US, Brazilian and Pakistani ethanol producers are jostling for position into a Chinese market that is showing signs of increased openness to imports as the government tentatively shifts policy away from domestic support for grain-based ethanol producers. 90,000/m3 of Brazilian denatured fuel grade ethanol has recently been reported booked for nearby delivery into China, with Brazilian export economics helped by the slump in the Real, which has fixated traders in the Asian market. But signs of a tightening Brazilian intercrop market could shift the seasonal export advantage to US exporters as US blending demand wanes in the Fall, with both Brazilian and US producers leaving Pakistani exporters struggling to compete on price, at least for fuel grade product. Any potential increase in Brazil’s domestic tax on gasoline will also adversely affect ethanol export economics as motorists substitute into cheaper ethanol until the gasoline/ethanol price equilibrium is restored. The US RIN and LCFS ticketing programs meanwhile both offer an added price incentive for importers to ship sugar cane-based ethanol northwards, raising the prospect that a triangular ethanol trade could emerge in which sugar-cane based ethanol ships northwards, displacing corn-based ethanol to Asian end-users.
Price spreads between US and Chinese corn have been drifting wider since the markets last trended at close to parity in early 2013, increasing the attractiveness of importing both corn and ethanol into China. Despite the second highest year for domestic corn production on record, 2014/2015 grain imports into China are already up 52% YoY, according to China’s National Grains and Oils Information Centre. Six eastern Chinese provinces meanwhile currently employ E10 mandates, while domestic ethanol production this year is expected to supply little more than half the 4mn t demanded by the existing government five-year plan governing renewables policy in road transport fuels.
Chinese importers currently report no restrictions on shipping in foreign ethanol for distribution through officially sanctioned oil marketers. But overseas ethanol exporters remain on their guard for any signs of sudden change in Chinese import rules should a rapid increase in arbitrage inflows start to upset domestic ethanol or corn producers. China’s government said this summer it plans to increase the influence of decentralised market forces on Chinese corn prices, while high domestic stocks of non-food corn could also be used to quickly spur domestic ethanol production if needed.
MS – 18/09/2015