INSIGHT: EU bioethanol producers blame poor market on US E90

12 December 2011 13:31  [Source: ICIS news]

By Sarah Trinder

LONDON (ICIS)--EU bioethanol producers have become increasingly concerned that US imports of E90 fuel ethanol (90% ethanol blended gasoline) are undermining the European market.

On 25 November, the EU initiated anti-dumping proceedings against US bioethanol imports following a complaint in October from trade association ePURE, which represents European renewable ethanol producers.

That complaint alleged that imports of US E90 fuel ethanol had increased in absolute terms and in terms of market share.

E90 fuel ethanol imports have not been subject to the same tariff as other denatured ethanol imports, and are alleged to have been exploiting a loophole in the market, although that situation could change.

“The prima-facie evidence provided by the complainant shows that the volume and the prices of the imported product under investigation have, among other consequences, had a negative impact on the level of prices charged by the Union industry, resulting in substantial adverse effects on the overall performance and the financial situation of the Union industry,” the EU said.

The trade association also alleged that E90 is subsidised by the US government: “[This confers] a benefit to the recipients, ie to exporters/producers of bioethanol. They are alleged to be limited to specific companies and therefore specific and countervailable.”

Subsidised US ethanol is being dumped, and is “cannibalising the EU market”, ePure secretary general Rob Vierhout has said.

The response from Edward Hubbard, legislative counsel for the US Renewable Fuels Association (RFA), has been that the US is only replacing the volumes missing from Brazil, whose presence in the export market has diminished because of tight domestic supply.

He says that loopholes are being exploited in EU import tariff legislation and causing issues for European producers. Hubbard also states that the US tax credit (on bioethanol) is misunderstood, and does not benefit producers but, in fact, benefits blenders and refiners of ethanol.

If ePURE’s complaint is upheld, some believe that levies could be applied to imports of US ethanol and penalties incurred by those importing it.

This would serve to limit the volume of US imports in the European market. But an important question is whether or not the presence of E90 really is to blame for the European bioethanol industry’s current predicament.

Domestic (or T2) fuel ethanol market prices have rarely dipped below €600/cbm ($800/cbm) FOB (free on board) Rotterdam over the past year, or, for that matter, peaked above €650/cbm FOB Rotterdam.

While this lack of volatility illustrates relatively balanced supply/demand fundamentals, it fails to account for the impact that high wheat feedstock costs have had on producer margins.

Producers argue that they are unable to achieve higher prices and, therefore, better margins because of E90 fuel ethanol’s comparatively cheaper values.

Not only are E90 fuel ethanol imports from the US currently subject to a lesser duty (6.5%) compared with other denatured ethanol imports, they also benefit from US government tax credits – namely, the Volumetric Ethanol Excise Tax Credit (VEETC).

European producers, unable to protect their margins, have been forced to run their plants at reduced rates, with UK-based producer Ensus temporarily closing its 410,000 tonne biorefinery in Wilton, UK, at the end of May this year.

Although other issues, such as delayed implementation of the EU’s Renewable Energy Directive (RED) and slow approval of Voluntary Sustainability Schemes, have been cited as contributing factors to Ensus’ closure, the presence of E90 fuel ethanol in the European market has also been a concern.

Ensus has been troubled by the VEETC and the low import tariff that benefits E90 fuel ethanol. A source at the company also believes the steady inflow of imported product led to well-supplied conditions, exerting downward pressure on domestic fuel ethanol prices.

However, producers’ concerns could soon be quelled, as the VEETC is to expire at the end of the year, and it is thought unlikely that it will be renewed.

Furthermore, the EU has voted in favour of a change to the E90 fuel ethanol tariff to €102/cbm – the same as the duty on denatured ethanol imports.

Some believe this will result in fewer and less attractive US imports and firmer EU fuel ethanol prices, as well as higher production rates.

Others believe that traders will find other ways to exploit loopholes in the import tariff legislation, and continue to import cheap US material, perhaps in the form of lower ethanol blends, such as E70 (70% ethanol blended gasoline), which would still qualify for the lower duty of 6.5%.

But if the inflow of US fuel ethanol imports does decrease, who will supply Europe’s 1.5m cbm demand deficit during 2012?

Sources say that European producers are unable to fully cover domestic blending mandates.

Brazil – previously the world’s biggest ethanol exporter – is largely out of the export market, following poor sugar cane harvests this year, with the majority of its ethanol being used domestically.

The country has had to lower its ethanol gasoline blend to 20%, down from 25%, in order to ensure supply for its domestic market.

Europe is therefore unlikely to receive any significant imports from Brazil in the near future.

This means US imports are likely to remain a constant within Europe, be it in the form of E70, E90 or T1 material.

Furthermore, how widespread is the use of E90? Countries such as the UK and Sweden are thought to use a significant amount, but how long will this level of usage continue, considering the UK is likely to adopt the RED before the end of the year?

In addition, countries that have already adopted the RED, such as Germany, are unable to use E90, as it is not certified as sustainable.

There is still demand for domestic product, especially RED-certified material, particularly in light of the fact that there is a 1.5m cbm demand deficit in Europe. So can E90 really be the cause of all European producers’ woes?

It cannot be denied that the slow implementation of the sometimes unclear RED by EU member states has had an impact on demand levels.

Buyers have at times been cautious about the fuel ethanol they purchase, as they are unsure about whether it will meet RED specifications. This situation has been exacerbated by the slow approval of Voluntary Sustainability Schemes.

The difficult introduction of E10 (10% ethanol blended gasoline) in Germany has also negatively affected the European market. Demand levels in Germany in 2011 are significantly below the projected levels, as consumers have largely rejected the fuel because of negative press and concerns that it might damage the engines of their vehicles.

In 2012, there will be changes to the way the EU imports US ethanol, but whether that alleviates all the European bioethanol industry’s problems remains to be seen.

($1 = €0.75)

By: Sarah Trinder
+44 20 8652 3214

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