Hot Oil Debate – Market Commentary

[London, February 2018] – The biofuels debate continues to be a hot issue and the movement of it has, and always will be driven by politics. Last month saw the European Parliament announced its decision to phase-out the use of palm oil in biofuel by 2021 dropping the permitted level of crop-based biofuels that can be used to the member states’ 2017 consumption levels, and no more than 7% of all transport fuels until 2030. EU lawmakers also decided on a 12% target for renewables in transport, which also includes 10% for so-called second-generation or advanced biofuels, such as waste-based biofuels and recycled carbon fuels.​ Apart from sending a clear message that the agri-business needs to move away from food-based crops, policymakers expect investments will be redirected into “fuels of the future”. This has clearly hit Palm Oil exporters hard. As of last year, Europe is now the second largest importer of Malaysian Palm Oil exports after India, having increased its imports to 2.06Mt while India imported 2.83Mt.​ One of the biggest arguments for moving away from the use of biofuels is the knock-on impact on emissions due to land-use change, degradation of land and an increase in food prices. Some organisations are pushing for a complete phase out of food crops for biofuels. ​In Europe, a new report commissioned by the European Commission argues that the higher renewables target would unlock an additional €368Bn of investment through to 2030. With existing technology, the EU is already capable of doubling its energy mix to 34% by 2030, thereby delivering deep emissions cuts and economic growth across the continent. But where will the product come from?​ In the UK, the use of biofuels in its energy mix has been decreasing since 2013/14, while worldwide production continues to rise. Some three quarters of the biofuel used in the UK is imported, however there has been a marked increase in second generation biofuels derived from waste such as Used Cooking Oil (UCO) as the consumption of crop-based biofuel has fallen. The use of UCO was driven in part by the EU “double counting” rule which allows fuel suppliers to reach their blending obligations with half the amount of biofuel if it comes from waste or other non-food product.  ​The UCO market is expected to increase at a CAGR of 3.3% between 2018-2023. We have already seen global UCO movement increase from 1.34M tpa in 2011 to 2.23M tpa in 2017, of which Europe imports the largest share (1.1M tpa in 2011 to 2.1M tpa in 2017). As the scalability of UCO sourcing is limited, the EU will be more reliant on imports. ​