The European T2 ethanol price surged to Eur809/cu m FOB Rotterdam on Aug. 6, the highest level since the assessment began in 2007 and surpassing the previous record high of Eur769/cu m in September 2012 by some distance, as ARA supply dried up.
While the price has been on a strong upward trend since June, the rally really intensified in the last week with buyers having immediate need for product and the spot price gaining Eur131 from July 30.
The move is even more remarkable considering that the T2 price climbed from all-time lows of Eur350.25/cu m in March, more than doubling in the space of just five months, as European fuel demand recovered from the impact of lockdowns.
But even with demand recovering perhaps quicker than expected, it is still not quite at pre-coronavirus levels, while the gasoline market is not sharing ethanol's bullish run.
However, supply curtailments over April-May and a greater uptake of material from the industrial side for hand sanitizer use left stocks drawn down and the recent increase in demand appears to have outpaced that of supply. Production margins for fuel ethanol have been very attractive since June, but margins are still higher for industrial grade ethanol even though the disinfectant demand has ebbed from the peaks of recent months. As a result, it is likely that any producer that is able to produce both grades is maximizing the industrial side.
Adding to the supply challenges for fuel ethanol, imports that were due to arrive earlier in August have been delayed and will now be arriving alongside other cargoes in a more concentrated period of time towards the end of the month and in September. As a result, despite the prompt rally, September paper is still pricing at a considerable discount at Eur635/cu m.
Steep backwardation on import expectations, demand uncertainty
Higher 2020 mandates had set ethanol on a bullish path at the start of the year and from that perspective the return of good ethanol demand is not surprising. But the contrast with trends in the gasoline market and the rapidity of the move have left many surprised, and some uneasy.
"I still can't believe it but seems to be true -- I am just worried about the following months [...] that a price collapse comes too sudden," a source said, adding that anything that goes too quickly in one direction can do the same in the other as well.
The ethanol curve is pricing a steep backwardation, on concerns of resurgence of coronavirus and a second round of lockdowns, as well as wide open arbs inviting imports. Q4 will also see some additional supply come into the market from the new sugar beet crop. But yields are under threat from dry weather and pest damage so this is unlikely to see a considerable influx of product into the fuel ethanol market. Furthermore, traditionally much of the beet-based ethanol goes to the industrial sector due to preferential odor qualities.
Overall, while the current peak is likely not sustainable and import arrivals should help cool-off the market, normal market conditions would not suggest a particularly bearish outlook. But the great degree of uncertainty is weighing on the forward curve, with imports and coronavirus the key variables.
