European ethanol margins hammered by natural gas rise

Quantum Commodity Intelligence - Ethanol production margins in Europe were hammered Thursday even as swaps surged close to 9%, with profits hit by a double whammy of huge increases for both energy and agricultural inputs, as the Ukraine-Russia conflict sent futures sky high.

March T2 ethanol swaps were trading €80/cu m higher in the afternoon at €1,005/cu m, while April and May were up the same amount to €985/cu m and €970/cu m and Q3 increased nearly €70/cu m to €910/cu m.

Spot physical was bid up to €1,063/cu m FOB ARA, leaving the assessment up €126.50/cu m on the day.

Theoretical crush margins for ethanol were as much as €120 lower though and possibly turned negative for wheat in some further out months, mainly on a 50% increase in the price for natural gas, with March Dutch TTF futures trading at over €144/MWh during the session.

Natural gas is a key energy input for the ethanol production process but has gone from a marginal and relatively fixed part of the profit calculation previously to a dominating factor in the last six months as the cost of the fossil fuel has risen to all-time highs.

Bioethanol usage in gasoline is mandated throughout Europe as part of renewables targets at blending rates of up to 10% so fuel suppliers are forced to buy ethanol, but a sustained fall in margins could still leave some local plants forced to shut down.

The rise in ethanol outright prices may also open opportunities for imports from further afield, adding to the competition for domestic suppliers.

Adding to the woes of ethanol producers were as much as 16% gains for European wheat futures and 11% for corn, with the sharpest rises at the front of the curve mirroring moves in the energy complex.

Both markets were acutely affected by the breakout of war in Ukraine, as the country is the largest supplier of corn into Europe, and Russia and Ukraine together form the largest wheat export hub globally.

Production margins for ethanol from corn appeared better than those for wheat, which is typical for the market, but there were question marks over the ability of producers to secure enough of the feedstock if exports from Ukraine were shut down.

Ukraine also has domestic ethanol production which regularly makes its way into European markets.

In the UK, for example, Ukrainian corn was one way or another the feedstock for 11% of all ethanol supplied in 2020 and the second-largest source of feedstock for ethanol overall, after UK wheat.