Economic nationalism remains the greatest threat to growth in global ethanol consumption
Considered individually, the outlook for the major ethanol producing regions is assuredly positive.
On the sugar side, the prospect of continuing low prices will favour switching to ethanol production. This will have a significant impact in Brazil, where the flexibility to shift between sugar and ethanol output is particularly pronounced. Low prices will be abetted by the ambitious RenovaBio programme, expected to lift demand by an additional 17 million cubic metres over the course of the 2020’s.
As to India, a considerable surplus molasses stock, a record low valuation of the rupee and a huge export bill for imports of foreign crude will create powerful incentives for fuel ethanol production.
On the starch side, an expected E10 blend mandate in China will create a greatly expanded market for fuel ethanol in the region, whilst in the US, the approval year-round E15 will set the world’s largest ethanol market on track for continued growth.
In short, favourable feedstock economics, robust crude prices and ambitious government programmes are all working in ethanol’s favour. “The prospects for the industry are quite bright,” Christoph Berg, Managing Director of commodity analysts F.O. Licht, told attendees at the World Ethanol & Biofuels conference last week.
He also highlighted the importance of surplus US ethanol production over the last several years, which has facilitated increased consumption in other markets. These factors have led F.O. Licht to forecast a 2% rate of annual increase in the size of the global fuel ethanol market over the next decade.
Trade disruption
Nevertheless, despite the positive outlook on the national level, Berg also used his address to provide a warning. Protectionist trade policies may prevent ethanol consumption levels from rising as quickly as they otherwise might.
“Trade disruption has now become the biggest threat to the ethanol industry,” he told the conference. “The world’s two biggest economies are on a collision course and, if no counteraction is undertaken, this is bound to have a negative effect on global growth perspectives.”
For both the US and China, tariffs are a problem. Ethanol is one of the worst hit commodities in the trade war, with Chinese tariffs on US denatured ethanol having climbed to 70% in July. Tariffs on undenatured ethanol stand at 50%. This came even though the US supplied more than 85% of China’s ethanol imports in the first quarter of 2018.
In the US, the result has been a severe glut in the domestic market. The situation was not improved by import quotas placed on ethanol by the US’s other main export market, Brazil, intended to protect the country’s domestic production. As the volume of ethanol produced in the US continues to climb, domestic ethanol prices have sunk to their lowest level in at least two years.
In China, tariffs on the world’s largest supplier have thrown the country’s E10 plans into doubt. Reduced competition from imported ethanol will be good news for domestic producers. But ramping up production on the scale needed to replace the 4.7 million barrels of fuel ethanol imported from the US at the peak levels seen in 2016 will be extremely challenging.
Alternative means
To a certain extent, the effects of the trade war can be mitigated through back door trade practices. Earlier this week, import statistics released by China’s General Administration of Customs revealed that some US ethanol is likely still making its way into the country through third-party buyers. The statistics showed that China has been importing tens of thousands of cubic metres of ethanol from South East Asian countries with little or no domestic production.
But these types of practices are inefficient and will not be enough to replace the lost trade caused by raised tariffs.
The US has also been trying to stimulate higher demand in other markets – chiefly Mexico and India – to balance the loss in trade. India has at present an effective blend rate of only 2.2%, well below its official mandate of 10%. Higher ethanol imports from the US could bring it closer to this level, but only if the restrictions currently placed on fuel ethanol imports are removed.
Mexico is also a promising option. Mexico already imports US petroleum – having this petroleum blended at a rate of 10% would facilitate the free flow of fuel imports, given the prevalence of E10 in the US. It would also help to alleviate the US ethanol glut.
Nonetheless, new markets are unlikely to provide a long-term alternative for the US. The best outcome for ethanol demand globally would be for trade restrictions to be removed.
“We seem to live in a twilight zone. The restrictive trade practices at the global level are in stark contrast to the numerous new ethanol growth initiatives around the world,” Berg told the World Ethanol & Biofuels conference. “Should the macro and the micro-economics for the product be aligned, perfect conditions for rapid growth could follow.”
