Biofuel prices and markets for production and consumption in the European Union and elsewhere in the world

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1 No. 9 December 2012 Network Support Department Communications, Planning and Economic Monitoring Sub-Directorate Economic and Price Monitoring Bureau Biofuel prices and markets for production and consumption in the European Union and elsewhere in the world Hugo Hanne 1 The present study offers an analysis of biofuel prices and markets for production and consumption in the EU and elsewhere in the world in the very recent past. Two biofuels currently dominate world markets: bioethanol, which is intended to be a substitute for premium-grade petrol, and biodiesel, which is a substitute for diesel fuel. The former is mainly produced and consumed in the US and Brazil, while the latter is produced and consumed in the EU. Production costs in the EU are not very competitive in comparison with world bioethanol prices, but they do cover world prices for biodiesel. 1. Biofuels: definition and purpose The world's oil reserves are naturally limited, and at a time when some experts despite the discovery of new reserves such as shale oil are predicting the imminent arrival of peak oil, biofuels are beginning to attract attention. These fuels, which are reduced from plant matter, are attractive because they are environmentally-friendly (made from agricultural and forestry byproducts) and because they will perhaps be a critical part of the energy mix of tomorrow. There are currently two main biofuel production systems: the oil and derivatives system for producing biodiesel, and the alcohol system (based on sugars, starch, cellulose or hydrolysed lignin) for producing bioethanol. Generically speaking, first-generation biofuels (bioethanol and biodiesel, depending on the agricultural sources used in producing them) are those that have been derived from food products, or more specifically, from the storage organs of plants (seeds of cereals and oil-producing plants, beetroot, oil palm fruits). Storage organs are where plants store sugar (beetroot and cane), starch (wheat and corn) and oil (colza, sunflower, jatropha and palm), which are also used in food products for human consumption. Using 1 Head of the Economic and Price Monitoring Bureau (1B), DGCCRF 1

2 first-generation biofuels to help meet future energy needs clashes with the need for food, which is also a subject of concern given the growing world population and changing lifestyles, particularly in the major emerging countries of Asia, Latin America and Africa. First-generation biofuels are also required for industrial purposes. Second-generation biofuels (bioethanol and biodiesel, depending on the agricultural sources used in producing them) are those derived from ligno-cellulosic sources (wood, leaves, straw, etc.) or those not produced from food crops, but plants that are strictly grown for energy purposes. Some experts also distinguish first- and second-generation biofuels based on the means used to produce them production methods for first-generation biofuels use fairly simple techniques, whereas more advanced processes are required for second-generation biofuels. Brazil was a trailblazer in the production and use of biofuels, particularly sugarcane ethanol, and transformed the country's motor vehicle fleet (the Pró-Álcool programme, decree-law of 14 November 1975, strengthened in 1979). As a result of the 1973 and 1979 oil crises, the US also launched a biofuel research programme at the National Renewable Energy Laboratory (NREL), which is funded by the Department of Energy. In France, initial testing of biofuel production took place at the Institut Français du Pétrole in the 1980s, and the development of domestic production benefited from the introduction of set-asides in 1992 under the Common Agricultural Policy (CAP). Starting in 2000, several factors contributed to the widespread expansion of biofuel agricultural production around the world, particularly in the US and in Europe. These included: Rising oil prices The imminent arrival of peak oil Efforts to fight climate change Threats to the security of oil supply (international terrorism, the geostrategic situation in the Gulf region, the political and social situation in Latin America, piracy in the Red Sea and in the Strait of Malacca) Agricultural overproduction Nevertheless, technical difficulties remain. Either agro-fuels must be adapted to today's engines via chemical transformation (for example biodiesel), which degrades the energy and environmental balance of these fuels, or engines must be adapted to natural biofuels, which is currently the subject of research efforts. 2

