SINGAPORE (ICIS)--Demand for fuel grade anhydrous ethanol in southeast (SE) Asia is expected to slow in the early months of 2018 amid increasing supply from the US but prices could find some support from arbitrage opportunities expected to be available in China.
The Philippines is the main southeast Asian destination for US fuel-grade anhydrous ethanol, which is used to blend with gasoline to meet the country’s biofuel blending requirements.
In 2017, anhydrous ethanol import prices in southeast Asia, specifically the Philippines, touched a high of $527/cbm (cubic metres) in April as strong demand for US material in Brazil caused a shortage in supply for Asian markets.
Prices however began to retreat after that and the decline accelerated in the final quarter of the year after Brazil introduced a quota system to limit imports of US ethanol and protect its domestic ethanol industry.
In December, anhydrous ethanol prices fell to a low of $441/cbm CFR (cost & freight) SE Asia (Philippines), the lowest prices on record since ICIS began tracking the data in January 2011.
That tracked a downtrend in US ethanol futures prices traded on the Chicago Board of Trade (CBOT) during that week as most market players anticipated slower demand amid expectations of higher ethanol supply.
Brazil’s Chamber of Foreign Trade (Camex) in late August approved a 20% tax on ethanol imports, which will be levied only after a tax-free quota of 600m litres/year is surpassed. The tax will be in place for two years, and after that will be re-evaluated.
In Brazil, the ethanol-use mandate has been mandatory since 1977 when the legislation required a 4.5% blend of anhydrous ethanol to gasoline. According to the legislation, the ethanol blend can vary from 18% to 27.5% and it is currently set at 27% (E27).
On the supply side, US production is expected to be strong in 2018. In December, the US Department of Agriculture (USDA) said in its World Agricultural Supply and Demand Estimate (WASDE) report it expected US ending stocks of corn to be lower because more of the grain could be used to make ethanol.
Annual US ethanol production stood at around 15.9bn gal in 2017, a figure expected to grow to 17bn gal by the end of 2018, the ethanol trade group Renewable Fuels Association (RFA) said.
But demand in the Philippines in the first few months of 2018 is not expected to be significantly higher due to its domestic local ethanol allocation program.
The program requires local fuel distributors to purchase a fixed monthly amount of ethanol from domestic producers before they can purchase imported material.
Under the LMA for the first quarter of 2018, the Department of Energy (DOE) set a total allocation of 75,790 cubic metres (cbm) of locally-produced ethanol, an increase of 7,040 cbm, or 10.2%, from the fourth-quarter 2017 allocation.
The higher allocation meant that Philippines demand for fuel-grade ethanol imports were expected to be lower in the first quarter of the year.
On the fundamental level, corn prices in the US are also expected to play an important role in ethanol prices in 2018 amid expectations of record crop yields.
But elsewhere in Asia, arbitrage opportunities are expected to offer a glimmer of hope, due to rising prices of domestic ethanol in China.
In 2017, China’s National Energy Administration (NEA) announced plans to expand the use of ethanol gasoline in vehicles and targets to achieve a national coverage of the biofuel by 2020.
The E10 gasoline blend, which contains 10% of ethanol, has been in use in 11 provinces and is mandatory in six provinces in China. But market sources said China may not be able to produce enough ethanol domestically to meet those targets and hence may need to import fuel-grade ethanol from the US.
Additionally, ethanol prices in China have skyrocketed in recent months, making US imports competitive despite the country imposing a 30% import duty on US material since January 2017.
In China, etac prices have also hit six-year highs and are expected to remain stable to firm in 2018 due also to the rising costs of feedstock ethanol.
However, latest official data out of the US so far have shown no exports of fuel ethanol to China from January to October 2017. Market sources in Asia said US cargoes bound for China would have been loaded on vessels in November.