Treading the high wire: The biofuel demand growth balancing act

Prima was named number one in research in biofuels in the 2017 Energy Risk Commodity Rankings. Managing director Matthew Stone foresees an expansive but volatile road in the year ahead, as global demand for low carbon fuels rises while politicians juggle domestic and export demands, with more geopolitical shocks and electoral upheavals likely. 

Which specific elements of your offering have driven the continued success of Prima in the Energy Risk Commodity Rankings?

Matthew Stone: Our dedication to mapping and understanding the global nature of the supply chains in renewable fuels in their entirety. Renewable fuel markets for transport have grown enormously over the past five years and are set to continue expanding, as the emphasis of government programmes homes in on slashing carbon emissions in this notoriously complex sector for decarbonisation. The race is now on to find eligible low carbon fuel transport in sufficient volume to meet governmental commitments to binding international targets. 

 

Matthew Stone, Prima

What are the current major challenges for traders that wish to access reliable price information and market research relating to the renewable commodities markets?

Matthew Stone: Biofuels markets are opaque and are now fragmenting further to accommodate new streams of non-conventional low carbon production. Prima has developed its proprietary price benchmarking services to provide unparalleled transparency and robustness to satisfy market participants’ trade and risk management needs. 

Establishing a fair-value physical price for these commodities is just the starting point. Producers, traders and end-users are now struggling to understand how to price the greenhouse gas savings of the fuels they are handling, a need that Prima is filling through its market data and price modelling services. 

 

What are the main issues that affected activity in the biofuels market in 2016?

Matthew Stone: In terms of framing the medium-term biofuels landscape, 2016 was an important year. Europe confirmed an aggressive schedule for demand growth through 2020, followed by a shift towards non-food renewable fuel solutions post-2020. The US implemented its own ambitious consumption targets that triggered a hefty Q4 price rally, only for post-election jitters to shatter policy certainties under the Trump administration. Meanwhile, developing economies in Asia cemented their emergence as major renewable fuels consumers in their own right, erasing long-standing assumptions about global supply/demand balances. 

 

What is your outlook for biofuels in 2017? Do you expect much change to the market issues experienced by traders in 2016? 

Matthew Stone: Demand growth is a certainty for this year across the globe, and increased consumption will create more demand for Prima’s pricing and analytic services. Prima will continue to innovate in providing solutions to the industry’s needs – the roll-out of its proprietary Discovery pricing platform being a prime example. 

As always with biofuels, the direction of travel further forward is far less predictable. The Trump administration will find itself treading a high wire between placating oil industry supporters opposed to renewable fuel mandates and meeting the expectations for domestic demand stimulus from the corn and soy belt constituencies that voted for Trump in their millions. Even if the administration decides to stunt federal blending requirements, the widening embrace of low carbon road transport fuel ambitions at state level will keep demand for these fuels growing and evolving. 

In Europe, Brussels decision-makers will need to balance their ambitions for a move away from crop-based biofuels with the supply-side constraints limiting the output of low carbon, non-food-based fuels. Politicians will attempt to perform this balancing act against increasingly vociferous lobbying by the agricultural and biofuels lobbies on behalf of European farmers alarmed at the prospect of demand cuts, while the wider political backdrop promises to deliver further electoral upsets that could again alter the assumptions around biofuels policy. 

In the emerging markets, biofuels titans Brazil and Argentina will need to balance their domestic biofuels demand requirements against the world’s growing appetite for their agricultural output – particularly as Trump’s rattling of his ‘America First’ sabre pushes major importers to begin hedging long-standing trade assumptions. South-east Asian producers, meanwhile, will need to juggle their restocking efforts in the wake of last year’s devastating El Niño drought with government ambitions to consume more renewable fuel at home to support commodity prices and improve current account balances. 

 

 

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