Obtain the data you need to make the most informed decisions by accessing our extensive portfolio of information, analytics, and expertise. Sign in to the product or service center of your choice.
The global biofuel sector is, like the energy sector more
broadly, being significantly impacted by the COVID-19 pandemic. In
most markets, biofuel consumption is underpinned by percentage
blend mandates and well-established supply chains. Thus, the
projected 48% decline in US gasoline demand next quarter will
translate into a 48% decline for US ethanol consumption. The
reality is a bit messier than that, with room on the margins to
deviate, but this "one-to-one" rule will generally hold -
particularly for ethanol.
Biofuel prices have declined recently, but they have not fallen
as fast as their "counterpart" refined fuel prices. This is largely
because the market for biofuel feedstocks is more diverse than that
for refined product feedstocks. Put another way, corn is used for
many things besides ethanol production, whereas the only use for
crude is producing gasoline, diesel, and the like. Because of how
significantly refined product prices have fallen, any
"discretionary" blending about mandated levels is likely to stop.
For the same reason, fuels with higher blend levels are now less
economically attractive, if not outright disadvantageous. This is
not a major issue in the US, since the vast majority of stations
offer a single blend level (E10). In Brazil, however, the standard
E27 blend and pure ethanol (E100) are both widely available - and
most vehicles have the optionality to consume either fuel. As a
result, sales of E100 are expected to plummet in Brazil as
consumers opt for the now-more-economical E27.
Figure 1: US gasoline and ethanol prices
In most markets, there is relatively little dedicated storage
capacity for biofuels, so demand destruction of this magnitude will
compel the closure (temporary or otherwise) of numerous production
facilities. Already, the price of ethanol in the US has fallen
below the average cost of production. The same is true for ethanol
producers the world over. The story is slightly more nuanced for
biodiesel. For example, in the US, most diesel demand comes from
commercial trucking, a sector which will hold up relatively well in
the coming months. Meanwhile, in Europe, most diesel demand is from
the passenger vehicle segment, which is being hammered by
government lockdown measures and social distancing. Thus, biodiesel
producers in the US have relatively less to worry about than those
in Europe.
Longer-term, a sharp - and lasting - drop in refined product
prices could act as a headwind for biofuel consumption.
Consistently lower fuel prices may make governments less willing to
increase biofuel blend mandates or otherwise financially
incentivize biofuel production. Consumer enthusiasm for a "greener"
fuel may also be dampened if that fuel entails a higher financial
burden. As with everything recently, much remains on how quickly
COVID-19 can be brought to heel.
Rob Smith is a Director of the Global Fuel Retail group
at IHS Markit.
