Have renewable diesel prices reached rock bottom?

Recent plans on legislative changes in Germany will bring about extra demand for HVO already this year and should provide a solution to the supply glut in the EU created by earlier legislative changes in Scandinavian countries.

The German government recently announced plans to terminate the usage of upstream emission reduction (UER) projects within the framework of the greenhouse gas (GHG) emission reduction mandate already at the end of 2024, two years ahead of previous schedules.  This change is in accordance with the changes in the European Fuel Quality Directive (FQD) that dropped provisions for GHG targets and thus UER measures, which means we should also expect similar changes in other countries using UER projects against the road transportation fuels mandates.  

The shift in Germany has been made possible thanks to the increased number of compliance options available to obligated under the GHG savings quota parties. For instance, the GHG reduction certificates coming from using electric vehicles (EVs), that in 2022 accounted for 5% of the total number of GHG saved, and in 2023 could have reached almost 10% of the total quota.

GHG mandate compliance in Germany in ktons of CO2 equivalent

Source: Kpler

In the meantime, the German Parliament greenlighted using co-processed HVO and renewable fuels of non-biological origin (RFNBO) to be counted towards the GHG quota.

We estimate that the recent legislative changes could bring about additional 0.6 Mnt of HVO demand necessary to fill the mandate in 2025. Together with the expected increase in SAF demand next year due to the ReFuelEU Aviation Initiative, there will be a significant need for imports of both HVO and SAF as the increase of production capacity in Europe is progressing at a slower rate than demand.  

If the outcome of the anti-dumping investigation against biodiesel imports from China turns out to be an introduction of additional import duties on Chinese product, that may also apply to HVO, leaving Singapore as the only viable source of non-EU supply. Moreover, European importers will have to compete with their US counterparts, the latter already benefiting from the Blenders Tax Credit (BTC).

Once the law has been published, it may give the operators incentive to blend HVO this year, above the current quota, bearing in mind potential increase in prices next year.

Especially looking at price relationship between HVO and FAME, it should be attractive for the blenders to increase purchases of renewable diesel.

This could have already started to materialise, given the recent uptick in the relevant spreads in Europe (see below) and could be signaling the end of the low-price HVO period.

Spread between HVO class I and FAME 0 and the spread between HVO class II and UCOME, USD/ton

Source: Kpler analysis based on Argus data

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