Trading over the last week has been steady to higher for fats. Over the last 36 hours many have put weekly price discussions aside and have focused on what the market landscape could look like under the newly elected President Trump. As a candidate he ran on a largely populist and protectionist platform which leaves the passage of the Trans Pacific Partnership in doubt. Doubt over the future of the TPP may affect the commodity markets in the coming weeks as the promise or prospect of increasing free trade diminishes. The USDA WASDE published bigger than expected volumes on corn and soybeans, which has turned the macros lower yesterday before a rebound this morning. Succinctly put, the macro discussion is full of uncertainty right now and this will certainly continue for the near future. President Obama has two months left in office and a lame duck session which is certain to see a flurry of activity.

Fat trading in AUS was up US$10 on exports and trading out of the NZ market was up NZ$15. Sources in the NZ market have suggested that if the NZ$ continues to gain against the US$, price corrections could be seen in the coming weeks. Demand has been strong from both China and Singapore, but uncertainty over tax credits in the US biofuels market may slow demand from Singapore for 2017.

EU trading continues to rise as product remains tight and demand strong. Sources have reported strong demand from both the chemical and biodiesel sectors. Spot supply for both UCO and Cat 3 fats is limited, hence the €50 jump in UCO over the last month and €30 – 50 increase on Cat 3 fats.

The US export market is flat with not a lot of action reported. Sources reported higher offers, but buyers have been unwilling to pull the trigger on additional material. December and early Jan are reported as well-booked and sellers are in a comfortable position right now. Those looking to cover sales may be less comfortable with the US interior seeing prices jump this week.

Chicago BFT traded up to $705/MT or $0.3200/lb yesterday morning as nearby demand surfaced in a market with thin spot supply. Sources had been offering December shipment material at this value throughout the week, but had been unable to move product at that price for that time period. The tech market is $760 – 770/MT or $0.3450 – 0.3500/lb, but offers for Dec shipment at the $770/MT mark into Chicago have gone untraded. Sources have commented that chemical demand is strong through the rest of the year and orders for finished goods are exceeding past seasonality. Prices have bucked the seasonal trend as well, following the macro markets higher for the first Q4 climb in six years.

US Animal Fat Exports

Total fat exports were up over 8,000 MT from August at 84,303 MT. The biggest increase was seen in the yellow grease market, which saw a jump of just shy of 6,000 MT from the month prior. The biggest importer of YG in September was Mexico, which nearly doubled its imports of US tallow at 7,152 MT. This was up 3,377 MT from August. Cheaper AV prices in California helped push material into the Mexico market. Inedible tallow was mainly destined for Mexico at 9,484 MT. Honduras, Guatemala, Nicaragua and El Salvador accounted for a combine 5,789 MT. Finland was the fourth largest importer of US inedible tallow at 2,000 MT.

Guest Commentary – California Low Carbon Fuel Standard

The Status of LCFS: Where are we now?
An Overview

John D. Courtis is an independent consultant on fuels and biofuels issues and was the architect of LCFS for California Air Resources Board

There were a number of debated discussions in the last seven years weather the LCFS program would be able to establish itself and become an important tool for GHG emissions reductions in California.  The LCFS includes carbon intensity (CI) performance standards for gasoline and diesel as well as provisions that award innovation and promote improvements on biofuels, on crude oil production, and on refineries. The LCFS also includes a fuel pathway approval process, a web-based reporting and registration system, and the requirements for a credit market system with a cost containment mechanism setting a ceiling on credit prices at $200 per ton of CO2.  Since its adoption in 2009, the LCFS has gone through a series of evolutionary changes from numerous revisions in 2011, to a number of legal challenges, to the final revisions in 2015 and its full implementation in 2016. There are elements in LCFS without significant controversies, such as the use of the CA GREET methodology in estimating direct GHG emissions, the pathway approval process for different fuels, and the reporting and credit marketing systems.  There are however other significant challenges ahead.  The iLUC methodology and its application are still debated, questions are raised on the LCFS ability to meet the 10% CI reduction targets as are set for 2020, and the full details of verification and monitoring are yet to be defined.  As a result, additional work may be needed for iLUC.  An evaluation and report to the Board in 2017 or 2018 on the ability to meet the 2020 standards are required. Also, in addition to the ongoing verification and monitoring of records, the verification standards need to be further defined.  ARB has already initiated the process for evaluating these and other issues and for proposing potential enhancements to LCFS by the end of 2017.  In the next months, a more detailed and in depth discussion of all these items is expected.

