Biofuels are the most scaled sector in the higher-value bioeconomy. Ethanol and biodiesel are both heavily traded global commodities, part of an industry valued at nearly $120 billion in 2023.
Yet over the last year, oversupply and low prices have sparked major project delays and sell-offs in Europe and the US.
Nonetheless, many are still optimistic about the long-term demand for renewable fuels that has been locked in by decarbonisation policy.
We look at reasons behind the downturn and why some think it’s only a matter of time before it bounces back.
What’s been happening in biofuels?
European biodiesel prices began falling early in 2023 thanks to both poor spot demand and oversupply. Declining prices in the North American biodiesel markets has occurred for similar reasons and the global downturn in demand has also affected Asian prices.
As a result, the oil majors that had branched out into renewables in recent years began pausing biorefinery projects in quick succession over the summer of 2024.
In June, BP said it would scale back expansion for new European sustainable aviation fuel and renewable diesel plants after biofuels dented its otherwise relatively robust profit performance in the second quarter of 2024.
At the start of July, Shell said it would temporarily pause construction work at its 820, 000 tonne per year biofuels facility in Rotterdam, saying it would lose $1 billion on the stalled project by doing so. The plant was to make waste-based jet fuel and biodiesel and would have been among the biggest European plants of its kind.
Early July also saw Chevron furlough workers at its German biodiesel plant in Oeding after winding down the plant months before. The company will likely close the facility altogether by the end of this year. It has also announced the closure of two biodiesel plants in the US Midwest.
How low are biofuels prices?
According to S&P Global, the premium of EU-compliant used cooking oil methyl ester, a biodiesel, was $645 per mt to ICE gasoil futures in late July 2024. This is lower than the average premium of $859/mt that has prevailed since S&P began to assess prices for the product in March 2020.
Prices have been low enough to produce the first negative profit margin at Neste since 2014. The company, Europe’s largest biofuel producer by capacity, reported a net loss of $156 million in the second quarter of this year.
Why are prices low?
Prices for biofuels are low because Europe and the US right now have more capacity to make the product than the market needs.
In the last several years, US petroleum refiners have decided to devote capacity to biofuels. Similarly in Europe, some fossil capacity has been converted into biofuels, such as the Livorno site in Italy and the La Mede and Grandpuits oil refineries in France. Overall, 17% of completed or announced petroleum oil refinery closures for 2020 to 2027 involve plans to transform the capacity into biofuel production facilities.
With all this biofuel capacity coming online at once, it became clear that the market would suddenly have more products than it could absorb.
This biofuel overcapacity represents the tail-end of a green industrial building boom that peaked during the COVID-19 years. Now as the global economy enters a general slowdown, high-risk green projects are at risk. Economic indicators and political developments in the coming years will be crucial in deciding when the next wave of interest in renewable energy will return.
Why has demand growth lagged supply growth?
Biofuels are heavily dependent on mandates. The US is among the world’s top biofuel consumers and there, biofuel demand is dictated each year by a regulation that says oil refiners have to blend a certain amount of biofuels into domestic fuel mixes or buy credits from those that do.
Thanks to the US biofuels mandate, demand for biofuels in the US ranges between 4 to 4.5 billion gallons a year – yet the capacity to produce biofuels in the US is set to exceed 7 billion gallons soon.
The mandate is the biggest determinant of demand because without it, the market would buy fossil oil instead since it is a much cheaper product. Because of the higher cost involved in buying biofuels, growth in demand for biofuels dipped slightly from 2021 to 2022, far below expectations made for the market before the energy crisis caused by the pandemic and the Russian invasion of Ukraine.
China is also feeding the oversupply according to European players that say that they are being undercut by high volumes of biofuels from there that do not meet standards set by EU law.
The EU initiated an anti-dumping investigation into Chinese Biodiesel imports in December 2023 and decided to impose anti-dumping tariffs of up to 36.4% on biodiesel imports from China in July. In China, this has led to low prices as the EU regulatory scrutiny led to used cooking oil methyl ester buyers to draw back on purchases.
In the US, biofuel producers are trying to ward off narrowing margins by importing cheaper Brazilian biofuel feedstock.
Are biofuel investments slowing everywhere?
No. Despite low prices, many large companies are sticking to biofuels investments and Brazil is a hotspot of activity here. The country is a huge agricultural and biofuels producer and costs of production are much lower than in Europe.
One of the firms backing biofuels in Brazil is Abu Dhabi’s Mubadala Capital, which still intends to invest about $13.5bn on a major biofuels project in Brazil, Acelen, consisting of five modules capable of processing 20, 000 barrels a day. It will also convert an oil refinery in Bahia to biofuels.
In a sign of how buoyant the industry is in Brazil, the country’s state energy company Petrobras even wants the Bahia biofuel asset it sold to Mubadala back. In July, it was reported it was conducting due diligence to bid for the refineries.
BP, which has recently withdrawn from new European projects, is also investing in Brazilian biofuels.
In Asia too, investment into biofuels continues to flow despite declining prices. A final investment decision was taken in late July over a Malaysian waste and residue feedstock biofuel production plant with a 650, 000 mt annual capacity. The partners behind the project are Japan’s Euglena, Malaysia’s Petronas and Italy’s Eni.
Others see biofuels as a place to reinvest profits while at the same time earning exposure to renewable energy, with all the long-term potential promised by the industry. It is for this reason that Swiss oil and gas trader Gunvor acquired half of Varo Energy’s $600mn Dutch biofuels, using the company’s record profits that it earned from the commodity boom after Russia’s invasion of Ukraine.
All these players have bet that strong long-term demand will catch up with the huge burst in supply over the last several years, even if in the short to medium term the outlook looks pessimistic.
What’s the longer term outlook?
The power of policy in shaping the biofuels market is on full display in Gunvor’s biofuels investment decision. The company has cited EU mandates for biofuel use as driving its decision to branch out into biomass despite its oil and gas focus.
In the EU, at least 2% of all aviation fuels must consist of sustainable aviation fuels by 2025, rising to 20% by 2035. It is these regulatory demands that some believe will lock in demand over the long term even if it is not apparent today.
Neste, another biofuel producer, also believes that sustainable aviation fuel will stay resilient even through the current downturn. While it has revised down expected sales volumes for this segment in 2024, it has stated that it believes short-term growth is possible and is gearing up for renewed demand in the third and fourth quarters of this year.
Apart from aviation, the EU has wider biofuels targets in place that also support expectations for a market recovery towards the end of this decade. EU countries are obliged to ensure that the share of renewable energy in the final consumption of transport energy is at least 14% by 2030. Of this, a minimum share must be 3.5% advanced biofuels.
New policy in China could also soon put pressure on global biofuel feedstock supplies. The country currently does not have biofuels mandates as in the US but there are now reports that by the end of this year, China plans to make it compulsory to blend 2 to 5 % of SAF into aviation fuels.
Politics will set the pace for biofuels expansion
The crucial thing for the biofuels market will be the direction of policy over the next few years. Demand for biofuels is heavily dependent on government mandates leaving it vulnerable to sharp shifts in policy.
This year and next will be pivotal in deciding whether favourable regulations will continue as it has done. After the 2024 elections, which saw the election of many far-right MPs, the EU parliament has suddenly been filled with lawmakers hostile to government policies that favour new energy industries. A Trump victory in November in the US may similarly divert support away from biofuels.
