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The world of biofuels is evolving at a breakneck pace. Global production capacity is accelerating and according to the International Energy Agency (IEA) Renewables 2022 report, demand for vegetable/waste oil feedstocks is set to increase by 56% over the next five years.
The United States and Europe are moving from biodiesel and ethanol to renewable diesel, while Indonesia, Singapore and India expect growth in biodiesel, sustainable aviation fuel (SAF) and ethanol. Singapore has long been a participant in biofuels, in particular SAF and marine fuel, while China is the world’s largest exporter of used cooking oil. Indonesia has the world’s highest transport fuel blending mandate and relies heavily on domestic palm oil as a feedstock.
Chinese Used Cooking Oil to Power the World
Waste and residues, a feedstock category that includes used cooking oil, is poised for the fastest growth among biofuel inputs, with the IEA projecting total feedstock share of waste and residue to grow from 9% in 2021 to 13% in 2027. One motivator for the growth of waste and residue as a biofuel input is the natural limitations of growing more soybeans, the oil of which is the primary feedstock for biodiesel and renewable diesel in the United States.
Additionally, legislation in the European Union supports the feedstock use of waste and residual oils on environmental grounds: used cooking oil, for example, conveniently circumvents the food vs. fuel debate as it has already been used in a food application.
China has a rich and oil-rich culinary tradition. Already the world’s largest exporter of used cooking oil, according to a working paper from the International Council on Clean Transportation, China is only beginning to unlock its waste and residual feedstock potential. Bloomberg estimates that in the city of Chengdu alone, Sichuan hot pot produces an average of 12,000 tons of waste oil every month.
Renewable diesel is the fastest growing and arguably most in-demand biofuel, due to its ability to be used in unmodified diesel engines. Two years ago, U.S. production of biodiesel exceeded that of renewable diesel nearly threefold, while today renewable diesel has more than caught up and in late 2022 monthly production capacity of renewable diesel exceeded that of biodiesel in the United States.
Prior to a ramping up of U.S. renewable diesel capacity, U.S. used cooking oil was often exported to Singapore to be converted to renewable diesel before being re-imported to the United States for vehicular use. Now, with U.S. production capacity of renewable diesel increasing, the country is keeping its used cooking oil for domestic refining. China is now experiencing competition for destinations between Singapore, Europe and the United States for its residual and waste oil exports. As China eyes carbon neutrality, however, the country may begin to use its own waste and residual feedstock for domestic refining.
Sustainable Aviation Fuel and Marine Fuel Take Off in Singapore
Outside of Europe and the United States, Singapore and Japan are the world’s primary sources of SAF. SAF is seeing accelerated demand in large part due to the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA), an initiative adopted by the International Civil Aviation Organization, which required aviation emissions reporting from 2021 onwards. SAF is seen as a crucial factor in decarbonization, as aviation cannot be accommodated by electrification: no battery can yet power a plane. Biofuel producer Neste’s Singapore expansion is set to dramatically increase capacity of SAF in the near term.
A robust port in itself, Singapore has the goal of zero marine emissions by 2050, aimed to be achieved via full electrification and biofuel use for local harbor craft in port waters. Singapore has supplied marine vessels with 70,000 MT of biofuels, according to Argus.
Indonesian Palm Oil Persists
In February 2023, Indonesia increased its biodiesel blending mandate from B30 to B35, augmenting what was already the world’s highest threshold. Biofuel in Indonesia is used both to meet climate goals and to shelter the developing population from volatile international petroleum pricing, while making use of an abundant domestic resource: palm oil.
Palm oil is the primary feedstock for Indonesian biodiesel, and while palm oil is being phased out as an input in Western production due to its association with deforestation, it is not expected to slow down in its use in Indonesian biofuel. In fact, net use of palm oil as a feedstock is expected to increase through 2027 as Indonesian gains more than offset Europe’s divestment from the feedstock, according to IEA projections.
Evolving Landscape, Evolving Risks
As the global biofuel market landscape evolves and becomes more complex, so do the risks and thus the risk management needs of market participants. Weather, geopolitics, supply chain issues or other events could affect any of these commodities at any moment. Soybean Oil, Corn, Ethanol, Brazilian Soybeans, UCO and Malaysian Palm Oil futures and options are available to trade at CME Group, providing risk management tools throughout the supply chain and across global markets. All will be markets to watch in the months and years ahead as supply and demand patterns continue to shift.
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