This article is taken from our biofuels platform dated 03/06/20.

The world economy is currently at a stand-still in wake of the COVID-19 pandemic. This is bound to have an effect on world ethanol trade. According to various estimates, world merchandise trade could drop by 10-30% in 2020 (Jan/Dec) and could therefore be bigger than the slump brought on by the global financial crisis of 2008/09.

Despite this, the dramatic demand destruction in key producing countries has raised fears in traditional importingregions that they may be inundated by a wave of ultra-cheap ethanol. While this cannot be ruled out entirely, it has to be recalled that logistics and specifications would stand in the way of a rapid increase in sales. Nevertheless, the sharp drop in prices in the US and Brazil mean that the arbitrage is open, and this may draw in additional volumes. However, what also is clear is that importing countries will remain watchful and lobby their governments for effective countermeasures.

Not least because of its considerable production overhang, the United States will continue to dominate world ethanol exports in 2020. While there are reports that the crisis could result in 50% of the country's capacity being shut down this will only be a temporary trough. Demand is forecast to recover again but it will still take months if not years before the pre-crisis levels will be reached.

Helped by very low production costs, Midwest distillers are set to ship a volume that will be only little changed from the 6.45 bln litres of ethanol that were exported in 2019.

As Brazilian millers will massively shift to sugar, the gap between the two nations in terms of ethanol exports can be expected to remain very wide.

Indeed, international trade will continue to be mainly driven by the exchange between Brazil and the US. In 2014 the trade between the two countries was close to 1.2 bln litres, more than between any other pair of countries. In 2016 it had reached 1.7 bln litres, or 14% of the world total, while last year it surged to almost 3 bln litres or 20% of world exports. In 2019, this dropped again to 2.5 bln litres.

Following the end of the anti-dumping duties on US ethanol in the EU, the bloc greatly expanded its purchase from that origin. At the moment this is expected to continue. However, this will only be one factor (and possibly not the most important one) which will keep prices under downward pressure in the bloc.

If it had not been of the COVID-19 induced crisis, 2020 could have been a year of recovery for the world ethanol trade. Besides improved market access in the EU, the Sino-US trade row looked like being resolved with the approval Phase 1 of a bilateral trade deal. This would have included ethanol. As the tone between Washington and Beijing is getting tense over COVID-19 this progress now looks to be at risk.

Outlook

The world ethanol market is in the grips of the COVID-19 crisis. The drop in transportation fuel demand and the general economic slowdown mean that world ethanol demand will be considerably lower this year.

In some instances, exports will be seen as a means to cushion the effect of demand destruction. This set-up has importing countries already on their toes as there is a chance that surplus volumes will be dumped at prices below the cost of production. As a result, the volume traded world-wide could fall by 10-15% this year with a partial recovery on the cards for 2021.

Since then more capacity has been taken out of the market and prices are on the rise again. Of course, this process is far from complete yet. But the lesson to be learnt is that the world market may help to address temporary imbalances, but it is not yet big enough to solve the fundamental supply and demand mismatch in the US.

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This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.