Biodiesel Market Report Contents Issue N o. 71 August 21, 2014 1. Market Status The endless transition era of the biodiesel market 2. Spot Market ARA Prompt disruption supported prices Shipping Latest fixtures reported 3. Charts 4. Regulatory Belgium UCOME eligible to DC Sweden Biofuels taxation in review France Advanced biofuels part of the plan 5. Statistics Sweden HVO use jumps further Indonesia Resurgence of PME exports to EU and US 6. Industry Finland Neste Oil hit 104% operating rate Germany Petrotec limits losses with trading p. 1 p. 2 p. 3 p. 5 p. 7 p. 8
1. Market Status As of August 21, 2014 eur/usd 1,328 The endless transition era of the biodiesel market Since the inception of the EU market back in 2006, players have been struggling to survive amid an ocean of regulatory uncertainties. Despite some call biodiesel a mature commodity, the promised land of stability and clarity has yet to be in sight. The RED transposition is barely finished that two new revolutions will force all Member States to review their biofuels policy from 2015. The ILUC directive, to be voted by the end of year, and the switch from energetic to GHG based mandates, will deeply change the biofuels landscape in the coming years. In this perspective, the rigorous follow-up of regulatory developments is a must have for any biodiesel player wishing to continue sailing to success. The team at Square Commodities will stay committed over the years to help you in this challenging but fascinating duty. Biodiesel Premiums USD/mt ( ) EUR/cum Non-RED Fame 0 RED vs ICE Gasoil 135 + 20 90-10 RME RED vs ICE Gasoil 145 + 15 96-10 UCOME EU RED vs ICE Gasoil 240-15 160-10 Replacement Costs Biodiesel red fob ara USD/mt ( ) EUR/cum USD/mt (vs spot) Fame 0 990 + 10 658 925-65 RME 1 000 + 5 665 993-7 SME 990 + 10 658 1 008 + 18 PME 975 + 15 648 858-117 UCOME EU 1 095-25 728 1 003-92 UCOME DE 1 105-20 735 1 013-92 TME cat. 1 1 070-15 711 798-272 Biodiesel red fob origin USD/mt ( ) EUR/mt 2014 RINs (cts/rin) SME Argentina 800-10 602 D4 53 PME Indonesia 825-5 621 D5 52 D6 49 Feedstocks ddp nwe USD/mt ( ) EUR/mt SPREADS USD/mt Rape oil 855-5 644 ROGO - 2 Soy oil 860-15 648 BOGO - 133 Palm oil 730-30 550 POGO - 210 UCO EU 825-15 621 TALGO - 207 UCO DE 835-15 629 UCOGO - 22 Tallow cat. 1 650-10 489 FFA 60% 640-10 482 Methanol EX-W NWE 430-5 324 Glycerine USD/mt ( ) EUR/mt Crude EX-W NWE 190-10 143 Refined EX-W NWE 570-10 429 Crude FOB ARGENTINA 130 0 98 Refined FOB ARGENTINA 435-45 328 Other fuels USD/mt ( ) EUR/mt Diesel 10 ppm FOB NWE 884 + 11 666 Gasoline FOB NWE 950-25 715 Ethanol anhydrous FOB ARA 875 + 55 659 Futures USD/mt ( ) EUR/mt ICE Gasoil 857-9 645 CBOT Soy oil 724-16 545 BMD CPO 647-24 487 Euronext Rapeseed 425 + 2 Biodiesel Market Report by Square Commodities 1 / 9
2. Spot Market ARA Prompt disruption supported prices Fame 0 and RME prices finally bottom out, after several weeks of discontinued fall. The price outlook remains bearish, characterised by a deep backwardation of the market. After several weeks of price erosion, sellers of physical biodiesel in ARA finally found an opportunity to stop the bleeding. Since last week, availability for August deliveries has proved to be limited, as the majority of big producers were unable to supply any parcel. Traders sitting on volumes temporized long enough to help premiums rebound by USD 20/mt on week, despite a flat ROGO. The rebound was made possible thanks to the regular interest of oil majors, which created a hole in supply. That configuration deepened the backwardation situation and muted all discussions for forward positions beyond Q3. The spread between prompt and Q4 positions widened to USD 70/mt for Fame 0 and USD 50/mt for RME. Traders try to take advantage of the situation by placing bids on Q4 positions but no seller is ready to commit with such uncertainty. The volatility within the vegetable oil complex, together with the complexity of the geopolitical implications on crude oil prices, pushes them to wait and see. With the end of the summer, some players also try to bet on the Fame 0 vs RME spread, which could widen in the coming weeks. The activity on the UCOME EU market scaled back this week from a peak observed in the two first weeks of August. Good demand from UK, where two big tenders from Exxon and Philipps 66 were reported, sharply stimulated the market. Prices were reported this week at around EUR 820/mt ddp, with all serious discussions focused on the prompt. Demand from German buyers is mentioned as very poor, with literally no discussion reported on DE material. The UCO market has been supported since early August by renewed