Europe ethanol may balance out sooner as imports dry up

Focus article by Vicky Ellis

LONDON (ICIS)–Imports of ethanol into Europe are drying up and this could balance out the market much sooner than many expect, according to some industry and market sources.

The EU traditionally is a net import market for ethyl alcohol, otherwise known as ethanol. While this is still the case, the two-year crash in prices and a weak euro have, to some extent, distorted this trend.

“What’s been quite amazing, unusual, in recent months,” said Dr Phillip Davison, Director General of the Industrial Ethanol Association (IEA), which focuses on beverage and industrial grade ethanol, “is that we’ve actually seen exports from Europe going to countries we’d normally import from.”

He points to countries such as Pakistan, which recently got preferential treatment to bring goods into the EU.

Last year the EU received nearly 64,000 tonnes from Pakistan – but data from statistics agency Eurostat suggests a fractional amount, 24 tonnes, went in the other direction.

As a major European producer puts it, Pakistani volumes have been “practically insignificant” so far this year, while a European trader says: “I know for a fact import volumes are drastically reduced. There’s much less from Bolivia, Guatemala, Pakistan.”

The EU even sent ethanol to Brazil and the US, traditionally strong significant ethanol exporters.

EU exports of denatured ethanol in 2014 nearly trebled to 31,423 tonnes compared with 2013, while imports halved to less than 11,000 tonnes, according to Eurostat figures this week.

Undenatured ethanol exports also nearly tripled, with 183,636 tonnes sent out of the EU in 2014, according to the statistics.

The trend may be driven by European pricing, according to Davison.

“It’s purely because the European price is quite depressed. It’s been a really unusual time,” he said.

The quarterly contract price range for German 96% beverage grade ethanol in the first quarter of 2015 was assessed at €59-67/hl FD (free delivered), while German 99% industrial grade ethanol was assessed at €64-72/hl FD. The last time prices were at this level is the second quarter of 2010.

Compounding the recent situation is the exchange rate: the euro-dollar dipped below €1.35 in mid-July 2014 and by the end of January 2015, it had plummeted to 11-year lows of €1.13 for each dollar.

A weak euro and low prices have put off firms which would usually bring product to the continent. It’s a reason why one European producer has been sending product abroad: “Clearly that’s made it easier for us to export and there has been a lot of activity.”

Meanwhile, buyers have not had difficulty getting hold of material, said another producer: “We’re still under pressure due to the huge amount of availability.”

Though some have been fixated on supply continuing to be plentiful, a few are starting to question this received wisdom.

New ethanol capacity in Germany at two plants has been the cause of nervousness among producers, but one trader argues the additional 60,000cbm/year at Zeitz, which is in ramp-up phase, plus Cargill’s new capacity at Barby due in October, will not necessarily offset a “shortfall” in imports.

“Imports are needed for a balanced market,” said the source. “Nobody is seeing that 300,000cbm of imports [are] strongly reduced. It could hit in the next two months. In Rotterdam they’ll say, sorry my tank is dry, then the French will have additional demands they’re not used to coping with, and there will be panic and prices will have to go up or there will be a lack of alcohol in Europe.”

A German producer said the imports fall could actually be “very helpful” for prices in the market.

Naturally, producers have their eye on profit margins, which have been feeling the squeeze.

Prices for non-fuel ethanol have been falling for two years, hitting a four-year low in December 2014. They may just have begun to level off.

There is consensus among a couple of producers that prices won’t drop any further. Separately, a European distributor and a major European producer said prices have “bottomed out,” while another European producer agreed the market has “hit a button” with prices.

Others in the industry remain sceptical prices will go up any time soon. “The same parties have been saying prices will go up for two years,” said one source.

The outlook for prices appears to hinge on several factors, with arguably the key issue being how well the euro performs.

As one trader said: “The euro-dollar [exchange rate] had a big, big influence. It will have bigger influence on next month.”

Meanwhile the monthly contract price of ethylene, which is a feedstock for synthetic ethanol, underwent a three-figure rise in March, to €910/tonne FD NWE, which could lead to increasingly bullish sentiment for synthetically produced ethanol.

Falling fuel ethanol prices are another factor, according to Davison: “What happens there will have a significant impact… pricing in Europe has been depressed, capacity underutilised. [Producers could think] where else can they put this product?”

And a European producer added: “It’s very likely there at least won’t be any decrease in the traditional market.”

The argument comes back to dwindling imports for one of the traders, who concluded: “It’s like we’ve been on a bike pedalling strongly, then stop pedalling and we’re still rolling, but if you don’t do anything soon you will stop. Few people have noticed we’ve stopped pedalling.”