As of today it appears that the regulated parties are in full compliance with the LCFS requirements.  A careful review of the CIs for the fuels in the LCFS market reveals that there have been a number of evolutionary changes in CIs from 2011 to 2016.  As figure 1 shows both gasoline and diesel substitutes have scored reductions in CI over the period 2011-2016. Similar improvements have occurred for other fuels such as CNG and bio-methane.

The changes in CI for ethanol, biodiesel, and renewable diesel, highlighting the importance of biodiesel and renewable diesel for LCFS credit generation.  The much lower CI biodiesel and renewable diesel have the potential to generate much higher credits on per gallon basis than ethanol would.

The evolution of the credit market from 2011 to 2016. It presents the credits and deficits that have been generated from various fuels, most importantly the bank of credits accumulated as of 2016.

Despite the gains depicted in Figure 2, this past trend of credit generation and banking accumulation may not continue with the same strength in future years due to standards becoming progressively more stringent. Fuels in future years will have much more difficult time to generate and accumulate credits.  In 2015 as well as in previous years, the gasoline and diesel standards were at 1%.  The percent reduction is increasing to 2% in 2016 and to 10% in 2020.  These increases in stringency along with the proportional increase in yearly deficits will not allow significant credit accumulation.  A glimpse of the future of credits is shown in the graph for the first quarter of 2016.  The generated credits for that period are closely balanced with deficits. As a result, the credits added to the bank are not significant.

The question of generating credits from 2017 to 2020 remains as does the issue of achieving compliance with the gasoline and diesel standards by 2020 and beyond.   The answer largely depends on the amount of credits that will be generated from existing fuels between now and 2020 as well as on the CIs and on improvements of CIs for these fuels.  The recent trade of credits, when standards became more stringent, demonstrated the importance of the credit market. Although it is too early to draw a complete picture, Figure 3 shows significant increases in trading at the start of the last quarter of 2015 and 2016 as compared to previous years.

Two key questions remain: Which low CI fuels are expected to play an important role in helping meet future targets? And what is the ability for volumes of lower CI fuels to reach the market?  From a monetary perspective, it appears that a LCFS credit price at about $100 per ton combined with the RIN value will create a significant incentive to attract low CI fuels to the California market.

A more detailed review of the gasoline side of the market reveals that it may be challenging to meet the future gasoline standards with gasoline substitutes currently available.  Ethanol blending in gasoline is currently limited to 10%, participation of E85 in the CA market is also limited, and no significant volumes for low CI cellulosic ethanol are predicted at this time.  While there is potential of lowering the CI for ethanol and providing some additional credits, it may not be enough to meet the 10% reduction for gasoline by 2020.

To meet the gasoline compliance obligations fuel producers-marketers must rely heavily on credits generated by other fuels or on credits bought in the LCFS credit market. Some of same challenges may apply to the diesel side.  However, since biodiesel and renewable diesel have much lower CI values, they allow for the generation of much higher credits between now and 2020.  Furthermore, there is potential for higher biodiesel or renewable diesel blends (B20 and above), assuming that infrastructure and NOx issues are resolved. Still, finding additional credits needs to be addressed. In addition to lower CI ethanol and diesel substitutes, LCFS allows credits to be generated from the following fuels or sources:

1.     Electricity and hydrogen

2.     Natural gas and renewable natural gas

3.     Innovative technologies for the production of crude oil

4.     Credits generated by the refineries such as Co-processing of bio-feedstocks, refinery improvements, use of renewable H2

In addition to ethanol, the major source of credits in 2015 was from biodiesel and renewable diesel; and that(TREND) is expected to continue in the very near future.

It is clear that electricity credits are on the rise. The 2015 electricity credits were at about 300,000 MT CO2, including the electricity used by fixed rail, buses, and light duty EVs.  Light duty EVs had cumulative sales at about 186,000 from 2011 to 2016. Credits from the use of bio-methane have also increased from close to zero in 2011 to about 590,000 MT of CO2 in 2015. The future credits generated from electricity and bio-methane will mostly depend on the number of vehicles powered by these fuels.  That said, there are limitations on the numbers of EVs or CNG or RNG vehicles that will be in the MV market before 2020.

Since refinery provisions did not take effect in 2015, there were no credits generated from refineries or from innovative crude oil production technologies.  There is a future potential for small amounts of credits from electricity or solar use for crude oil production and potentially small credits from the refinery provisions but not a lot before 2020.

In a summary, the major source of credits must come from increased volumes of biodiesel and renewable diesel, providing the needed feedstocks will become available, their production will be directed towards the lower CI diesel, the infrastructure issues will be addressed, and credit prices remain healthy.

Table 1 illustrates the critical role of waste/residue based biodiesel or renewable diesel to the success of LCFS.  The importance of biodiesel and renewable diesel will be covered in depth in a follow up article.