Commodities 2024: European ethanol market to maintain growth in 2024, despite challenges to regional producers

Firmer demand can be expected for fuel ethanol in the European market through 2024, though European producers may have to contend with inflows from major import markets, despite the end-year slump in prices in 2023.

E10 roll outs and an increase to volumetric blending mandates in some member states are expected to carry demand higher on the year, despite rollback of requirements in others. The adoption of the revision to the Renewable Energy Directive (RED III) will support demand growth as member states look to remain on schedule to meet more ambitious targets. RED III increased the 2030 target for the share of renewable energy in the EU's overall energy consumption from 32% to 42.5%.

Import flows will play a key role in supplying the continent, and market participants will actively watch movements in the arbitrage from the US and Brazil. Healthy inventories in these two regions, abundant feedstock, low seasonal domestic demand, and new production capacity coming online in 2024 are factors pointing to a bearish trend for European import prices.

Legislation drives higher consumption

Rollout of E10 gasoline to forecourts in Poland will be the biggest driver for higher demand in 2024. Poland's largest refiner PKN Orlen said earlier in the year that it would be able to begin producing E10 fuel from January 2024.

"As a result [of the roll out], we will increase the demand for bioethanol needed for fuel by nearly 50%," PKN Orlen CEO Daniel Obajtek said in a tweet in April 2023.

One source suggested that Poland would be able to cover the higher demand with its own bioethanol production, though a second said that most of the country's production is technical grade ethanol.

The bio-blending mandate in gasoline in Italy will also be lifted to 1% in 2024, up from 0.5% in 2023, though no stipulation has been specifically made for bioethanol.

One legislative downside to consumption is the Swedish Riksdag's vote on Nov. 30 to change the national mandate for petrol and diesel emissions reduction to 6% in 2024, from 7.8% and 30.5% respectively.

Lower prices boost higher blend demand

Demand can also find firmer footing with increased E85 consumption in France, as European ethanol prices have been discounted to gasoline since March 2023, S&P Global Commodity Insights data showed.

"With ethanol prices in the low Eur600's, contracts for distribution [for E85] will probably pick up some more demand in France," a trader said.

In Germany, E10 market share is expected to rise further and blend rates to remain steady, despite a trend of advanced biodiesel imports from Asia making it increasingly more cost effective to meet greenhouse gas reduction targets.

"Ethanol will still remain the cheapest part of the compliance recipe, people will still max out the ethanol blend," a source said. "I don't think advanced FAME will be sold at a price that will undermine that."

However, the same source said that E10 could see less discounting against E5 in Germany through 2024, as alternative methods for meeting GHG reduction obligations become more cost effective for fuel suppliers.

European fuel ethanol consumption is forecast to grow 6% year-on-year to 8.7 million cubic meters in 2024, S&P Global data showed. Production can expect proportionally similar growth, up 5% on the year to 6.3 million cubic meters. However, the production deficit continues to highlight the necessity of imports to the bloc.

Cheap ethanol squeezes production margins

Weaker pricing will offer a bleak production landscape in Europe, with some sources indicating negative margins heading into the new year. One trader said that T2 ethanol prices in December were Eur100-150 behind the basic cost of production, not considering additional distribution costs or by-product income.

An oversupply of German THG-Quoten tickets is expected to depress high GHG-saving premiums, which could push EU producers to hold onto molecules until later in the year.

"The question is whether producers would be willing to give these low levels on premiums [in contracts]," a Germany-based market participant said. "If they do not do volumes on these terms, they will keep it and we will see a big spot market next year."

Participants eye competitive T1 ethanol

Healthy corn and sugarcane crops have supported production rates and stock build in the US and Brazil, narrowing the arbitrage despite T2 levels falling to more than two-year lows in December.

"There seems to be ample stocks in Rotterdam," a trader said. "There's a slight contango on the front of the curve [from January] ... People don't want to carry too much though as there is the big threat of the import arbs."

European cellulosic ethanol demand will continue to exceed supply in 2024, due to a shortage of plants that are able to process the EU-compliant biofuels.

"We have more demand than we are able to close out right now," Paulo Neves, Vice-President Trading at Raízen, told S&P Global Commodity Insights in an October interview. "The offtake from these for the next 10 years has been fully committed to buyers."

Raízen is set to begin production at two new second-generation plants in 2024, with a joint annual output capacity of 164,000 cubic meters of cellulosic ethanol.