Analysis of the U.S. Biodiesel and Renewable Diesel Market by Genscape and Playmaker Strategies

Analysis of the U.S. Biodiesel and Renewable Diesel Market by Genscape and Playmaker Strategies
Blog July 27, 2017


There are a number of impactful events happening in the world of biodiesel and renewable diesel right now that influence the supply and demand balance, and thus, the commodity prices in 2017 and beyond. Two of these events are highlighted in detail in this blog:
  • There is an ongoing trade case being evaluated related to biodiesel imports
  • The Environmental Protection Agency (EPA) has proposed 2018 RFS volumes for the total advanced biofuels, which are comprised almost entirely of biodiesel and renewable diesel, and the 2019 RFS renewable volume obligations (RVOs) for biomass-based diesel (biodiesel and renewable diesel)
Genscape and Playmaker Strategies are combining our knowledge in this blog to bring additional market insight on these current events. 

Future Blogs will discuss:

  • The Biodiesel Tax Credit
  • Updates to the U.S. biodiesel trade case on antidumping and countervailing duties
  • Upcoming issues related to the RFS and RVO’s

Biodiesel Anti-Dumping and Countervailing Investigations

On May 5, 2017, the U.S. International Trade Commission (ITC) voted to continue antidumping and countervailing duty investigations of biodiesel imported from Indonesia and Argentina into the U.S. A preliminary Department of Commerce (DOC) determination on countervailing duties is anticipated on or about August 22. If the DOC approves the preliminary duties, then the preliminary countervailing duties (cash deposits) would likely begin as soon as August 28. Additionally, the DOC is scheduled to make a preliminary antidumping determination on or around October 20. If the finding is affirmative, then preliminary antidumping duties would likely begin as early as October 26. The imposition of preliminary duties could slow imports of biodiesel into the U.S.

It is common for remedies to be granted in antidumping and countervailing duty proceedings, and it would be reasonable to assume that biodiesel imports from Argentina and Indonesia will likely be subject to some level of these duties from the U.S. The European Union, when facing a similar fact pattern, imposed duties on Argentinian biodiesel imports. However, the timing and levels of potential duties remains to be seen. These factors will have an impact on the market – notably on volumes and price of Argentinian and Indonesian biodiesel and renewable diesel consumed in the U.S. Generally speaking, the expected impact of imposed duties would be a decrease in volumes imported to the U.S. from these countries due to an increase in price of these sourced commodities.

As stated above, the next major steps in this trade case will be on or around August 22, when the Department of Commerce is expected to announce its preliminary determination on countervailing duties. Deposits for countervailing duties could begin a week later. The preliminary antidumping determination is expected to occur in late October. Both Genscape and Playmaker Strategies are closely monitoring this case, and will continue to provide updates and perspective as events unfold.

Finally, if you are a company importing biodiesel from Argentina or Indonesia, then the ITC and DOC can initiate “retroactive” CVD cash deposits for illegal dumping. If that were to happen, the retroactive duties will likely be due from May 30, 2017.

Question: If duties are imposed in late August, what sources other than Argentina biodiesel imports could realistically fulfill the remainder of the 2017 advanced mandate?

Based on our analysis presented in this blog, we expect that increased production from U.S. producers and minor quantities of imports could amply balance the advanced demand from the 2017 RVOs. Looking forward to 2018, further increases in U.S. production could be expected. The tables and explanations that follow walk through the discovered supply and demand balance. 

2017/2018 Advanced Supply and Demand Balance Outlook

Table 1 shows the 2017 advanced renewable fuel RVOs and the estimated demand for biomass-based diesel (BBD) to meet the total 2017 RVO. Genscape’s expected total demand for biomass-based diesel is about 2.5 billion gallons. The estimate considers: 1) sugarcane ethanol imports and other D5 qualified fuels produced at the same rate as 2016; 2) no additional cellulosic fuel produced over what is mandated; and 3) biodiesel and renewable diesel making up the remainder of the advanced mandate. 

2917 RFS Advanced RVOs

Table 2 shows the estimated U.S. produced biomass-based diesel supply for 2017. At a minimum, the industry would be capable of the same domestic production as last year. Through April, the EIA reports that there has been about 20 million gallons less of U.S. production compared to 2016, which is not unexpected considering the lapse in the tax credit. Genscape estimates that with the imposition of duties, the U.S. could increase its biomass-based diesel production through increased utilization by about 100 million gallons over the remainder of the year.

