EU canola demand in doubt over biodiesel

Europe has been a strong customer of Canadian canola, but there are concerns over slumping biodiesel demand

The European Union should continue to be a top customer for Canadian canola despite slumping biodiesel demand in that market, says a leading oilseed analyst.

“On paper, the demand is there for quite large import volumes,” said Siegfried Falk, co-editor of Oil World.

The EU has been Canada’s salvation at a time when sales to China have been severely restricted.

Through the first seven months of 2019-20 the EU has purchased 1.23 million tonnes of Canadian canola, making it the top buyer of the commodity ahead of Japan’s 1.22 million tonnes and China’s 795,300 tonnes.

Imported Canadian canola is used for the production of biodiesel in the EU. Sales into that market have been strong due to a dismal EU rapeseed harvest.

The sudden surge in business to the EU came at an opportune time when sales to China are down 71 percent due to an export ban on product from Viterra and Richardson International.

But there are concerns that the EU market could soften due to slumping biodiesel production caused by reduced fuel consumption related to COVID-19 travel restrictions.

IHS Markit reports that rush hour traffic trackers in cities like Milan, Madrid and Paris have fallen by up to 80 percent compared to average levels.

The firm is forecasting an eight percent reduction in biodiesel production to 13.7 million tonnes in 2020.

Consumption is expected to fall two million tonnes to 14 million tonnes from 16 million tonnes in 2019.

“In a world without the coronavirus, biodiesel demand was set to rise by 12 percent to 17.8 million tonnes,” stated the analytics firm in a recent article.

IHS Markit believes plant-based biodiesel will be particularly hard hit, with production falling to a six-year low of less than 10 million tonnes.

A similar situation is happening in the United States ethanol sector. Production has cratered to less than 500,000 barrels per day from pre-COVID-19 levels of more than double that amount.

That is dragging down U.S. corn prices as analysts are forecasting about a 500 million bushel drop in corn used for the production of ethanol.

Falk agreed that COVID-19 is having a profound impact on the biodiesel sector as movement restrictions curb fuel use in the EU, the U.S. and elsewhere.

Oil World is forecasting a 3.9 million tonne reduction in world biodiesel production in 2020. The impact of the pandemic started in March but will mainly be felt in April and May.

The other problem is that crude oil prices plummeted in March and early April, which made biodiesel uncompetitive in the energy market.

Key oil-producing nations have since agreed to cut global production by 10 to 20 percent, which should cause prices to rebound.

Falk said reduced biodiesel production has curbed rapeseed crushing in the EU far below pre-COVID-19 expectations.

“This is reflected in the price premium of European rapeseed versus Canadian canola, which has narrowed,” he said.

The premium needs to be larger to support the trade flow of Canadian canola to Europe.

However, he believes the reduced EU biodiesel demand is a temporary situation. He is hoping conditions normalize by May or June.

Falk also noted that the supply of an alternative biodiesel feedstock has been drastically reduced. Shipments of used cooking oil from Asia and Europe have decreased sharply as restaurants around the world have been closed due to COVID-19.

“The bottom line is it’s not a tremendous loss in actual rapeseed oil demand,” he said.

There is a temporary glut of the product but heading into 2021, he anticipates a shortfall of rapeseed oil.

The other piece of good news for Canadian canola growers is that EU rapeseed production will likely experience another down year.

Production fell 15 percent to 17 million tonnes last year. Oil World is forecasting a slight rebound to 17.3 million tonnes in 2020 if growing conditions remain favourable.

“The balance will stay tight,” said Falk.

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