The outlook for European T2 ethanol is bearish all the way into the new year, with concerns around the potential removal of antidumping duties against product from the US, as well as the new sugar crop impact, putting pressure on the European market.
The August backwardation against Q4 at around Eur57/cu m and against Q1 at Eur72/cu m further attest to the sentiment, with the sugar beet-based ethanol volumes expected mainly from October and the decision on antidumping duties due at the end of February.
The EU antidumping duty of 9.5% on US ethanol imports has been in place since February 2013. In June 2016, the European General Court ruled against the duty, but the European Commission filed an appeal two months later.
The duty has kept the arbitrage between the EU and the US mostly closed, with the majority of US volumes making it into Europe being destined for the T1 markets, notably Norway.While much uncertainty remains on trade policy, with previous experience suggesting that such decisions are often subject to delays and reversals, the potential of US-EU trade flows opening up is sending shivers down the spines of EU producers.
However, with a market so bearish and increased domestic European supply expected, some sources think removal of the duty may not necessarily lead to a huge influx of product.
"Antidumping comes into effect only if the market is short -- if the market is long and prices fall, who cares about antidumping," a source said.
But if European producers want to keep US product out, they will have to accept considerably lower prices and margins. The US arb has long been seen as the ceiling for the European market, but the antidumping duty has allowed this to be sustained at a much higher level.
In the recent past, even when the arb briefly opened on the prompt, the consistently steeply backwardated market structure also prevented T2 volumes getting booked from the US, as it would require a high-risk appetite.
Other factors to consider to assess the impact of a duty removal would also include product specification, certification and GHG savings.
Most US ethanol achieves on average GHG savings below 50%, which is in effect the minimum that European buyers would take and as of January 1, 2018, this will also formally become an EU Renewable Energy Directive requirement.
Furthermore, US product would have to meet EN spec and be ISCC certified.
"It's hard to believe [ethanol] flows from US to EU too easily without more investments in certification," a source said.
If the financial incentive is there, US producers will try to meet these criteria. Already this year market sources said US producers have been very active in trying to promote their product in Europe.
"US production keeps going up and demand is not going anywhere so they need more exports," a source said.
As the Brazilian government has implemented a 20% tax on ethanol imports that exceed a tax-free quota of 600 million liters/year, this is expected to have a significant impact on US ethanol exporters, considering that 54% of US ethanol exports in May 2017 were directed to Brazil, according to EIA data.
"Interesting to see Brazil and US going in the opposite direction of Europe at this point," a source said.
Even if several US producers get certified, the 50% GHG hurdle will be the hardest one to overcome.
Some sources think GHG limitations will not necessarily be a deal breaker if the arbitrage opportunity is good enough. But realistically it would not make much sense to bring product into the EU if it cannot be counted towards national mandates, simply to blend as an octane booster.
But although not many US plants meet the ISCC, EN spec and 50% minimum GHG requirements, there are a few that do, so an open arb would bring at least some volumes to Europe.
"We won't see hundreds of cubic meters offered, but I'd say 30-40,000 per month won't be an issue for those producers," a source said.
