- EU biofuel producers are arguing that Indonesian biofuel is being rerouted through China to avoid duties
- The EU’s subsidies for biodiesel produced from Chinese cooking oil make those exports worth double on the EU market
- The subsidies make it more profitable for Chinese producers to export, and to import Indonesian biodiesel for domestic use
- The EU is dragging Indonesia into a trade spat with China that its own subsidies have created
Last month it emerged that the EU was commencing an anti-circumvention case against China and the UK for its exports of biodiesel.
For those unfamiliar with circumvention cases in international trade, they run as follows: a country or bloc (in this case the EU) imposes a tariff on imports (in this case, it’s a tariff biodiesel from Indonesia). The importing country then argues that imports are being diverted through another country to avoid that tariff (in this case the EU is arguing those imports are going through the UK and China).
A History of Blocking Biodiesel
In 2013, the EU placed antidumping duties on Indonesian biodiesel, as well as biodiesel from Argentina. After a WTO complaint by Indonesia, the EU duties were found to be illegal in 2018. Within a few months, the EU placed countervailing duties on the same Indonesian exports. Indonesia launched a WTO case against those EU measures last month.
The ongoing measures point to one underlying reality: the EU biodiesel industry struggles with competition. This takes place at two levels. First, EU rapeseed producers can’t compete with palm oil as a feedstock for renewable biodiesel, which resulted in the Renewable Energy Directive ban on palm oil accessing EU subsidies for biodiesel (that ban has also been challenged at WTO by Indonesia, as discriminatory). Second, biodiesel producers struggle with production costs against overseas counterparts, whether in Indonesia or Argentina – and now China.
So, EU producers now that think circumvention is taking place and that biodiesel in the form of used cooking oil (UCO) based on palm oil is now being routed through China. What lies behind the claims – and, a related question, why are Chinese exports of biodiesel so competitive in the EU market?
RED Distorts the Market
The EU Renewable Energy Directive (RED) creates demand for ‘accepted’ biofuels by mandating that a percentage of transport fuels be used in the overall fuel mix. With palm oil out of the picture because of the EU RED ban, this means a greater reliance on rapeseed oil. However, the Russian invasion of Ukraine has placed upward pressure on rapeseed oil prices – cutting into the margins of biodiesel producers reliant upon rapeseed.
The biggest competition for these producers now comes from producers using UCO to create biodiesel. But the RED gives UCO an additional price advantage because UCO provides a ‘double credit’ in the renewable mandates. In other words, only half as much UCO-based biodiesel has to be used to meet the EU RED’s mandate as biodiesel from rapeseed.
But there’s now an additional complication.
Competition – on used oil
Up until recently, the UCO biodiesel market was dominated by domestic EU producers that were either relying on UCO collection across Europe, or UCO imports that were being processed into UCO biodiesel in Europe. However, UCO collections in the EU are basically at capacity; there’s a limited amount of waste oil. The EU has therefore been importing UCO from China, United Kingdom, Malaysia, Indonesia, Saudi Arabia, and Russia. In 2021, the EU imported around half of its UCO for conversion into biodiesel – representing around 10 per cent of the entire biodiesel supply.
There is a limited amount of capacity for processing UCO – and it has hardly changed since 2019. In 2020, this naturally forced a change in import markets. The EU started importing more processed UCO biodiesel (rather than the unprocessed UCO) from China. Why? First, to meet the additional demand for UCO-based fuels and limited capacity; second to replace the bans on palm oil; and third to mitigate the high price of rapeseed-based fuels.
In competitive terms, it’s worth noting that the cost of producing biodiesel from used cooking oil is around one-third that of rapeseed, and is around two-thirds the cost of palm oil. Think about that: it costs less than half to produce, and is worth twice as much. It’s almost impossible to determine if biodiesel is made from used materials or virgin materials.
The argument on the side of the EU biodiesel processors is essentially that the biodiesel being imported from China could be ineligible for one of three reasons: a) it’s not produced with used cooking oil, and therefore not eligible for the double subsidy; b) it’s produced in China with palm oil, and therefore not eligible for the RED subsidy; or c) it comes indirectly from Indonesia, and therefore likely uses palm oil and is not eligible for the RED subsidy.
Do the EU arguments have merit?
China’s UCO collections, processing and exports have accelerated significantly over the past few years.
The combined capacity of China’s biodiesel producers is around 4.7 billion liters annually, with an additional 3.4 billion liters coming on line. This is a vastly export-oriented industry. As the USDA notes:
“China’s 2022 biodiesel production [was] forecast at 2.4 billion liters, up by over 32 percent from 2021 due to a surge in exports, well above previous records, almost entirely to the EU. From January to June 2022, China’s biodiesel exports rose 60 percent year-on-year. The vast majority is shipped to the Netherlands and Belgium.”
It’s also worth remembering that there is no real state support for biodiesel; its main use is in diesel electricity generation, not road transport, and domestic demand is low.
“Expansion of China’s biodiesel production remains limited for the foreseeable future with ineffective tax breaks and no other incentives, blending mandates, or punitive carbon taxes on fossil fuels. In addition, a nationwide supply chain would need to be built up as UCO is the only feedstock available in large volumes … In contrast, China’s exports of biodiesel will once again grow in 2022, driven by demand for waste-based biofuels in Europe which benefit from EU double-counting provisions.”
“Biodiesel exports will surge in 2022, almost entirely to the EU, due to the double-counting provisions for UCO-based biofuels of the EU’s Renewable Energy Directive (REDII) and support by a 70 percent VAT rebate. Average biodiesel prices reached U.S.$1,654 (RMB 11,000) per ton in early 2022, up over 30 percent year-on-year, with even higher prices for HDRD. Current biodiesel prices are no longer affordable on the domestic market, but exports remain competitive to Europe. From January to June 2022, China’s biodiesel exports rose 60 percent year-on-year. The vast majority is shipped to the Netherlands and Belgium. Despite the export expansion, China’s exports only account for 3-5 percent of the EU’s biodiesel/HDRD renewable diesel demand.”
And in terms of collections, there’s a strong market for UCO in international markets. As S&P notes:
“Singapore, home to Neste’s renewable production hub, has also been on the receiving end of UCO from China. In 2021, UCO exports from China to Singapore reached 205,497 mt, a massive hike versus 9,816 mt in 2019, reflecting the growth in UCO demand as part of Neste’s feedstock mix.
Substantial amounts of Chinese UCO were also sent to Malaysia. In 2021 a total of 66,682 mt of Chinese UCO were stored at Port Klang and Pasir Gudang, and transported to Europe with UCO collected from other countries.”
China is the elephant in the room, Indonesia a bit player
On balance, it’s unlikely that any Indonesian palm oil is actually making its way to the EU market.
But what EU industry figures are overlooking is arbitrage within the Chinese market. Compliant Chinese UCO biodiesel that goes to the EU is probably worth double what it is in China – but there’s still demand for biodiesel within China.
The case of EU biodiesel producers is shaky at best. They are seeking to protect their market from superior foreign competition – the same motivation that has prompted previous tariffs and duties. It’s worth noting that the primary complaints have come from Germany – which doesn’t have UCO facilities, only rapeseed. It’s likely they’ll be hoping to tax China’s exports to make them less competitive against Germany’s rapeseed biodiesel.
Indonesia’s role here is one of collateral damage. European producers are seeking to nail Chinese exporters. But in doing so, they’re dragging Indonesia into another biofuel argument. It looks to be another in the long list of cases where poorly designed European subsidies have led to unintended consequences.