Corn Rally Sparks Green Fuel Rethink by Chinese Energy Giant

Source: By Alfred Cang, Bloomberg • Posted: Tuesday, November 3, 2020

Millions of hungry pigs in China are setting off a chain reaction in the fuel market, causing the biggest oil refiner to rethink its sales strategy.

A hog herd boom amid a push to revive supplies of the nation’s favorite meat has driven up corn prices as demand for animal feed soars. That’s sent biofuel costs flying for oil titan Sinopec Group, which is now being forced to scale back its plans to sell E10, a mix of 10% corn-derived ethanol and gasoline.

China has a mandate to roll out E10 fuel nationwide from 2020 in an effort to reduce pollution and support its agricultural sector. But adoption has only taken hold in the country’s east, and speculation swirled earlier this year about a possible suspension of the program even as the nation sought to increase ethanol imports, sowing confusion over Beijing’s commitment to the E10 plan.

“The policy objectives for E10 are not clear,” said Luxi Hong, a Beijing-based BNEF oil and petrochemicals analyst. “So from the perspective of a fuel supplier, there aren’t enough incentives to blend ethanol gasoline, especially when profits can’t be guaranteed.”

E10 implementation, and implied fuel ethanol demand

In a rare notice sent to some clients, Sinopec Group said it will reduce E10 sales in China’s east because of a “severe shortage” of ethanol supplies. Northern areas of Jiangsu province will be the most severely impacted, Sinopec said in response to a Bloomberg News inquiry.

Sinopec has increased fossil fuel supplies in the affected areas to meet local demand and will restore E10 supplies to normal levels when the company is able to purchase enough ethanol, it said. The giant refiner operates the country’s largest gas station network.

Ethanol supplies in parts of other provinces such as Anhui and Shandong will be also halted, China Energy News, a newspaper run by the National Energy Administration, reported, citing a survey with local gas stations. In an editorial, the paper urged the government to review the green fuel plan and lower the program’s dependence on grains.

The company is not the only one affected. Producers of ethanol for road fuel have been keeping product inventories low and are reluctant to raise output because of the surge in corn prices, according to four Chinese grain traders. Corn accounts for 87% of Chinese ethanol, China Energy News said.

Corn prices have jumped more than 30% this year in China as hog herds recovered more quickly than expected from African swine fever, demand increased from the starch industry and typhoons flattened the crop.

Corn prices climb on supply shortage

And prices are likely to rise further, a senior agriculture ministry official said last month, adding that some farmers are withholding their crops on expectations of higher prices. In Dalian, benchmark corn futures closed at a record on Oct. 30. The supply deficit could hit about 60 million tons in 2020-2021, which would be partly covered by widespread use of low-quality wheat.

Cheaper Oil

Along with demand from hogs and fuel makers, the coronavirus pandemic has driven up consumption of ethanol as a sanitizer. All the extra demand has pushed up prices of ethanol so much that they have surpassed gasoline by almost 1,300 yuan ($194) a ton to post the widest spread since at least 2017.

Ethanol prices exceed gasoline in China this year

Imports aren’t much help either. Though China used to be a major buyer of U.S. ethanol, the trade war meant Beijing hit American supplies with 70% tariffs. While the truce could see more shipments, purchases have been scant so far.

All this will probably further reduce the chances of more ethanol use on the roads. “It’s hard for Chinese producers to raise E10 output with all these market fluctuations and lack of strong policy support,” BNEF’s Hong said. “Companies and local governments are hesitant to invest in an industry with so many problems, which seem to have come one after the other this year.”

(Adds background in 7th and 8th paragraph)

|