Ethanol acts as lone bright spot amid China commodity gloom

Source: By Chris Prentice, Reuters • Posted: Monday, August 17, 2015

Aug 17 Recent news from China makes depressing reading for commoditiesproducers, with a slowing economy, tumbling stock prices and a currency devaluation all signaling weaker demand.

There is one exception: the world’s second biggest economy has begun importing ethanol in volumes big enough to stir hopes that it might herald an opening of a major, until now barely accessible, market.

“If it becomes constant, that’s big news. China’s a place where everyone looks and says, ‘what if,'” said Jordan Fife, a merchant with BioUrja Trading LLC in Houston.

State-run grain trader China National Oils and Foodstuffs Corp, known as COFCO, has begun shipping ethanol from its recently acquired mills in Brazil in recent months, the first shipments from the world’s second-biggest exporter since 2012, according to trade sources and Brazilian trade data.

Other Chinese buyers have also booked cargoes from the United States – the largest such purchases on record – as well as South Korea, for delivery through August, traders said.

In all, China’s imported over 56,000 tonnes of the biofuel in the first half of this year, worth about $27 million based on U.S. prices, twice the volume for all of 2014.

That is still tiny compared to last year’s global import volumes of 5.5 million tonnes, according to the International Sugar Organization. Traders speculate though, that the spike could signal Beijing’s intentions to ease restrictions on its biofuels market that could transform the global $40 billion-per-year ethanol industry.

Whether the trickle will become a torrent, as it happened with China’s crude oilimports a decade ago, will depend on the reasons behind this year’s buying spree, which so far remain unclear.

The Brazilian ethanol is coming from a $1.5 billion agribusiness venture COFCO formed there with Noble Group last year, according to a COFCO company official who confirmed the shipments. That could suggest the shipments may be a result of China’s expanding overseas resource-related assets rather than a broader demand trend.

Some traders also said the purchases might simply reflect opportunistic buying as tumbling global sugar and corn prices make foreign ethanol cheaper relative to Chinese supplies.

Chinese prices of corn and wheat the country uses in most of its ethanol production have been driven up by Beijing’s grains stockpiling program and U.S. corn costs about one-third of what one must pay in China.

Beijing restricts imports of ethanol for fuel use but has allowed state-run oil companies to import on a trial basis over the past three years, according to data and trade sources.

Still, many industry sources are skeptical that buyers such COFCO and state oil companies China National Petroleum Corp and Sinopec Ltd can continue the current pace of imports without drawing ire from Beijing.


For the moment, the purchases are a boon for sellers including merchants Noble Group Ltd, Louis Dreyfus Commodities BV, and Vitol SA. The companies did not comment on their role in the deals.

If sustained, Chinese buying could provide much-needed relief for U.S. producers. Firms such as Archer Daniels Midland Co and Pacific Ethanol Inc were hit by a collapse in margins as gasoline prices hold near six-year lows while the cost of corn rises. U.S. ethanol stocks are near three-year highs and regulators are cutting back on the volume of biofuel that must be blended into motor fuel.

In Brazil, economic woes have stoked uncertainty about fuel demand while producers suffer from a double whammy of low prices of ethanol and sugar and higher costs due to dollar-denominated debt.

No wonder that U.S. and Brazilian ethanol producers – which together provide more than 80 percent of the global supply – are keen to see China becoming a regular buyer. Its ethanol demand is projected at 2.3 million tonnes this year, but traders say the market could grow far beyond that if a 10-percent ethanol fuel content mandate applied in some provinces is expanded nationally.

China imported about 5,000 tonnes of U.S. ethanol in June alone – half the annual shipments in 2013 and 2014 according to U.S. government data. One trader estimated that another 50,000 tonnes is headed to China by the end of this month.

Brazil exported about 11,250 tonnes of Brazilian sugarcane ethanol in the first six months of the year, data show, the first such sales since 2012.

“It seems like a shift,” said Steve Nicholson, an analysts with Rabobank AgriFinance in St. Louis, Missouri. But it was too early to tell for sure.

“Is it an opportunity for U.S. or Brazilian ethanol producers to find a new home? We don’t know yet.”