In Asia, ethanol is split into two grades, anhydrous and hydrous.
Anhydrous grade, also known as fuel-grade, is used as a fuel additive to reduce emissions of carbon monoxide.
Hydrous grade or B-grade ethanol is used in the production of alcoholic beverages.
As most ethanol in Asia is produced by fermentation of sugars and yeast, supply for both anhydrous and hydrous ethanol were highly dependent on sugarcane and cassava crop harvests, resulting in tumultuous supply for 2013.
Anhydrous ethanol supply in Asia was largely on the shorter side in the first half of 2013 as producers in Thailand were focusing on domestic demand. The Thai government had phased out 91 RON gasoline on 1 January 2013, implementing the E-20 mandate, increased the number of E-20 gashol stations in the country and provided a tax rebate for eco-cars manufacturer to boost consumption of domestic ethanol.
However, a five-year import tariff of 9.5% imposed on American ethanol imports had encouraged US-based producers to look towards selling their fuel-grade ethanol to Asia instead, relieving the tight supply in the region.
At the start of April, corn and grain prices in US collapsed when a government report showed higher than estimated US corn stocks. American producers started exporting their cargoes to plug the supply shortfall in Asia as favourable weather conditions for corn crops in US ensured abundance in harvest amid high gasoline inventories, poor economics and weak domestic demand.
Subsequently, supply/demand fundamentals in Asia for the third quarter of 2013 turned long as a record corn harvest in US had pushed several US producers to export their surplus towards Asia.
Demand from the Philippines remained firm throughout the year, as the government has mandated a compulsory 5% ethanol blended in gasoline mandate with an increase to 10% by end of 2013.
According to 2013 data from the Department of Energy, Philippines is dependent on ethanol imports to fulfill their local gasoline blending requirements as local production can only meet 17% of the country’s requirements.
Similarly in the hydrous market, supply was tight in the first-half of the year as the main supplier, Brazil, was undergoing intercrop-harvesting season.
Most Japanese and South Korean end-users had covered their production requirements in anticipation of the supply dearth.
Pakistan-origin parcels were limited to Asia as several hydrous producers were sitting on low molasses inventories, having sold their excess to Thai ethanol makers. Thai producers were procuring molasses to boost their production capacity as domestic demand increased by leap and bounds.
Furthermore, supply from Pakistan was limited as producers enjoy duty-free trade in European countries for B-grade ethanol.
In the second-half of the 2013, a record 2013-2014 sugarcane crop harvest in Brazil left domestic producers saddled with a huge inventory of molasses. Sugar mills in Brazil directed a larger share of their cane harvest to production of ethanol, further increasing availability of third and fourth quarter arrival supply.
Anhydrous ethanol prices have been on the downtrend since mid-year 2013 as increases in supply suppressed market sentiment.
Import prices were assessed at $760-780/cbm CFR Philippines, softening to $610-640/cbm CFR Philippines by the end of 2013.
Prices rebounded after the new year on the back of expectations that supply would tighten in the first quarter of 2014 because of a lack of deep-sea cargoes.
Several US-based producers have increased their offers for export cargoes as a combination of firm domestic demand, lowered inventories, higher feedstock corn prices and a disruption in railway transportation bolstered their sentiments.
In the hydrous sector, balanced supply/demand fundamentals kept prices fairly stable. Prices hit a high of $720-730/cbm CFR NE Asia on 12 June on the back of anticipated limited availability from Brazil to dropping to the lowest of $670-680/cbm CFR NE Asia on 21 August as Brazilian export supply increased, according to ICIS data.
Currently, fermentation processes based on starch or sugar-based feedstocks, such as corn and sugarcane, are being used to meet the demand for ethanol as a fuel.
Dry milling continues to be the production process of choice, while wet milling makes up a much smaller portion of the market. An increasing amount of ethanol is produced from non-traditional feedstocks such as waste products from the beverage, food and forestry industries. In the near future, ethanol will be produced from agricultural residues such as rice straw, sugarcane bagasse, corn stover, municipal solid waste and energy crops such as switchgrass.
Anhydrous ethanol spot prices are expected to continue its rollercoaster ride as supply from US producers were reduced on the back of a harsh winter in the US. The severe winter conditions have caused a disruption in logistics, as railway cars were unable to run on schedule.
As a result, several US-based producers were faced with high tank inventories as delivery to their domestic buyers were delayed. Subsequently, anhydrous ethanol makers with inventory pressure reduced their production capacity. Thus, export supply was lowered, shutting US/Asia arbitrage.
Prices of hydrous ethanol are expected to remain stable during the year as supply/demand fundamentals are likely to stay balanced.
Brazilian producers expect a healthy 2014-2015 sugarcane crop harvest and would be able to continue exporting their cargoes to Asia without much fanfare.