25 April 2011 18:31 [Source: ICIS news]
By Ross Yeo
LONDON (ICIS)--The high premiums commanded by sustainably produced ethyl tertiary butyl ether (ETBE) could be undermined by an influx of certified Brazilian material into the top tiers of the European market this summer.
There are three unofficial tiers in the European ETBE market that emerged following the implementation of the EU's renewable energy directive (RED). The RED sets out the criteria for a biofuel to be classified as sustainable, and therefore eligible to count toward mandated biofuel targets.
The first and lowest tier consists of non-certified material with no sustainability documentation, and generally involves Brazilian imports. Premiums over methyl tertiary butyl ether (MTBE) – a standard method of ETBE pricing – have recently plummeted. Amid the record-high MTBE prices seen during the week ending 15 April, ETBE was sold at a slight discount to MTBE for the first time.
The second tier involves those member states that have partially transposed the RED into their own legislation, and therefore require less stringent documentation. Second-tier pricing is often seen in a wide range from state to state, given the differing legislations and requirements. The ETBE premium over MTBE during the week ending 15 April, for example, was heard in the range $150–250/tonne (€104–173/tonne) FOB (free on board) Amsterdam, Rotterdam.
The third tier essentially concerns the German market, which is not only one of the largest markets but also adheres to the strictest sustainability criteria. Material must be certified by one of only a few approved RED compliant schemes, such as the International Sustainability and Carbon Certification (ISCC). Furthermore, biofuel suppliers must apply for proof of sustainability under the local system, which can take several months.
The exhaustive criteria required in the German market and the limited number of suppliers able to meet these demands mean ETBE premiums are regularly seen as high as $295–300/tonne. Combined with all-time high MTBE prices around the $1,350–1,400/tonne mark, absolute ETBE prices are upward of $1,650/tonne.
These high values could soon be eroded, however, by the certification of Brazilian material as sustainable. A source close to Brazilian producer Braskem said the company expects to have its material certified under the Better Sugarcane Initiative (BSI) by June or July this year. Furthermore, several sources expect all EU states, including Germany, to approve the BSI by around the same time.
Germany recently approved its third scheme, the Roundtable for Sustainable Biofuels (RSB) – in addition to the ISCC and another scheme known as Redcert – which was seen as a good indication that the BSI would also receive recognition, according to a biofuels analyst.
Braskem is the only producer in South America – and one of only a handful outside of Europe –and the only importer into Europe. It brings in 250,000–300,000 tonnes/year, with around half going to northwest Europe and half to the Mediterranean. This compares with the approximate 300,000 tonnes of German consumption in 2010.
Faced with such a potentially large expansion of supplies, European producers said they would expect the high premiums in Germany to fall in the event of Brazilian certification.
“For sure…if [BSI gains German approval] then it will certainly effect ETBE premiums,” said one producer.
A second producer also agreed prices would fall, but thought there would be a significant delay between Braskem obtaining certification and the market being affected.
“Getting certified, that’s only step one. The first time we bought ISCC ethanol was in December, and it took us three months just to get Nabisy registration. It’s a lengthy process,” said the second producer.
A trader agreed that the high German prices would in all likelihood decrease, and added that the three-tier system would merge into two - German approved certified product and material with enough documentation for the remaining EU states.
The trader added, however, that the system could still be complicated by the vulnerability of the Brazilian material to pricing games. Much Brazilian material is brought to Europe by traders at prices based on the open trading market. As such, this market, which constitutes a minority of spot business, is often seen as vulnerable to manipulation, and the trader saw no reason why this would cease.
“I think what we’ll see is the ISCC premiums come off a bit, but we’ll still be left with the two market tiers. And don’t forget the Brazilian stuff could still be subject to pricing games in the window.”
Despite the potential reduction in margins, few players on the sell-side seemed overly concerned and were buoyed by the fact the summer high season is fast approaching. Further, with the astronomical MTBE values currently abounding, sellers acknowledged that absolute ETBE prices were far higher than many had anticipated.
One even saw the high prices as potentially damaging to demand in the long term, and hinted that slight reduction in values would not meet much protest.
($1 = €0.69)
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