Tuesday, December 19, 2017

Ethanol Trade between the U.S. & China Spikes in Wake of Price Drop

Since early October, it has been reported that the fuel ethanol arbitrage window from the U.S. to China has officially opened. This comes after the Chinese government implemented a hefty 30 percent import tariff in January of 2017 in an attempt to boost domestic corn and ethanol production. There are 11 provinces and 40 cities that currently have a 10 percent ethanol blend rate mandate, but China has announced a timeline for implementing the mandate across the country by 2020. Chinese domestic policy also dictates that almost all of the ethanol used must be domestically produced, according to the U.S. Department of Agriculture. China was one of the top buyers of American fuel ethanol in 2016, comprising of approximately 17 percent of all exports according to U.S. Census Bureau data.

Initially, many analysts and traders believed that there would not be any fuel ethanol trade between the U.S. and China with this tariff in effect. From the time the tariff was put in place through October 2017, almost no ethanol from the U.S. shipped to China according to U.S. Census Bureau data. However, with current U.S. ethanol prices as low as $1.30/gallon, exporting fuel ethanol to China is now very attractive, even with the tariff in place.

U.S. Fuel Ethanol Exports
Total U.S. fuel ethanol exports compared to U.S. exports to China from 2014 to 2017. *2017 data through October. Data source: U.S. Census Bureau Trade Data

With the arbitrage window open, when will shipments begin moving ethanol to China and from where? 

Two shipments out of Oiltanking Texas City in Texas City, TX, and one from Kinder Morgan’s Delta Terminal in Harvey, LA, are currently en route to Ningbo and Nanjing, China. Genscape also saw that the vessel “Beatrice” out of Oiltanking Texas City changed its original destination from South Korea to China. All three shipments are expected to arrive in China before the end of the year.

Genscape Vesseltracker Track
Genscape Vesseltracker’s data shows that three shipments have left the U.S. Gulf Coast loaded with ethanol and are headed to China. Click to enlarge
Ethanol production has not shown a slowdown, and storage levels are still high, supporting ethanol exports from the U.S. With Brazil’s 20 percent tariff quota in place, additional export destinations are needed to keep pace with U.S. ethanol production. Various destinations such as India, Spain, and Nigeria have replaced the volume that may have been shipped to Brazil. However, while ethanol prices are still low, it appears that U.S. ethanol exports to China will remain attractive throughout the end of the year.

Genscape will continue to track the movements of future ethanol shipments to China and the current production levels. To receive the latest information on U.S. ethanol exports from the Gulf Coast, including daily storage measurements of terminals known to export ethanol, ethanol volumes loaded to vessels, and up-to-date vessel destinations, please click here to learn more about Genscape’s Ethanol Exports Monitor.

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