Asian fuel-grade ethanol is being sold below cost to the Philippines ahead of implementation of the E10 mandate in August as players battle for a larger market share, industry experts said this week.
The hefty discounting applies particularly to newcomers fighting for a piece of the action, they added.
Platts assessed spot ethanol prices on a CIF Philippines basis at $814/cubic meter on June 7, down $51/cu m or 5.9% from the year's high of $865/cu m on April 25.
The decline tracked the global fall in sugar prices but seemed to have ignored strong demand from the Philippines and higher freight costs.
On June 7, loading prices from Chicago were assessed 262 cents/gallon and New York Harbor Barge prices were assessed 265 cents/gal. That equated to around $760-768/cu m after factoring in conversion and logistic differentials.
Cargoes from the US and Brazil usually go to Singapore or Ulsan to break bulk. Current freight rates from US to Singapore or Ulsan were pegged at $70-75/cu m. Those from Singapore or Ulsan to the Philippines were $45-55/cu m.
This indicates $875-898/cu m for cargoes arriving in the Philippines, $61-84/cu m lower than Platts assessed price on June 7.
Additionally, offers to the Philippines in May hovered around $805-820/mt cu m on a CIF basis, with some trades reported at below $800/cu m for July-August deliveries at a freight cost of around $70/cu m -- a much bigger loss for those sellers.
"That does not cover costs, even though I know some traders are selling at this level," one trader said. "The US market is in a contango, Brazil is going up, up, up. "Even though Thailand had a record crop this year, it is not enough to cover the demand."
"Besides, they are facing infrastructure limitations. So even those who were short on sugar, betting the market would eventually drop, threw in the towel and got out of their positions and still the sentiment continues to be bullish," the trader added.
PLAYING THE LONG GAME
The Philippines is heading to a partial implementation of the E10 mandate -- which requires 10% of the total volume of gasoline sold in the country to be ethanol-blended gasoline -- on August 6.
Full implementation is due to take effect February 6, 2012, but the industry expects 70-80% of the market to meet the mandate from the outset.
For the existing E5 mandate, the country needs 200 million liters/year of ethanol, doubling to 400 million liters/year when full implementation of the E10 mandate comes into force.
But local production, which was not operational in 2010, is only 40 million liters/year -- meaning the Philippines imports most of its needs.
With the country's demand for imports set to double, independent oil companies such as Total and Phoenix Petroleum have stepped up preparations such as the installation of storage facilities and/or retrofitting existing tankage to enable them to import ethanol in bulk and blend it themselves.
Prior to this year, traders such as Cargill, Petrobras, Vertical, Alcotra, Sietco, Astra Oil, Bunge and ED&F Man accounted for most of the market share. But with rising demand, others such as the North Sea Group, Sojitz and PetroVietnam have jumped into the fray.
The traders' main aim currently is to build long-term relationships with oil companies, even at the cost of steeper discounts at present.
"Many want to try and get the market [share], so they write a check," said a trader. "Selling below cost equals writing a check."
Meanwhile, domestic producers such as Roxhol Bioenergy and San Carlos Bioenergy are gearing up to restart their idled ethanol facilities in July and September, respectively.
Both producers have opened talks with oil companies for off-take deals, and were said to have offered ethanol at Pesos 34-40/liter ($787-920/cu m).
Local oil companies were more inclined to buy domestic product, market sources said. They want to support local production as stipulated in the Biofuels Act of 2006 and some even expect the Department of Energy to make the use of locally produced ethanol compulsory before allowing oil companies to import the shortfall.
"Unfortunately, the Southeast Asian markets (industrial and fuel) do not react very well to market-related prices in the West (Brazil and the US)," said a Western trader. "So if the price today FOB Brazil is X, it is not a matter of X plus cost equals CIF SEA. In theory yes, but in practice no."
The Western trader said companies with global trading positions could manage their prices and costs through different positions in the paper and physical markets and therefore were able to adjust to changing market conditions or offer bigger discounts, as they did to the Philippines.
