Why Argentine biodiesel exports have been so volatile since 2012 and what might happen with the opening of the US and European Union markets. November 2016 report.
General view
Fuel derived from vegetable oils is poised to capitalize on emerging international opportunities. On one hand, on October 6th, the World Trade Organization (WTO) upheld a ruling in Argentina's favor. The ruling, against the European Union, concerns the antidumping tariffs the bloc imposes on imports of Argentine biofuels.
On the other hand, in January of last year, the United States authorized the use of biodiesel from Argentina as vehicle fuel. Previously, biodiesel was exported to the U.S., but for other purposes.
The U.S. Environmental Protection Agency (EPA) is the highest authority regarding restrictions on potential pollutants. It was the agency that issued the authorization on the 28th of that month. This factor solidified a significant increase in shipments to the U.S., which now accounts for more than 90% of Argentina's exports of this fuel.
It's worth noting that the two largest international markets for biodiesel are the United States and the European Union. This is because, in these countries, as well as in our country, there is mandatory legislation requiring the blending of diesel fuel with biodiesel at a specific percentage.
For producing countries like Argentina, access to these types of markets is key for one simple reason: the current low oil prices. Without regulations establishing a minimum biofuel content, it's unlikely that refineries will use them on their own. Without this legally mandated demand, Argentina wouldn't be able to export anything at all.
Recent history
As shown in Figure 1 , Argentine biodiesel exports have been highly volatile. Over the past four years, the industry has faced three crises, from which it has subsequently recovered with varying degrees of success.
The first drop in exports occurred after the nationalization of YPF . At that time, the Spanish government imposed sanctions on Argentine biodiesel, removing national companies from the list of potential suppliers to the market. Prior to nationalization, Spain was the main destination for Argentine biodiesel exports, which led to a considerable decrease in foreign sales.
However, months later the industry had already diversified its exports to other countries, although always within the European Union, a market with mandatory cutting, as the main destination.
The hardest blow to the national industry came at the end of 2013. The EU decided to apply an anti-dumping tariff of between 217 and 246 euros per ton, which made exports completely unviable. Months later, a new recovery began, this time thanks to government support.
In 2014, export duties on biodiesel were significantly reduced (from 22% to less than 10%). This allowed producers to lower their selling prices and begin supplying other markets where biodiesel use was not mandatory. This was a time when petroleum products were very expensive (with crude oil above USD 100 per barrel). Thus, soybean biodiesel appeared to be a relatively inexpensive option.
New markets and new obstacles
After so many complications, the outlook seems optimistic once again for biodiesel producers. Starting in 2017, Argentina will have, for the first time ever, unrestricted access to both the European and US markets. Industry analysts estimate that, once the situation has fully normalized, it will be possible to export a total of 1,5 million tons to Europe, a similar volume to what was originally sold there.
If sales to the United States remain at the average observed in the last five months, this would imply that exports could climb to 3 million tons, representing a value 80% higher than the export record observed in 2011. Thus, total production could exceed 4 million tons.
However, not all the news is encouraging, and bilateral disputes persist. At the end of October, a Latin American country began applying antidumping duties to Argentine biodiesel. This was Peru , which did so through the National Institute for the Defense of Competition and Intellectual Property ( Indecopi ). Resolution 189/16 established duties ranging from US$122 to US$191,6 for a period of five years. These represent between 17% and 31,6% of current FOB values. It is estimated that this measure will prevent US$150 million in exports from reaching the country.
International Look
According to estimates from the United States Department of Agriculture ( USDA ) in its annual report on biofuels in Argentina, biodiesel production could reach 3.100 billion liters, increasing production by around 15% compared to 2016. Exports are expected to increase by 13% compared to 2016, and by 90% compared to 2015.
Regarding the production complex , it is expected that the same number of facilities that have been operating in the country since 2014 will be maintained, that is, a total of 38 plants. However, there are announced investments for the sector that will allow for an increase in production capacity from 5.200 billion to 5.400 billion liters between 2016 and 2017.
At the same time, to increase production, the utilization of installed capacity will rise from 49,8% to 57,4%, the highest percentage in the last five years. An increase in the national blending rate is also expected, from 8,7% to 9,7%. This reflects an increase in local consumption of around 6%, reaching 1.4 billion liters.
Strengths and weaknesses of the sector
The legislation mandating the blending of biodiesel with diesel fuel creates a significant dependence for the biodiesel industry. However, this is not seen as a weakness, as it is unlikely to change. This is due to the powerful lobbying efforts of environmental groups.
On the other hand, one might expect that, given that both oil and soybeans are commodities , there would be significant volatility in their production and trade. However, this is not the case. Primarily, trade volatility stems from bilateral relations, which, as we have seen, can lead to the application of protectionist or antidumping measures.
The main weakness of the biodiesel industry will emerge in the medium term, and that is the electric vehicle . Pollution no longer comes from engine use; if it does, it will originate in the power plants. These could be controlled by the state.
Meanwhile, the range of these types of cars is increasing, as are the charging stations. For example, it's now possible to cross the United States from coast to coast using the stations installed by one of the companies that manufactures these vehicles.
Open access, for use and citation
The report is available freely and without charge, under a Creative Commons license (CC BY-NC-SA 4.0):
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El regreso del biodiesel. Informes del Observatorio UNR N.º 34 — Serie Puente Académico N.º 11, noviembre de 2016. ISSN 2683-9067 / 2683-9091. Autores: Luciano A. Jara Musuruana, Patricio H. Almeida Gentile y Germán A. Tessmer.