3 2. Production of biofuels increased in the EU and elsewhere in the world. The production of bioethanol in the 27 Member States remains low compared to production in Brazil and especially in the US, but the situation is reversed for the production of biodiesel, in which the EU leads the way. Biofuel production data is rather patchy. The OECD database provides information on production in the major producing countries such as the US, Brazil, Argentina, Canada and the EU-27, and on global production of bioethanol and biodiesel starting only in Bioethanol production has been constantly increasing, rising from 72 billion litres in 2007 to approximately 106 billion litres in 2011, a 47% increase in five years. Bioethanol production in the EU-27 stood at 4 billion litres in 2007, or 6% of world production, and was nearly 7 billion litres in 2011, still some 6% of world production. Production in the US during the same period rose from 42% to 48% of world production (30 billion to 51 billion litres), whereas Brazil's percentage of world production fell from 31% to 27% for the same timeframe (although production increased from 22 billion to 29 billion litres). Bioethanol production in millions of litres by region Evolution de la production de bioéthanol en millions de litres par région , , ,00 millions de litres 60000, , ,00 0,00 Canada UE27 Etats-Unis Argentine Brésil Monde millions of litres Légende: Canada EU-27 US Argentina Brazil World 3

4 Global bioethanol production between 2007 and 2011 (in millions of litres) Canada , , , , EU-27 4, , , , , US 29, , , , , Argentina Brazil 22, , , , , World 72, , , , , Source: OECD Share of domestic production in global bioethanol production between 2007 and 2011 (in %) Canada 1.3% 1.6% 1.6% 1.6% 1.7% EU % 6.0% 6.2% 6.3% 6.4% US 41.6% 42.7% 48.3% 48.8% 48.4% Argentina 0.3% 0.3% 0.3% 0.4% 0.4% Brazil 31.0% 31.7% 27.3% 26.9% 27.3% For biodiesel, world production more than doubled between 2007 and 2011, from less than 11 billion litres to more than 23 billion litres. The EU produces roughly half of the world's biodiesel, but this share fell off between 2007 and 2011, from 59% to 46% (although production rose from 6.5 billion litres to nearly 11 billion litres). The United States' share in global production of biodiesel remained at about 13% during the same period, but suffered a severe falloff in 2009 and 2010 to less than 5% of global production. Brazil produced less biodiesel in 2007 than Argentina (2.9% and 4.2% of global production, respectively), but has caught up since and slightly surpassed Argentina in 2011 (10.5% vs. 10.1%). Brazil's production of biodiesel increased nearly eightfold over the period, whereas that of Argentina increased fivefold. 4

5 Biodiesel production in millions of litres by region Evolution de la production de biodiesel en millions de litres par région 25000, ,00 millions de litres 15000, , ,00 0,00 millions of litres Canada UE27 Etats-Unis Argentine Brésil Monde Légende: Canada EU-27 US Argentina Brazil World Global biodiesel production between 2007 and 2011 (in millions of litres) Canada EU-27 6, , , , , US 1, , , , Argentina , , , , Brazil , , , World 10, , , , , Source: OECD Share of domestic production in global biodiesel production between 2007 and 2011 (in %) Canada 0.9% 0.9% 1.5% 1.6% 1.4% EU % 51.0% 55.7% 50.0% 46.0% US 13.7% 15.0% 9.6% 4.8% 12.6% Argentina 4.2% 8.9% 6.7% 11.0% 10.1% Brazil 2.9% 6.0% 7.5% 12.1% 10.5% 5

