Policy changes in the U.S. and Europe are quickly regearing biodiesel demand toward a focus on the carbon emissions cuts which feedstocks can hit, triggering an upsurge in international interest in feedstocks able to deliver low carbon emissions. Demand growth for low carbon, particularly waste-based feedstocks in North America, is being driven independent of federal policymakers. This has allowed the sector to sidestep some of the gyrations in RFS2 expectations seen under the Trump administration.

California’s Low Carbon Fuel Standard carbon cap-and-trade scheme for the road transport fuels sector has pioneered the carbon counting approach now mushrooming across other western states and parts of Canada.

California’s greenhouse gas (GHG) saving target will hit 10 percent by 2020. The introduction of a Clean Fuels Program in Oregon targeting similarly aggressive carbon cuts will bolster California’s demand. Oregon plans a 10 percent cut in state transport GHG emissions by 2025 relative to a 2015 baseline by adopting a declining average carbon intensity (CI) for transport fuel suppliers to hit each year.

The success of California’s program meanwhile has inspired the Canadian government to consider launching its own transport fuel carbon cap-and-trade program, which will supplement provincial carbon-cutting efforts, including Ontario’s high-GHG threshold for blended biofuels.

California’s aggressive carbon-saving mandate and the subsequent rise in state carbon ticket prices have already triggered a boom in low carbon renewable and biodiesel demand. Corn oil, which boasts a relatively low average CI of 36.49g CO2e/MJ under the California LCFS methodology, has seen its consumption as a U.S. biodiesel feedstock soar 25 percent year-over-year (YoY) through the first seven months of 2017 to 842 million pounds, supporting a steady rise in corn oil prices. Prima Markets’ data shows corn oil prices had gained 4 percent since the beginning of 2017 by the middle of September, despite the 6 percent slide in soybean oil prices over the same period.

U.S. consumption of other low carbon wastes is also growing. U.S. white grease consumption as a U.S. biodiesel input climbed 8.5 percent YoY through the first half of this year, despite a 1 percent drop in output. U.S. consumption of yellow grease as a biodiesel input jumped 6 percent in the first half of this year.

Overseas Markets Hungry for US Waste
U.S. buyers of waste feedstock are facing mounting competition from international buyers interested in using the low carbon footprints of these grades to feed growth in overseas carbon-counting mandates.

The EU will restrict the use of crop-based biofuels in the European road transport fuel sector, while increasing the market share of waste-based advanced biofuels to 6.8 percent by 2030. Europe’s demand for imported waste is already rising. Chinese exports of used cooking oil (UCO) climbed almost 200 percent to more than 176,000 tons in the first eight months of this year, with two-thirds shipped to the EU.

A hefty flow of UCO, corn oil and other feedstocks, such as fish and tall oils, has been scheduled to ship to Europe from the U.S. this year. European buyers continue to seek fresh supply from Asia, North Africa and South America.

U.S. exports of corn oil to Europe have breached 100,000 tons so far this year, according to shipping data collated by Prima Markets. Strong overseas demand for U.S. yellow grease into waste-dominated biofuels markets such as the U.K. has been constrained by falling U.S. domestic supply, driving U.S. prices higher.

While domestic tallow consumption as a biodiesel feedstock in the U.S. has been weaker YoY, California’s insatiable appetite for imported renewable diesel is ironically pulling the strings behind much of the recent export boom. Exports of inedible tallow skyrocketed 38 percent YoY through the first seven months of 2017. Most of this was shipped to feed renewable diesel production in Singapore, before being sent back to the U.S. West Coast.

Big Oil Turns to Small Carbon
Longer term, shifts in corporate strategy look set to continue diversification into low carbon feedstocks, regardless of government policy.

Even with the politics of the U.S. RFS2 mandate looking uninspiring, oil majors are increasing their commitment to developing advanced biofuels, aware these investment signals could be critical to long-term prosperity in a low carbon fuel economy. In the distillates world, ExxonMobil has given top billing to its research work into algae as an advanced biofuel feedstock, while French oil firm Total has been busy advertising its global commitment to aviation biofuel. Global renewable diesel leader Neste meanwhile is busy considering where to build its fifth large-scale renewable diesel plant after exhausting its capacity to supply global demand growth from its existing international production footprint.

Longer term, low carbon feedstock suppliers are likely to find supplementary demand from the petrochemicals sector as these firms increase their focus on the production of low carbon, biodegradable products such as plastics.

Author: Niamh Boyle
Senior Research Analyst, Prima Markets
+44-207-064-6470
Niamh.boyle@prima-markets.com