China's announcement that it will increase ethanol import tariffs in 2017 has turned market participants' outlook for US exports in 2017 bearish, sources said Tuesday.
"With the rate at which we are producing ethanol and with China gone, prices could correct sharply," said one source.
The US is on track to produce a record volume of ethanol in 2017, but if exports slow, the domestic market could quickly find itself oversupplied and prices under pressure.
Production averaged 1.049 million b/d in the week that ended January 6, according to weekly US Energy Information Administration data.
Some of the largest US ethanol producers, including Green Plains and Archer Daniels Midland, have said they expect exports in excess of 1 billion gallons in 2017. But exports could come up short of that total without one of the largest buyers in the market.
The Chinese ministry of finance announced December 23 it planned to adjust import tariffs on many agricultural commodities, including ethanol.
The ministry did not say where the tariff on imported ethanol would be set, but many market participants expect it to climb to 30% from its current 5%, and argue this would make imports uneconomic.
The changes are due to take effect after the Lunar New Year, with sources expecting the finalized tariffs around the end of January.
Several US cargoes that were booked to China have been canceled, Reuters reported Monday.
China was the third-largest buyer of US ethanol through the first 11 months of 2016, according to US Census Bureau data. China took 20% of all fuel ethanol exports through November. Overall, the US exported 942.8 million gallons of ethanol through November, already the highest volume since 2011.
There is no likely source of demand to replace China. Brazil emerged as the largest buyer of US ethanol in 2016, but that was largely due to a domestic shortage as producers diverted more of the sugarcane crush to sugar production.
Brazil took 25% of the US' 2016 fuel ethanol exports through November, according to the Census Bureau data.
Sky-high sugar prices encouraged the shift in market dynamics. But Brazilian ethanol production is likely to increase in 2017, lowering the country's demand for imports.
"Brazil would start slowing down, they start their ethanol production in March and April," said the source. "India cannot take enough volume to fill in the gap."
That said, Kingsman, the agricultural analysis unit of S&P Global Platts, forecasts ethanol production in Brazil will total 7.09 billion gallons in 2017, compared with UNICA estimates of 2016 output of 7.67 billion gallons.
Platts assessed Argo ethanol, a benchmark for physical US ethanol, at $1.4855/gal Tuesday.
Platts assessed fuel-grade ethanol in the Philippines, a reference price for Asian ethanol, at $498.67/cu m Tuesday.