interest from UCOME producers who had to cover some shorts. As Greenergy re-started production at its Immingham plant, demand was further stimulated. This helped prices to rebound above depressed levels discussed around EUR 590/mt ddp at the end of July. UCO EU ddp was priced this week at EUR 620/mt. Despite some interest for double-counted TME cat. 1 in Italy was mentioned, the spot market continued to be extremely slow. Prices stalled around EUR 805/mt ddp NWE. Shipping Latest fixtures reported PME 18,500 mt Straits/Savannah (05-15/09) 10,000 mt Batam/China (25-30/08) 6,000 mt Kuantan/S.China (25-30/08) UCOME 4,000 mt Visak/Thames (15-31/08) HVO 9,000 mt P.Marghera/Lavera (20-25/08) FAME 3,000 mt Rotterdam/Stanlow (10-20/08) 3,500 mt Dunkirk/Fos (20-25/08) 3,000 mt Castellon/Sicilly (20-25/08) 3,000 mt Sete/Fos (15-20/08) 3,000 mt Dordrecht/Fawley (11-12/08) 7,000 mt Barcelona/Fos (08/08) SME 15,000 mt Argentina/S.Spain (15-20/08) 30,000 mt Argentina/Spain (13/08) 30,000 mt Rosario/Rotterdam (15-16/08) 7,500 mt San Lorenzo/Peru (17/08) 20,000 mt Rosario/Ivory Coast (29/08) Biodiesel Market Report by Square Commodities 2 / 9
3. Charts The dramatic fall of BOGO boosted further attractivity of discretionnary blending The confirmation of a record harvest in the US together with shrinking palm oil prices pressurized CBOT soy oil to a new 5 years low. The attractiveness of SME for discretionary blending is likely to continue for several weeks/ months. 70 50 30 10-10 -30-50 16.01.14 31.01.14-70 -90-110 -107-130 -150 BOGO (USD/MT) 15.02.14 02.03.14 75 17.03.14 01.04.14 16.04.14 01.05.14 16.05.14 31.05.14 15.06.14 30.06.14 15.07.14 30.07.14 14.08.14-143 Biodiesel premiums finally rebounded in August Because rape oil prices resisted better than soy and palm oil, the stabilisation of the ROGO spread around USD 5/mt helped RME and Fame 0 premium to rebound. The move was possible thanks to renewed interest from few oil majors. 260 240 220 200 180 160 140 120 100 80 250 175 165 110 105 145 135 03.04.14 03.05.14 03.06.14 03.07.14 03.08.14 Fame 0 RED vs ICE Gasoil (USD/MT) RME RED vs ICE Gasoil (USD/MT) Biodiesel Market Report by Square Commodities 3 / 9
3. Charts (continued) Favourable economics boosted Fame/HVO use in Sweden Historical low spreads between feedstocks and gasoil pushed Swedish blenders to rely massively on Fame and HVO during 1H 2014. The trend is likely to continue in the coming months and may accelerate if the new proposal of biofuels taxation passes into law. 350 300 250 200 150 100 50 0 1H 2012 156 2H 2012 226 1H 2013 246 2H 2013 269 1H 2014 328 Fame/HVO blended Neste Oil sold 1.049 million mt of NEXBTL during 1H 2014 The leading HVO supplier in the world suffered from the US regulatory outlook but increased significantly its sales to the Europe-Asia-Pacific region. Sales to this area, which are mainly focused on the EU, overcame during Q2 2014 the historical high US sales achieved in Q4 2013. 600 550 500 450 400 350 300 250 200 150 100 50 0 191 271 365 132 356 370 272 234 Q3 2013 Q4 2013 Q1 2014 Q2 2014 Sales to North America Sales to Europe-Asia-Pacific Biodiesel Market Report by Square Commodities 4 / 9
4. Regulatory Belgium UCOME eligible to DC The Royal Decree fixing rules for biofuels eligibility under the double-counting scheme has been published earlier this month. UCOME is officially eligible to the double-counting scheme, together with animal fats cat. 1 and 2. The government however clearly signalled its will to control strictly the supply chain of biofuels eligible under category C. All companies planning to blend UCOME or TME into diesel before selling the product on the Belgian market will have to fulfil a demand at the General Direction of Energy. FAPETRO, the entity in charge of fuels quality, will statute on the eligibility of the biofuel within 2 months. Together with the blender, FAPETRO will set a surveillance plan based on sample taking, which should lead to strict quality controls. Based on the decree content, we estimate that the blender will have to make a demand for each one of its UCOME/TME suppliers. The authorisation will be limited to a specified quantity, and valid for three years. Six months before the end of the authorisation, a request of renewal will have to be asked at the General Direction of Energy. The Decree specifies that the blending of biofuels under category B and C must occur in Belgium. Some exceptions can be granted on demand, but the general principle is mandatory. The company asking for the authorisation can be a producer only if the plant is based in Belgium. All UCOME/TME producers based outside Belgium must