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Developments in Renewable Fuels’ markets

Continued growth in global biodiesel demand

Global biodiesel demand continued to grow in 2013, in line with long-term projections. The pace of growth was slower than between 2008 and 2012, however. Demand grew in North America in particular, on the back of higher mandated content requirements. Demand for biodiesel in the EU fell compared to 2012, due to a lower mandate in Spain, double countable biofuels reducing physical demand, and stagnating fossil diesel demand. Demand for premium-quality solutions such as NExBTL renewable diesel developed positively everywhere.

Biofuel legislation in Europe and the US set for a number of changes

Legislation designed to promote the use of renewable energy sources and biofuels has been developed and introduced around the world for a number of years.

In fall 2012, the European Commission proposed a significant change to the EU's biofuel legislation by splitting the 10% requirement for biofuel usage in traffic and transport by 2020 into two parts – limiting the proportion of biofuels produced from food crops to 5% in 2020 and requiring the other 5% to be met using biofuels produced from waste, residues, or completely new types of raw materials.

A further proposal announced in fall 2013 indicated that biofuels produced from food crops should be limited to 6% of total traffic fuel consumption and that an advanced biofuel quota would be introduced from the beginning of 2016 onwards for biofuels refined from nonfood inputs rising to 2% by 2020. Debate on how best to reform legislation in this area is continuing, as no changes have yet been approved.

The Environmental Protection Agency (EPA) in the US announced a proposal covering renewable fuel mandates for 2014 in November that would retain the biomass-based diesel mandate at the 2013 level and reduce total renewable fuel mandates by 8% compared to 2013.

Neste Oil and the advanced biofuels industry believes that the industry has proved its capability to deliver growing volumes of advanced biofuels during 2013, and biomass-based diesel in particular, to the US market. As a result, Neste Oil favors higher 2014 mandates for advanced biofuels than those contained in the EPA proposal, as this would support further research and investment in this area.

Strong margins for conventional biodiesel

Margins in the European biodiesel market improved significantly in 2013 compared to recent years. Product shortages and raw material prices both contributed to this development. The volume of cheap biodiesel on the market dropped considerably after the European Commission announced that it was going to impose heavy import duties on biodiesel imports from Indonesia and Argentina, which acquired a more than 20% share of the European market in 2012, with sales of more than 2 million tons.

Biodiesel margins in the US remained modest during the early part of the year, but reached an all-time record around mid-year. Numerous factors contributed to this, primarily strong product demand combined with low feedstock prices. Demand for renewable diesel improved, not only as a result of the higher mandate, but also because of the need to find alternatives to ethanol; usage of the latter has begun to reach 10%, challenging the capabilities of the country's distribution infrastructure. Margins declined from the peak levels seen in the middle of the year, as the price of end-product and RIN declined strongly as the EPA announced its proposal for biofuel mandates for 2014.

Major fluctuations in renewable feedstock prices

The price of renewable feedstocks fluctuated strongly in 2013, as in previous years. Crude palm oil prices varied between USD 680/t and USD 825/t (Malesia) and averaged USD 770/t (957). Lower-than-expected supply growth, combined with strong exports, kept Malaysian palm oil inventories below the 2 million ton benchmark level from March 2013 onwards, which resulted in higher prices towards the end of the year.

Rapeseed oil (RSO) and soybean oil (SBO) prices fell during the year. SBO prices, in particular, came under pressure, as the US soybean crop was better than expected, while the outlook for the 2014 crop in South America remained very good. The price differential between palm oil and rapeseed oil was wider than the long-term average during the first half of the year, but narrowed subsequently. The CPO/RSO spread fell from USD 330/ton in the first quarter to around USD 150/ton in the fourth quarter of 2013. Animal fat prices remained at a premium over palm oil, but the premium was clearly narrowed during the fourth quarter.

Competition is also expected to increase, alongside higher demand

Neste Oil is the world's largest producer of renewable diesel and the NExBTL renewable diesel that it produces using its proprietary technology is of a significantly better quality than conventional biodiesel. The only other companies producing a comparable product on an industrial scale are US-based Diamond Green Diesel and Dynamic Fuels, which have a combined production capacity of 700,000 t/a. There is a surplus of conventional biodiesel capacity, and a number of poorly performing small plants have been closed as a result in recent years.

Competition is expected to increase significantly over the next few years, as the marketplace prefers premium-quality, advanced biofuels of the type represented by Neste Oil’s NExBTL renewable diesel. High-quality ‘drop-in’ renewable fuels like NExBTL do not require modifications to existing vehicle engines or distribution and logistics systems. The use of premium-quality renewable diesel is not limited by the 7% blending limit in Europe imposed on conventional biodiesel. The supply of renewable diesel is also expected to increase as new capacity enters to the market.