Roman Zenon Dawidowicz | Biodiesel Supply and Price Trend in Global

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Biodiesel Supply and Price Trend in Global and Asia market Roman Zenon Dawidowicz, Asia Biodiesel, Ethanol & Feedstock Broker July 2015

Global 2015: The big picture  As of mid-2015,164 countries around the world have adopted at least one type of renewable energy target, up almost four-fold from 43 countries in 2005.

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Asia 2015: The big picture

Country

Mandate Translates to

Consumption.2014

Production.Capacity/yr

Korea

B2

400k mt

800k mt/yr

Japan

0%

3.6k mt

6k mt/yr

Note (eg: currrent state and what is expected to happen) Will increase 2.5% this Aug, 2.5% will last 3yrs. And then will increase 3.0% Small market, only some local governments have their own policy for voluntarily using Bio. Plan is to increase to B10 in Sept.Malaysia's nameplate biodiesel capacity of its 21 members is 2.7m mt/year, but current utilization is only 22% in 2014, according to a Malaysian Biodiesel Association member.

Malaysia

B7

600k mt/yr

0.59m mt

2.7m mt/yr CIMB Research expect a 3.4mill kl consumption for 2015 after proposed biodiesel subsidy.

Indonesia

B15

4.09mill mt/yr1.57mill mt/yr

3.48mill mt/yr

China

0%

0.97mill mt/yr

3.48mill mt/yr

Looks to move to 10% biofuels mandate by 2020, and currently has a 15% overall target past 2020

 As gloomy as it may appear now with Gasoil below $600/mt, the biofuels story is far from dead as mandates are still increasing globally in Brazil, Argentina, Korea and perhaps Indonesia.

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Asia 2015: The big picture  Indonesian Palm Oil Levy worsening PME trade to Europe and USA (Expected levy 1 July) 

USA likely to move to Arg SME (EPA Mandates)

 PFAD double count PME likely to be the bulk of this years EU imports.  Falling RINS Prices in USA, along with the Indo export tax create a lower expectation for USA imports.

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Asia 2015: The big picture Gasoil vs CPO ($/mt) & Spread ( Bloomberg)

1000

Palm Oil ($/t) Gasoil $/mt

900

250 200

POGO ($/mt 800

300

150 100 50

700 0 600

-50 -100

500

-150 -200

400

-250

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CPO 2015: The big picture  Malaysian CPO production continues to trend higher while exports surge.  The higher palm oil stocks are likely to dent optimism about CPO price prospects.  Still awaiting the report from the MAA on B10 usage

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PME Biodiesel 2015: Expectations  Neutral assumptions on CPO price   

High vegetable oil production A weaker global economy and crude oil price Slow progress of biodiesel policies in Indonesia and Malaysia.

 Expect stocks to rise further, driven by the seasonally-higher CPO output. (approx. 2mmt End June 15)  Malay B10 programme to consume about one million tonnes of CPO a year, from 700,000 tonnes under the B7 programme.  Other Potential bullish factors   

Concerns that the ongoing El Nino could disrupt palm oil supplies Indonesia’s plan to raise their biodiesel usage by implementing a CPO levy on planters.

India CPO demand as drought affects soybean crop

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Other Asia Biodiesel 2015: Expectations  Korean Exports  

Korea continues to export UCOME to USA and EU Problem with Korean exports to EU market is securing ISCC feedstock at an attractive price.

 China discretionary import market dead    

Indonesian PME currently priced @ $760 CNF South China South China local PME price is around RMB 4700/mt, so converting to CNF around $650/mt South China local Diesel price is around RMB 5400/mt, so converting to CNF around $740/mt Cycle Oil? apparently 3x30kmt of Cycle Oil arrived this month

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2015: Europe - The big picture  Industry’s mortal threat quashed: EU Parliament backs down on swingeing ILUC factors which would have slowly strangled biodiesel  RED renegotiation caps crop-based biofuels at 7% market share: FQD carbon targets require demand growth through 2020  German GHG mandate adds to market complexity. BUT producers can now monetise carbon savings  Fortress EU remains: imports choked to a trickle

by CVDs and anti-dumping on US, Indonesia, Argentina. BUT vegoil inputs largely remain derivatives of CBOT direction 9

2015: Europe - The big picture RME vs PME vs SME FOB ARA 1200 1150

RME Fob ARA $/mt

1100

PME Fob ARA $/mt

1050

SME Fob ARA $/mt

1000 950 900 850 800 750 700



EU Intercrop tightness has seen rapeseed oil stretch its price lead over palm and soy over the past month, a trend which poor European 2015 crop fundamentals suggest will continue.

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2015: Europe - The big picture  EU rapeseed forecasts suffer downgrades widespread drought.

amid

 Tight spreads between palm oil, rape oil and soy bean oil have kept EU biodiesel and other vegoil buyers focused on domestic compressing price spreads between RME and FAME zero to near flat.  RSO spreads to PO of over $200/t through the end of this year may leave palm looking attractive as a feedstock for EU biodiesel producers.

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Who consumes what and where?

Consumption profile is hugely diverse.