6 3. The consumption of biofuels is on the rise in the EU and the rest of the world. Bioethanol is mainly used by the countries that produce it, i.e. the US and Brazil. The EU is the world's top producer of biodiesel and also its primary consumer. World consumption of bioethanol has grown from 71 billion litres in 2007 (somewhat less than half of global production for the same year) to 106 billion litres in 2011, which represented slightly more than the year's production, and reserves were tapped. Consumption of bioethanol in the EU rose from 7.1% of world consumption in 2007 to 8.7% of world consumption in This was equivalent to 123% of the EU's production in By 2011, this figure had increased to 137%, which represents a worsening of the energy balance, as the external deficit for bioethanol went from 23% to 37%. The US are the main consumers of bioethanol (44.5% to 49.5% of global per capita consumption) and also run a slight external deficit (consuming 103% of domestic production). Potential bioethanol export countries are Brazil, the second largest producer and consumer of bioethanol, and Argentina. World consumption of bioethanol between 2007 and 2011 (in millions of litres) Canada 1, , , , , EU-27 5, , , , , US 31, , , , , Argentina Brazil 18, , , , , World 70, , , , , Source: OECD Share of domestic consumption in global bioethanol consumption between 2007 and 2011 (in %) Canada 1.6% 1.7% 1.5% 1.7% 2.1% EU % 8.0% 7.6% 7.8% 8.7% US 44.5% 47.0% 50.1% 48.7% 49.5% Argentina 0.2% 0.2% 0.2% 0.4% 0.3% Brazil 26.4% 25.6% 23.5% 24.8% 23.6% 6

7 Rate of coverage of domestic consumption by domestic production of bioethanol between 2007 and 2011 (in %) (relationship of domestic consumption to domestic production) Canada 120% 105% 97% 107% 129% EU % 133% 124% 125% 137% US 106% 110% 105% 100% 103% Argentina 62% 62% 70% 97% 95% Brazil 84% 80% 87% 92% 87% Turning to biodiesel, consumption more than doubled between 2007 and 2011, rising from 10 billion litres to 22 billion litres. The EU is the world's top producer and consumer of biodiesel, but its share of global consumption fell from 68.7% in 2007 to 58.9 % in The EU's dependency on imports also grew, as the rate of coverage of domestic consumption by domestic production went from 106% to 120% for the same period. The United States' share of consumption remained steady between 2007 and 2011 (around 10.5%) but consumption of biodiesel in the US was only 78% of production in 2011, giving the country excess biodiesel production with respect to the rest the world. As for Brazil, its consumption of biodiesel grew sharply from 3.2% to 11.2% of global consumption for the period in question. Throughout the timeframe, Brazil remained selfsufficient with an unchanging rate of coverage of 100%. World consumption of biodiesel between 2007 and 2011 (in millions of litres) Canada EU-27 6, , , , , US Argentina Brazil , , World 10, , , , , Source: OECD 7

8 Share of domestic consumption in global biodiesel consumption between 2007 and 2011 (in %) Canada 1.0% 1.0% 1.1% 1.5% 1.7% EU % 66.7% 68.7% 63.7% 58.9% US 10.6% 8.7% 5.2% 3.6% 10.5% Argentina 0.0% 0.0% 1.3% 2.8% 2.4% Brazil 3.2% 6.9% 7.9% 12.9% 11.2% Rate of coverage of domestic consumption by domestic production of biodiesel between 2007 and 2011 (in %) (relationship of domestic consumption to domestic production) Canada 100% 100% 74% 89% 111% EU % 114% 118% 120% 120% US 71% 50% 52% 70% 78% Argentina 0% 0% 18% 24% 23% Brazil 100% 100% 100% 100% 100% 4. Global prices and production prices for bioethanol both increased between 2002 and 2011, but the gap between European production prices and global selling prices has been steadily narrowing. Based on data from the OECD (available only from 2002 onward for the EU), we can see the increase in production prices for a hectolitre of bioethanol in national currencies from 2002 to 2011 in the five major production zones (Canada, EU, US, Argentina and Brazil). 8

9 Bioethanol production prices between 2002 and 2011 (in national currency by hectolitre) Canada EU US Argentina Brazil Source: OECD In national currency, the annual increase in production prices is particularly low in euros for the EU (1.7% annually). Productivity gains were no doubt achieved during the initial years of bioethanol production in this economic zone. Conversely, the increases were much less favourable in terms of cost competitiveness in the US (+12.1% annually) and above all in Argentina (+18.6% annually). In Brazil (+8.1% annually) and in Canada (+6.4% annually), production prices increased in a less dramatic fashion. Rate of annual change in production prices between 2002 and 2011 in national currency by hectolitre (in %) Moyenne Canada 7.0% 15.8% -0.7% 33.1% 0.3% -37.2% 29.7% 5.3% 4.1% 6.4% EU % -2.8% 2.5% 18.8% -9.3% 6.5% -13.8% 19.2% 3.4% 1.7% US 20.5% 25.2% 6.5% 43.3% 6.3% -37.7% 22.2% 16.2% 6.0% 12.1% Argentina 19.5% -7.5% 49.2% 37.5% -8.7% 14.8% 11.4% 39.0% 11.9% 18.6% Brazil 29.8% -13.7% 24.5% 17.6% -19.5% 6.0% 3.2% 18.0% 7.3% 8.1% 9

