Concern muted despite further plunge in fuel ethanol price

Focus article by Vicky Ellis

LONDON (ICIS)–Falling fuel ethanol prices in Europe are not a cause for alarm because February is usually a soft month for prices, market sources said this week.

A pragmatic attitude may reflect the fact that prices were strong for most of 2015, with decent margins available for producers.

Producers, such as Associated British Foods (ABF), have done well with recent prices, as seen from ABF’s positive trading update on 22 February which showed an improvement in profitability partly linked to better bioethanol prices. ABF is the owner of Vivergo Fuels’ ethanol plant in Hull, the UK.

A downturn has begun though and it is not clear when it will end: Spot prices for T2 or domestically sourced fuel ethanol dropped well below €500/cbm on a free on board (FOB) Rotterdam basis in the past week.

Weaker buying interest is seen as a driver for this, while restrictions to supply at the start of the year have now been removed, such as the return to action of Vivergo Fuels’ ethanol plant in Hull which was believed to be down for maintenance from the end of December 2015.

“Normally the first quarter has low demand,” said a trader: “Prices have been falling. I don’t really see the March demand. I think it will continue to drop in March and start picking up April.”

A second source said: “The question is whether it’s going to stay at these levels or not? Right now it’s a period where there is less consumption, obviously stocks are getting a bit higher now because of that, as production is more or less the same. So it’s normal to see a bit of a correction, [although] we’re talking about more than a bit of a correction.”

Another said: “My feeling is that the demand is a little bit less than the end of last year and in the short term this will be not changed… It’s interesting to see [on] a graph, the sharp decrease, shows we had an extraordinarily high price, which is why the falling distance is so extreme. On the other hand, it’s quite a normal price level for this [early] time of year.”

 “I see trains coming in, and see Vivergo fully operational now,” the first source added.

Nordics not interested for now

“Very little spot demand” for product was linked by another source last week to some buyers in Nordic regions deciding to take term contracts until the end of April, to avoid the risk of supply disruptions should Spain’s Abengoa suffer any production issues.

The company has been under financial strain and filed for insolvency protection at the end of 2015. It plans to sell its ethanol plants and has laid out plans to salvage the business.

Ethanol imports from the US have been seen going to Scandinavian nations, and this could also be impacting the market balance.

Small contango – but for how long

A slight contango structure entered market pricing in the past week. This is when prices for physical product in months ahead are higher than for prompt delivery (i.e. within the next month).

According to the first trader on Wednesday: “The market is in a contango right now, a contango of March to April is €5/cbm.”

The second said: “It’s obvious, when you have a contango, it means the market is not at its best. The question is will it stay or not. The fact is stocks are going up, it is more difficult to sell ethanol than what it was one month or even 40 days ago.”

The outlook for ethanol may depend upon such northern European demand; the usual seasonal uplift from around Easter holiday time when blenders start to prepare for the summer driving season; and other factors including the future of Abengoa, which owns a big ‘swing’ plant at Rotterdam.

“If people from Scandinavia start buying product again, I think it will be balanced but until then I don’t see it [a change],” said the first trader.

Another did not expect a sea change either: “Maybe in the short term, one or two months, [there will be] no change unless some big news comes on market.”

Prices stronger year on year despite plunge

Take this current weak point and compare it with the weakest point of last February, when trading values scraped a bottom of €425/cbm at the start of the month, and it is possible to see why the mood is not overly pessimistic.

This week’s prices (the lowest of February 2016) are around 13% higher.

The picture looks slightly less rosy when comparing average prices for 25 February 2015, which were 3.3% lower than on 24 February 2016. (This comparison is the closest it is possible to get to a year-on-year comparison with weekly data.)

However it is also worth noting that prices had rebounded by 25 February 2015 after CropEnergies was known to have temporarily closed its UK-based Ensus plant as early as 11 February 2015, followed by an official announcement a week later.