to yield. This prompted the USDA to drastically revise down their estimate for average US yields in Augusts WASDE (World Agricultural Supply and Demand Estimate) report, and since then the market is forecasting an even lower yield.
Corn prices have consequently rallied sharply and now all values are priced around $8/bushel until September 2013. Ethanol values have similarly risen and this has squeezed the margins of imports into the EU, despite T2 (ie European domestic) prices having rallied to record highs.
The European Response
European production has historically lagged demand. Though, in recent years, there has been sufficient capacity, marginal producers have been forced to cut operations as they have been unable to compete with imported product primarily in Finland, the Netherlands and the UK. With imports currently priced out, the European market is offering an opportunity for domestic ethanol producers to increase production.
Although European feedstock prices have also been inflated by the stronger grains prices, current T2 prices are at levels that should ensure that efficient EU producers are earning decent returns. This change in price dynamics should also encourage those plants that have not been operating at full capacity to increase rates, and this, combined with new plants in Hungary and the Netherlands, should alleviate some of the tightness brought about from reduced import flow.
Though there are many variables to consider the largest factor that could potentially impact the European market is the progress of the two ethanol plants in the UK. Ensus was previously shuttered over a year ago as it struggled with poor margins and having to compete against E90 imports in the UK. With the closure of this loophole, and a return to relatively attractive operating margins, the plant is now reopening, which could add an additional 400mn litres of supply on an annual basis from UK wheat. In addition the Vivergo plant, owned by AB Sugar and BP is also under construction, and scheduled to come on stream by the end of the year.
The outlook for the European market, over the medium term, appears to be positive and on course to reach an equilibrium. However, there is much less certainty surrounding the longer term prospects for the European market. Aggressive biofuels targets as laid out in the Renewable Energy Directive (RED) will require demand to more than double from current levels in order to meet the 10% by energy content obligation.
But, with 10% ethanol blending (E10 fuel) struggling to take off, and higher blends required to offset energy losses, the feasibility of this target being achieved remains in doubt. While the adoption rate of higher blends needs to rise there is additional uncertainty on the supply side.
Stringent sustainability requirements and with the EU Commission yet to make a decision on how greenhouse gas emissions from biofuels via indirect land use will be considered, the investment climate remains uncertain. To some extent these contradictions and conflicts are part of the enigma of European policy. However, they are also a large part of the reason why the development of the RED has lagged the pace of the US RFS and why the emphasis on innovation in feedstock technology is very much focused on the Americas – even for European firms.
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About: Toby Cohen is a Director at Czarnikow Group – a global commodity house with activities ranging from physical trading to corporate finance. The company did physical business in 90 different countries last year with a turnover in excess of $3bn in physical transactions. Czarnikow has a first hand presence in most of the major sugar markets of the world and works throughout the entire supply chain providing services to growers, millers, refiners, beet producers, merchants and industrial users. The company operates from its head office in London and a network of 10 regional offices to service clients and customers globally.