INSIGHT: US biodiesel RIN credit trading outpaces the fuel

23 February 2011 17:45  [Source: ICIS news]

By Judith Taylor

Trading in the US of renewable identification numbers (RINs) is outpacing buy/sell interest in biodiesel in the first quarter largely because obligated parties are concerned about there being sufficient biodiesel production to meet the blending volume mandate of 800m gallons this year.  

Biodiesel 2011 (B11) RINs, the credits blenders and others need to meet mandated biofuels blending obligations, were trading at $1.25-1.27/RIN (€0.91-0.93/RIN) in active finished business during the second half of February.

January B11s traded in the high 70s cents/RIN, jumping into the 90s cents/RIN in early February as obligated parties that must purchase either the RINs or the biodiesel scrambled to buy the hedge tool.

The scramble to buy sufficient RINs to cover mandated volumes was prompted by the fact that the restart of US biodiesel production continues to be slow.

Reasons for the slow restart of US biodiesel production output lay mostly in the high cost of feedstocks, coupled with challenges in securing credit. 

Lending institutions remain cautious in general and careful in particular with the uncertainties of funding biofuel investments on the heels of the fourth-quarter 2008 economic crash that put most of the 176 operating US biodiesel plants out of operation.

Meanwhile, the RIN market continues to soar to new highs, with differing points of view about what the push to these price levels means.

One viewpoint on the high value of B11 RINs seen in today’s US industry is that the biodiesel industry continues to offer a poor profitability model.

Some industry players thought that the return of the $1/gal federal tax credit for biodiesel and the rise in energy costs would assist in easing the poor economics of producing and blending biodiesel.

Feedstock costs have skyrocketed to such an extent that a number of biodiesel restart hopefuls have said that, unless a plant is backwardly integrated to soybean crush, it will have to go to multi-feedstock status in order to be able to purchase feedstock.

Multi-feedstock options allow biodiesel production from grease and fat feedstocks as an alternative to vegetable oils.

But fats and grease prices have risen alongside the vegetable oils, with the industry standard bleachable fancy tallow (BFT) prices rising from about 27 cents/lb at this time last year to 47.50 cents/lb in recent closes in the Chicago cash markets.

Feedstock costs represent about 85% of the cost of producing biodiesel, putting the ongoing credit crunch in funding at the top of the worry list for many, if not most, biodiesel restart attempts.

With the US industry producing only 315m gallons of biodiesel in 2010, according to industry participants, there may not be enough of the biofuel available to meet the mandate or any refreshed domestic demand, or the 800m gallon 2011 US Environmental Protection Agency (EPA) blending mandate.

Expectations from some US biodiesel participants are that the industry will rise like a phoenix from the dust of its former self and will meet the EPA mandates.

But it is a slow start for now and even those most dedicated to an auspicious 2011 for the US industry say the production ramp-up is unlikely to happen until the second quarter, perhaps even mid-to-late in the second quarter of the year.

Again, the slow uptake keyed off getting the necessary credit funding to purchase forward positions in a feedstock market in which tight supply of grease presents one challenge and high costs of either greases or vegetable oils presents another.

If applicable RIN certificates are in short supply at the same time a return to B100 demand is incipient, then parties obligated by the volumetric blending mandates of the EPA will need to purchase biodiesel.

Hence the RINs are doing the job they are supposed to do by providing blenders an alternative route to meet the EPA blend mandates at a time when blending is not necessarily economically favourable.

($1 = €0.73) 

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By: Judith Taylor
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