German 2.3mn t/yr market consumes 90% crop based biofuels and 10% waste based around geographically diverse network of inland refineries

120 100

(DFT, UFOP)

UK Germany

80 60 40

20 0 Waste 2.5

VVO

HVO

EU biodiesel demand (EurObservER)

2

Million tonnes

UK double counting has encouraged the polar opposite structure, Spain likely to follow

Germany vs UK market structure

1.5 1 0.5 0

Germany France Italy UK Spain Poland sweden Austria Belgium Netherlands Denmark Portugal Czech Rep Finland Romania Greece Slovakia Hungary Ireland Bulgaria Lithuania Slovenia Luxembourg Croatia Latvia Cyprus Malta Estonia

EU Market around 11mn tonnes in 2015, but estimates complicated by German GHG experiment

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Double count cuts vegoil demand Bulk imports shriveled since 2013. BUT growth of double count incentives has cut VVO demand by twice the volume consumed. Array of feedstocks widening to include more palm waste alongside Tallow, UCO

180000 160000

EU Imports ‘000t (Eurostat)

140000 120000 100000 80000 60000 40000 20000

Annual double count consumption at circa 1.5-2mn t implies VVO demand reduction of 3-4mn t Slack demand has left EU producers suffering from overcapacity, poor margins. Integrated producers are idling plants

0

240

RME-RSO margin $/t (Bloomberg)

200

160 120 80 40 0

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Germany blazes the GHG trail

Higher GHG savings = lower blend volume. German diesel demand masks drop in overall blend ratio FQD requires 6% transport fuel carbon saving reduction by 2020: implies hefty demand growth from environmental best in class biofuels, particularly economic recovery lifts diesel demand

36,50,000

German biodiesel vs diesel (BAFA) Blend ratio %

34,50,000

tonnes

Germany started counting carbon, not tonnes, from 1 Jan 2015, requiring 3.5% saving. The change has dragged standard headline GHG savings towards 60% compared to RED 35% standard

8.5 8

32,50,000

7.5

30,50,000

7

28,50,000

6.5

26,50,000

6

24,50,000

5.5

22,50,000

5

240

EU diesel demand mn toe (EC)

220 200 180 160 140 120 100

1990

2000

2010

2020

2030

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Biodiesel vs diesel 2014’s booming harvests briefly sent biodiesel into discount vs gasoil, triggering surge in “discretionary” blending worldwide

Despite overhang in world oilseed output, Saudi refusal to cut production in wake of shale boom sent gasoil into a faster tailspin shutting discretionary economic window Oilseed oversupply remains: overseas mandates increasingly crucial to consuming marginal vegoil tonne and supporting vegoil price

300 250

Month 1 Bean oil vs gasoil $/t (Bloomberg)

200 150 100 50 0 -50 -100 -150 -200

120 100

Global oilseed balances mn t (USDA) Oilseeds Vegoils

80 60 40 20 0 2013/2014

2015/2015

2015/2016

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Reading the markets CBOT remains the world’s directional 1200 1100 bean oil benchmark. EU still lacks convincing feedstock hedge as liquidity 1000 remains thin in Euronext RSO futures. 900 BOGO spreads still widely used.

800

Bean oil vs biodiesel $/t (Bloomberg) Soybean oil RSO RME

700

US advanced biofuel mandate implies up600 to 27% rise in US biodiesel consumption 2014-2016. Closely watching RINs provided accurate bellwether of post770 RINs reflect US bio balance (Bloomberg) 760 EPA vegetable oil spike 750

Indonesia working on 15% biodiesel mandate to soak up palm oil domestically

0.92 0.9

EPA mandate published 29 May

740

0.88

730 0.86 720 710

0.84

700 690 680

$/t

Bean oil $/t D4 RIN¢/gal

¢/gal

0.82 0.8

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US watch: 2015 RVO EPA proposes ambitious increases over 2014 volumes Change on 2014

% Standards

RINS

106 mill gal

+73 mill gal

0.059%

106 million

Biomass Based Diesel 1.70 bill gal

+0.07 bill gal

1.41%

2.55 billion

+0.22 bill gal

1.61%

2.9 billion

-

244 million

Cellulosic Biofuel

Advanced Biofuel Advanced Gap

2.90 bill gal

1.094 bill gal +0.077 bill gal

Total Renewable Fuel

16.3bill gal

+0.37 bill gal

9.04%

16.3 billion

Ethanol

13.4 bill gal

+0.15 bill gal

7.43%

13.4 billion

All volumes are ethanol-equivalent, except for biomass based diesel which is actual

The percentage standards correspond to the four separate volume requirements. The standards represent the ratio of renewable fuel volume to non-renewable gasoline and diesel volume.

US watch: 2016 RVO 2016 sees further increases, particularly for cellulosic biofuels which took a write down of 1.42 billion gallons in 2014 Change on 2015

% Standards

RINS

206 mill gal

+100 mill gal

0.114%

206 million

Biomass Based Diesel 1.80 bill gal

+0.10 bill gal

1.49%

2.7 billion

Cellulosic Biofuel

Advanced Biofuel

3.40 bill gal

+0.50 bill gal

1.88%

3.4 billion

Advanced Gap

1.394 bill gal

+0.30 bill gal

-

494 million

Total Renewable Fuel 17.4 bill gal

+0.90 bill gal

9.63%

17.4 billion

+0.60 bill gal

7.75%

14 billion

Ethanol

14.0 bill gal

All volumes are ethanol-equivalent, except for biomass based diesel which is actual

The future  With EU Parliament decision to ditch harsh ILUC on biodiesel, stage is set for EU industry to monetise environmental best practice in pursuit of 6% GHG saving subject to 7% first gen crop cap  EU market can grow sustainably: needs to adopt best practice on feedstock, chain of custody and technology to address post-mandatory world from 2020  Despite the lack of arbitrage, price direction will be determined globally. Risk management requires an informed, accurate world view on policy, S&Ds and price

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Contact Information Roman Dawidowicz mobile +65 9628 8735