10 Nominal exchange rates between 2002 and 2011 (in US$) Canadian dollar Euro US dollar Argentinian peso Brazilian réal Source: World Bank, DGCCRF calculations Expressed in the same currency (US$), production prices have increased in every production zone (Canada, EU, US, Argentina and Brazil). The euro/dollar exchange rate penalises the EU in terms of production prices, because the dollar fell sharply against the euro between 2002 and This is also the case for Canada and Argentina, but the reverse is true for Brazil, as the réal has fallen against the US dollar since When compared, bioethanol production prices were highest in 2011 (in decreasing order) in the EU (US$ per hectolitre, equivalent to US$ per litre), Canada (US$ per hectolitre, or US$ per litre), the US (US$ per hectolitre, or US$ per litre) and Brazil (US$ per hectolitre, or US$ per litre). The lowest production prices can be seen in Argentina, at US$ per hectolitre, or US$ per litre). Bioethanol production in cents per litre by region Prix de production du bioéthanol en cents par litre par région 100,00 90,00 80,00 70,00 cents par litre 60,00 50,00 40,00 30,00 20,00 10,00 0, Canada UE 27 Etats-Unis Argentine Brésil 10

11 US$ cents per litre Légende: Canada EU-27 US Argentina Brazil World bioethanol prices in US$ between 2002 and 2011 (per hectolitre) Canada EU US Argentina Brazil According to the OECD, world bioethanol prices rose from US$ per hectolitre in 2002 to US$ per hectolitre in 2011, a threefold increase (+206%), or an increase of US$ in 10 years. On average, world prices increased 15% annually. If we assume that the entire production of the various zones under review was sold at world prices, the production margin of bioethanol (world price less cost of production) would be very negative for the EU (a gap of US$ cents between the production price and the world price), although this negative balance has lessened over time (US$ 0.40 in 2004, US$ in 2010 and US$ in 2011). Under this scenario, the only bioethanol-producing country that turned a profit throughout the period in question is Argentina (gross production margin of US$ in 2011). Brazil, on the other hand, saw its gross production margin turn negative starting in 2010 (-US$ in 2011). 11

12 World prices and price gaps between domestic production and world bioethanol prices per hectolitre between 2002 and 2011 (in US dollars) World prices Canada price gap EU-27 price gap US price gap Argentina price gap Brazil price gap When one compares the world price per hectolitre in US dollars (or in US dollar cents per litre) of bioethanol and that of imported premium-grade petrol between 2002 and 2011, one can see that the gap favours bioethanol (less expensive than imported premium-grade petrol) between 2004 and 2008, and then again in In 2008, when world energy prices especially that of oil spiralled sharply upwards, the gap between premiumgrade petrol and bioethanol rose to more than US$ 0.18 per litre (US$ 18 per hectolitre). By 2011, it was US$ per litre. Comparison between the prices of imported premium-grade petrol and bioethanol between 2002 and 2011 (in US$ cents per litre) Evolution comparée des prix du supercarburant importé et du bioéthanol en cents par litre de 2002 à ,00 70,00 60,00 50,00 cents par litre 40,00 30,00 20,00 10,00 0, prix mondiaux prix supercarburant importé US$ cents per litre Légende: World prices Price of imported premium-grade petrol 12

