Promise of giant Chinese ethanol demand evaporates

USDA says the planned E10 by 2020 will not be reached along with projected corn sales that lift markets

Forget about one possible bullish factor in grain markets, say analysts.

Those holding out hope that China will follow through on its intention to adopt a 10 percent nationwide ethanol blend by 2020 had their hopes dashed in a recent U.S. Department of Agriculture report.

On Sept. 13, 2017, China’s National Development and Reform Commission, the National Energy Administration and 13 federal ministries jointly announced a plan to achieve E10 by 2020.

The plan would have mopped up a lot of China’s burdensome corn reserves as 87 percent of the country’s fuel ethanol production is corn-based.

As it became clear that China wouldn’t be able to meet the target with its own production there was hope that the country would import U.S. ethanol, sparking new demand for U.S. corn.

But the ongoing trade war and escalating Chinese tariffs on imported U.S. ethanol have quashed those dreams.

A new report by the U.S. Department of Agriculture’s Foreign Agricultural Service, details just how short China is going to fall of its lofty E10 target.

It estimates that the blend rate in 2019 will be 2.5 percent.

“China will most likely achieve a blend rate of 3.0 to 3.5 percent by 2020, well short of the central government’s effort to achieve E10 use nationally by 2020,” stated the report.

Rich Nelson, chief strategist with Allendale Inc., said grain markets were not counting on a surge in corn demand stemming from China’s E10 goal.

“The market in previous months had correctly said, ‘that’s a great headline but no one believes it,” he said.

Earlier this growing season traders had also been hoping for a Chinese buying spree that was supposed to include ethanol purchases but that never materialized either. So the E10 disappointment was not all that disappointing.

“It’s another broken promise by Chinese government officials, but no one was expecting it to be fulfilled,” said Nelson.

The USDA report made it clear China won’t be meeting its E10 goal by importing foreign ethanol. The U.S. is the world’s biggest exporter of the fuel but it faces stiff 70 percent tariffs entering the Chinese market.

“High tariffs on U.S. ethanol limit demand for larger volumes of lower cost ethanol imports, especially in South China where grain-based ethanol production is especially limited,” stated the report.

If China fully implemented an E10 blending program the nation would be consuming 19 billion litres of fuel ethanol annually. That would be more than four times the 4.3 billion litres expected to be consumed in 2019.

China has 12 licensed ethanol producers and another two are expected to launch in 2019, resulting in a combined capacity of 5.39 billion litres of production.

The USDA says there are a number of reasons why China will fall way short of its E10 goal.

“Rigid energy policies restrict fuel ethanol production, as well as critical investment in ethanol blending and distribution,” stated the report.

There is no national mandate for ethanol blends and the country’s major commodity exchanges lack ethanol futures contracts to help manage risk.

Nelson said it would be “fantastic” for corn demand if China ever fully implemented an E10 policy but he isn’t holding his breath as the trade war lingers.

“We are clearly at the point where until we see a solid agreement signed and announced no one is going to believe any comments from any official on anything regarding ag trade to China,” he said.

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