find a Belgian company to fulfil the demand of authorisation. It means producers intending to hit the market will have to collaborate with their potential Belgian costumers before signing the contract. This may constitute an important hurdle for the business. The double-counting scheme is now in force, with a limitation set at 1% e.c of diesel sales. Belgian oil companies should be currently active at discovering prices and taking contacts. HVO is also recognised as a potentially eligible fuel for the Belgian market. Biofuels eligible for double-counting in Belgium UCOME TME cat. 1 & 2 Cellulosic ethanol * Lignocellulosic methanol * * in their pure form or within MTBE/ETBE Sweden Biofuels taxation in review The government released a proposal to fully exempt HVO from the energy tax while significantly decrease tax break for Fame. Back in June, the EU Commission did not approve the Swedish project for a 9.5% blending mandate because it considered it as a State aid that would have been redundant with the CO 2 tax exemption. This decision has forced the Swedish government to review its strategy for biofuels support. Meanwhile, a governmental report from the Swedish Energy Agency showed that Fame has been overcompensated in 2013: enjoying a 84% tax break of the energy tax, Fame blended into B7 was last year far less taxed than diesel based on energy content. The fact that RME prices continued to drop dramtically in 2014 compared with diesel prices adds worries to see the overcompensation exploding further this year. Overcompensation is forbidden by the State aid decision made by the EU Commission two years ago, and Biodiesel Market Report by Square Commodities 5 / 9
4. Regulatory (continued) contrary to the EU law. The Swedish government wants therefore to address it quickly in order to avoid penalties imposed to Swedish companies. In parallel, it wants to find an alternative to boost CO 2 cuts into the transport sector. Given the additional cost of production of HVO compared to conventional diesel is currently so high, the Swedish government considers that the risk for overcompensation is inexistent in the case of HVO. As a consequence, its proposal includes the following features: Decrease of the energy tax exemption for Fame: low blends from 84% to 8% and B100 from 100% to 8%. Such levels guarantee that overcompensation would not occur again in the future. The measure would apply from January 1, 2015. Withdraw the limit of 15% currently imposed to full exemption of HVO. If accepted by the EU Commission, this measure would imply a full exemption of HVO in blends up to 100%. The measure would apply retroactively from May 1, 2014 (date initially planned for the 9.5% mandate). Reinforce the monitoring system from the Energy Agency to avoid overcompensation like 2013. Instead of publishing a report once a year, the Energy Agency would publish its investigations more frequently, to monitor closely the evolution of prices. France Advanced biofuels part of the plan The government agreed on a project of law for the energetic transition that includes non-food biofuels to help reaching the 10% RED target. The government found it necessary make the text recalls that the objective for renewable energy into transport is fixed at 10%. But for the first time in France, advanced biofuels made from non-food feedstocks which do not imply a risk for Indirect Land Use Change (ILUC) are clearly supported. Together with electric cars, they would constitute the basis of the energy transition for the transport sector. Specifically, the text plans that within the multi-year programming of energy use, a target for incorporation of advanced fuels would be fixed. The list of advanced fuels and the measures taken to reach the target would be set through legislative ways. The law will be debated in October at the Parliament. If advanced biofuels are put forward within the energy transition, the share of UCOME and TME within the biodiesel mix would evolve faster than expected from 2015. A likely scenario would be that the missing 3% e.c to the 2020 target would be fulfilled mainly with advanced fuels (including UCOME and TME) and electric cars, in line with the current Council s proposal for ILUC. The proposal has been in consultation nationally until August 7. The Energy Agency already backed it. No schedule is available yet regarding the legislative process and the eventual decision from the EU Commission. If passed, the measures would considerably hit Fame competitiveness and boost HVO attractiveness. Given the blend ratio of Fame/HVO came already close to the 15% limit (see Statistics section), operators would surely try to increase further HVO use. That would considerably pressure the HVO market and be a bullish factor for feedstocks. Biodiesel Market Report by Square Commodities 6 / 9
