RINs in oversupply as biodiesel imports surge

Thursday, September 17, 2015

The boost in demand comes despite poor blend margins which are break-even at best when accounting for the RIN value. The bulk of the industry appears to be acting with near certainty of a reinstatement of the biodiesel tax credit (BTC) to make them whole this year.

The US is on pace to produce and import at least 2.16bn USG of RIN-generating biodiesel and renewable diesel with most market participants anticipating between 1.9bn and 2.2bn USG depending on when or if the BTC is reinstated. This would leave between 200mn USG and 500mn USG of production for carry over RINs compared with a total carry over capacity of 425mn USG, or 283mn RINs based on the current proposed Renewable Volume Obligation (RVO) for 2015. Should the industry produce in excess of its total carry over capacity, the 2015 D4 RIN will not lose much intrinsic value as many obligated parties will be using D4 RINs to satisfy their advanced biofuel obligation.

Nearly 6pc of the RIN-generating biodiesel consumed in the US so far this year is in the form of Argentine imports. During the first six months of 2015 the US imported 811,000 bl, or over 34mn USG, from Argentina representing 34pc of total biodiesel imports for the first half of the year. This compares with no imports during the same period last year.

Unlike years prior, much of this volume qualifies for RIN generation after the US Environmental Protection Agency (EPA) gave the green light to Argentina to qualify for credits in January of this year. While the US imported 1.2mn bl of biodiesel from Argentina during the last six months of 2014 without a RIN advantage in place, market participants are expecting around 1.6mn bl of term imports to arrive during the second half of the year bringing total Argentine imports to nearly 2.4mn bl.

Imports of renewable diesel from Singapore are on the rise too. The US imported 1.9mn bl of renewable diesel during the first six months of 2015, up 43pc on year-ago levels. Even if import activity slows during the second half of the year, the US will soak up at least 3.2mn bl of renewable diesel from Singapore this year. Rising prices for Low Carbon Fuel Standard (LCFS) credits have spurred this commerce. LCFS credits are averaging $33.12/t year-to-date, up 12pc from year-ago levels and have tripled since June to $66/t.

The pace of imports could change depending on what form of biodiesel tax credit the government ultimately signs off on.

The potential for the tax extenders bill currently under review to reinstate the BTC as a domestic producer's tax credit rather than a blender's credit could drastically alter economics for imported barrels and shelter the US biodiesel producers from global market forces for the next two years. Not only could this back out Argentine barrels but possibly renewable diesel from Asia depending on prices for LCFS credits.

A producer's tax credit would also alter the state of blend economics. In order to make blending profitable some of the BTC would have to be passed on in the form of a discount to the fuel contingent upon RIN values. RIN values are falling rapidly as robust biodiesel production and imports has created a D4 glut, while the conventional ethanol RVO this year is around 670mn USG short of the blendwall. RIN generation has been averaging a 95mn credit surplus each month in relation to the monthly RVO requirement. Yet, a producers' tax credit would back out imports, taking RINs out of the system and adding support to prices.

The biodiesel industry is waiting to see if the BTC will be reinstated retroactively before the EPA announces its final RVOs in November.

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