13 Gap between the world prices of bioethanol and imported premium-grade petrol in US dollars per hectolitre (or in US dollar cents per litre) World prices Price of imported premiumgrade petrol Gap Sources: OECD for world bioethanol prices, INSEE for world prices of imported premium-grade petrol, DGCCRF calculations 5. Compared with bioethanol production, the EU is much better placed in terms of production prices for biodiesel production In this section, production and market prices are given for the period , as production price data in the OECD database is only available for the EU from 2005 on. The production prices of biodiesel in national currencies increased for every production zone. In the EU, production prices rose from 70.1 per hectolitre to per hectolitre between 2005 and Production prices for biodiesel between 2005 and 2011 (in national currency per hectolitre) Canada EU US Argentina Brazil Source: OECD The average annual increases in production prices were relatively restrained for Brazil (+3.8% per year), average for Canada (+7.0%) and the EU (+7.6%), and relatively high for the US (+10.7%) and especially for Argentina (+15.6%). 13

14 Rate of annual change in production prices in national currencies for one hectolitre of biodiesel between 2005 and 2011 (in %) 2006 Moyenne Canada -1.0% 7.8% 42.8% -20.4% -3.7% 16.7% 7.0% EU % 4.2% 32.4% -22.5% 9.5% 15.4% 7.6% US 9.4% 10.4% 43.9% -25.6% 6.0% 19.9% 10.7% Argentina 11.4% 15.8% 46.0% -12.3% 11.2% 21.4% 15.6% Brazil -5.2% 1.9% 33.8% -18.5% -5.6% 16.3% 3.8% Expressed in the same currency (US$), production prices in 2011 were relatively similar in Canada (US$ ), the EU (US$140.60), the US (US$ ) and Brazil (US$ ), resulting in an average of US$ 145 per hectolitre. They were much lower in Argentina (US$ per hectolitre). The EU is the second cheapest production area after Argentina, which shows the European Union's productive advantage in biodiesel compared with bioethanol production. Production price of one litre of biodiesel by region (in US$ cents) Prix de production du biodiesel en cents par litre par région 180,00 160,00 140,00 120,00 cents par litre 100,00 80,00 60,00 40,00 20,00 0, US$ cents per litre Canada UE 27 Etats-Unis Argentine Brésil Légende: Canada EU-27 US Argentina Brazil 14

15 Production prices for biodiesel per hectolitre between 2005 and 2011 (in US$) Canada EU US Argentina Brazil World prices of biodiesel rose between 2005 and 2011 from $86.7 per hectolitre to $142.6, which represents an overall increase of 64% and an average annual increase of 11%. The gap between the production price and the world price of biodiesel has been favourable for the EU since 2009 (gross production margin of US$ 0.77 per hectolitre, rising to US$ 1.93 in 2011). It was favourable for Argentina for the entire period (US$ 0.24 in 2011), favourable for Canada until 2009 (negative gross production margin of US$ per hectolitre in 2009) and unfavourable for Brazil for the entire period (negative gross production margin of US$ per hectolitre in 2011). Between 2007 and 2011, the gross production margin for biodiesel in the US stood at zero. 15

16 World prices and gaps between domestic production prices and world prices per hectolitre of biodiesel between 2005 and 2011 (in US$) World prices Canada price gap EU-27 price gap US price gap Argentina price gap Brazil price gap The Economic and Price Monitoring Bureau (1B) of the DGCCRF (Directorate General for Competition Policy, Consumer Affairs and Fraud Control) establishes and introduces measures to bolster economic transparency of the manufacturing and marketing processes for goods and services. This means that it is able to base its analyses in this area on objective and common factors. Its work involves price analysis and monitoring formation mechanisms for prices and margins, in conjunction with other relevant monitoring centres. It also produces economic studies for the Directorate and is tasked with its in-house documentation and economic monitoring responsibilities. Lastly, it carries out statistical analyses of the consumer complaints register. Address Ministère de l économie et des finances - DGCCRF Bureau de la veille économique et des prix (1B) Teledoc boulevard Vincent Auriol PARIS CEDEX 13 FRANCE Bureau-1B@dgccrf.finances.gouv.fr 16