5. Statistics Sweden HVO use jumps further For the eleventh consecutive semester, the volume of Fame/HVO blended into diesel increased during 1H 2014. Latest data released last week by SCB show that up to 328 Kcum of Fame/HVO has been blended during Jan-Jun 2014. Together with 38 Kcum used as B100, a total of 366 Kcum of diesel bio substitutes has been used during the period. The average blending ratio reached 14.2% vol., close to the 15% limit granted for the HVO full exemption of the EUR 561/cum energy tax. The success of Fame and HVO in Sweden can be explained by the record low level of premiums vs gasoil recorded since the beginning of the year. Between the end of Dec 2013 and the end of June 2014, the RME RED premium over gasoil crashed by 50% in ARA. Although HVO prices are not transparent, the premium over gasoil negotiated with Swedish blenders must have dropped below EUR 500/cum. This figure is an estimation of the tax advantage vs diesel (EUR 561/cum) minus transport, blending and storage costs associated to HVO blending. Indonesia Resurgence of PME exports to EU and US Data from inspectorate reveal a jump in exports to Spain, Netherlands and the US. Fame export activity from South East Asia has been in July the busiest in the year with up to 124 KT exported from Indonesia (110 KT) and Malaysia (14 KT). The revival of activity (+ 47% vs June) was prompted by a renewed interest by EU and US costumers, while B100 trade activity to China stalled, with only one parcel of 10 KT exported. Apart two big shipments of DPME to the US (35 KT), all activity was focused on PME. Three shipments from Indonesia to Spain (32 KT) appear intriguing. Given the spread between PME and Fame keeps on being largely below the anti-dumping level, it s likely that they are part of a blending scheme with final destination Africa. Shipments from Malaysia headed to Rotterdam (7.5 KT) and Spain (6 KT). Biodiesel Market Report by Square Commodities 7 / 9
6. Industry Finland Neste Oil hit 104% operating rate 1H 2014 results published earlier this month highlighted stable revenues (EUR 33 million), lower margins being compensated by a new jump in sales. During Jan-Jul, Neste Oil sold 1 049 KT of NEXBTL globally, of which 723 KT into the Europe-Asia-Pacific region. In a difficult environment in terms of reference margins, the company managed to operate its plants, totalling a yearly capacity of 2.125 million mt, above their theoretical nameplate capacities. Neste performed well regarding its additional margin, which takes into account quality premiums, hedging performance and logistics costs among other result drivers. It increased to USD 148/mt during the period, up from USD 77/mt last year. The share of waste and residue (mainly animal fats and palm fatty acid distillate) into the feedstock mix increased further to 66% during the period, also contributing to boost performance. Neste Oil sold in the Europe-Asia-Pacific region about 190 KT more than during the same period last year. This figure is equivalent to the SME/PME imports figure during 1H 2013: 151 KT. In parallel, NEXBTL sales must have increased in Sweden, where HVO blending has beaten records. We therefore estimate that Neste s sales growth has benefited from both factors. The increase of sales in North America, which grew from 262 to 325 KT despite the slash of the blending mandate and uncertainties about the 2014 RFS mandate, is also a clear signal that the company has the ability to navigate difficult business environments. Germany Petrotec limits losses with trading In a weak margin environment, the leading EU UCOME producer increased sales thanks to a dynamic trading activity. Despite the EUR 0.9 million loss recorded in 1H 2014, Petrotec managed to consolidate its position as the leading supplier of UCOME in the EU. Production stayed stable on year at 69 KT, with an average operating rate of 75%, while sales increased 6.7% to 93 KT thanks to a stronger trading activity. The successful optimisation of logistics and feedstock sourcing during a harsh Q2 leaded to unexpected profitability during the quarter (EUR 0.75 million). That was however not enough to compensate with the Q1 loss. Considering the bearish trends of prices and delays between UCOME and UCO price corrections, Petrotec achieved a better than expected 1H 2014. Biodiesel Market Report by Square Commodities 8 / 9
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