To understand the basis for the 100 million gallons, there are two considerations: offline plants coming online and increasing capacity utilization. For the former, Genscape estimates that there is about 350 million gallons of non-operational annual capacity represented in the 2.3 billion gallon capacity reported by the EIA. (Note that the EPA reports 4.1 billion domestic gallons registered for advanced biomass-based diesel.) Considering 30 to 60 days to bring an offline plant online with feedstock sourced, it seems fair to consider only fourth quarter production for 2017. Depending on the duty and cost of production, there would be some offline gallons that would be financially incented and others that would not. To account for this, the analysis considers only half of the non-operational plants coming online for 2017. Biodiesel plants do not typically run at maximum capacity year-round, and Genscape uses an 85 percent average operational rate to translate capacity to average annual gallons. Using this methodology, Genscape estimates that bringing non-operational plants online could increase production by about 40 million gallons in 2017 (=~350gal/yr*0.25*0.5*0.85).

Genscape estimates that increasing utilization for online plants could add another 40 million gallons of 2017 production. An additional 20 million gallons is represented for the REG Geismar renewable hydrocarbon diesel production facility, recovering from conditions that took it offline in the fourth quarter of 2016. With all of these factors in consideration, Genscape’s estimated U.S. produced BBD supply availability is 1.93 billion gallons for 2017

Estimated 2017 U.S. BBD supply

Finally, Table 3 considers countable U.S. imports of biomass-based diesel prior to any potential duty. For the analysis in Table 3, renewable diesel imports are considered to continue unimpeded year round, while advanced biodiesel imports by vessel are only considered through August 2017. Rail imports from Canada are estimated to continue year-round. A total of about 580 billion gallons of D4-qualified biomass-based diesel imports are expected whether or not a tariff decision comes down from the ITC. 

estimated of 2017 u.s. imports of bbd

From these three tables, a supply and demand balance is formulated in Table 4. Effectively, the available supply balances demand. If there is a gap of a few million gallons, based on previous years, there is ample physical supply from South Korea, Germany, and potentially other countries for gallons needed to balance the advanced RVOs without further imports from Argentina. 

estimated 2017 supply and demand balance summary

If a long-term tariff is established, in 2018 U.S. producers will have had more time to react and a greater percentage of the off-line capacity could roll online. The incentive for the marginal gallon will be higher and U.S. producers could present a more economical option to satisfy the mandate. While it is unlikely that all offline capacity would be able to come online in 2018, the possibility of adding 200 to 250 million gallons per year to the run rate by end of year would not be out of reach. This would bring the total available U.S. produced supply from 2.1 to 2.2 billion gallons. The proposed advanced volume for 2018 is 4.24 billion ethanol equivalent gallons, which after allowances for cellulosic biofuels, sugar cane ethanol, and some other marginal advanced gallons leaves the expected demand for biodiesel and renewable diesel again at about 2.5 billion gallons. Slightly more biomass-based diesel (about 0.01 billion gallons) would be needed in 2018 over 2017, based on the current proposed volumes. A similar analysis to 2017 would anticipate that biodiesel imports of up to 200 million gallons (2.5B demand - 2.1B U.S. supply - 0.2B renewable diesel imports) would still be needed to meet the 2018 total advanced mandate. 

Soybean Oil Demand Impact

If U.S. biodiesel production increases with the implementation of a tariff, Genscape expects that soybean oil demand would also rise, which could lead to a price increase for bean oil and the D4 RIN value. Bean oil statistically accounts for about 55 percent of biodiesel feedstock based on EIA data. For every additional 100 million gallons of produced biodiesel in the U.S., the rise in soybean oil demand is about 400 million pounds, statistically speaking. For reference, about 6,100 million pounds of soybean oil was used for biodiesel in 2016 according to the EIA. In 2017, there could be an increase in demand for soybean oil over 2016 to about 6,400 million pounds if the U.S. produces more gallons. Also in 2018, an increase of another 800 to 1,000 pounds would not be unreasonable if another 200 to 250 million gallons comes online. 

Additional Demand Considerations for Biomass-Based Diesel

In addition to the trade case creating more incentive for U.S. biomass-based diesel production, it is important to note that biodiesel and renewable diesel are next in line to ethanol to cover the non-advanced renewable mandate. This could generate more BBD demand in 2017 and 2018. Looking at 2016 as a reference, D6 RINs from biomass-based diesel sources accounted for about 0.45 billion of the D6 RIN generation pool. Ethanol D6 RIN generation accounted for about 14.7 billion gallons of the 15.0 billion gallons that could be used for non-advanced renewable fuels under RFS. Note that 0.23 billion D6 RINs were retired for reasons other than RFS compliance and were taken out of the 2016 supply balance. 

In 2017, with the lapse of the tax credit, D6 RINs from Indonesian biodiesel specifically have been absent from the supply balance. D6 biodiesel RINs accounted for 0.17 billion RINs of the 2016 supply. The absence of the D6 biodiesel supply in 2017 could place additional demand pressure on advanced biomass-based diesel, to the tune of 100 million gallons.

Another factor to consider is that the D3 cellulosic RIN supply is only about 10 million RINs ahead of last year through May, while the mandate is 80 million RINs higher than last year. A cellulosic RIN obligation can also be met through the purchase of a cellulosic waiver credit paired with an advanced RIN. The need for advanced RINs for pairing creates an additional need for advanced gallons. EPA data indicates that last year about 34 million cellulosic waiver credits were purchased for 2016 compliance. These would have demanded 22 million gallons of biomass-based diesel (or equivalent).

2018 Renewable Volume Obligations

Proposed volume requirements

The RFS and the Advanced Biofuels program will likely come under greater scrutiny in 2017 than in previous years. It remains to be seen how the new political leadership at the EPA and in the White House will administer the RFS program. In addition, lawmakers on Capitol Hill are under increasing pressure to make statutory changes to the RFS program that would be detrimental to biofuels producers. 

The overall 2017 RFS was set at 19.28 billion gallons, with 4.28 billion gallons being allocated to Advanced Biofuels and 15 billion gallons allocated to conventional biofuels. It is anticipated that the EPA, through the regulatory process, will review the entire program prior to establishing 2018 volumes on or before November 30, 2017.  

Advanced Gallons 2018 vs. 2017

In gallons, the Advanced Program for 2018 is nearly identical to the 2017 RVO program, in that the EPA set the advanced volumes at 4.24 billion gallons, only slightly down from 4.28 billion gallons for 2017. The advanced volume set aside for cellulosic biofuel (CB) is lower in 2018 than 2017. For 2018, the volume for CB is proposed at 238 million gallons and for 2017, it was set at 311 million gallons which is a reduction of 73 million gallons for CB.

By statute the undifferentiated advanced volume is set at 4.0 billion gallons for 2018 – EPA followed the statute for that part of the program and did not invoke “general waiver” authority to lower the volume below 4.0 gallons.

In comparison, by statute the undifferentiated advanced was 3.5 billion gallons in 2017. During the same year, in addition to the minimum statutory volume (3.5 billion), the EPA grew the undifferentiated advanced by a discretionary 469 million gallons for a total advanced program of 4.28 billion gallons (3.5 + .311 + .469 = 4.28). In 2018, the EPA did not propose any discretionary volumes for advanced biofuels beyond the statutory minimums (4.002 + .238 = 4.24).

For a copy of the proposal see the following link: Proposed rule (PDF) (89 pp, 849 K, pre-publication, signed July 5, 2017).The final rule is expected to be published in late November 2017.  

About Genscape and Playmaker Strategies

Genscape measures market fundamentals using thousands of patented and proprietary land, sea, and satellite monitors strategically deployed worldwide, delivering exceptional insight and intelligence to clients. In the Agriculture space, Genscape is carefully monitoring the U.S. soybean crush, using independent sensors to monitor plant processing rate. With the Genscape information, clients can watch how the crush is evolving and get Genscape’s estimate of the monthly crush as it is happening in near-real-time. The service also provides a daily summary of plant outages. In the Biofuels space, Genscape monitors all biodiesel and renewable imports into the U.S., providing weekly updates of what is on the water and what has arrived. Measured imports are available months before EIA reported data. To learn more, or to request a trial of Genscape’s Global Biodiesel Imports Monitor, please click here.

Playmaker Strategies, LLC is a government relations firm located in Washington, DC.  The firm’s Principals, Larry Schafer and Manning Feraci, are seasoned government relations experts with decades of experience successfully addressing the specific federal legislative and regulatory issues facing biofuels stakeholders. Playmaker Strategies uses its knowledge of the policy, process and players to keep their clients up to speed on happenings in Washington, DC that will impact their bottom line and while helping them tailor and implement effective government relations strategies to meet their advocacy goals.