Asia's Up And Coming Ethanol Sector

BMI View: Asia is one of the most dynamic continents in terms of production and use of ethanol. Buoyed by supportive government policies and strict mandates, Thailand and the Philippines are at the forefront of the region. Meanwhile, rising prices and low availability of ethanol feedstock prices hampers the development of a domestic biofuel industry in South and North Asia.

Asia is one of the most dynamic continents in terms of production and interest into the development of biofuels, and especially ethanol. Asia's rising focus on biofuels is mainly being driven by steady rise in energy demand and growing pressure on their trade balance, as most countries are largely dependent on oil imports, and are committed to reduce greenhouse gas emissions. Abundant feedstock in some countries and strong government support for increasing domestic value added products to the sector are also behind the boom of the industry.

Buoyed by supportive government policies and strict mandates, Thailand and the Philippines are at the forefront of the ethanol production and consumption (as % of total fuel oil use) in Asia. Thailand has the largest blending rate in the region, as it is now filling its E10 mandate.

Some Overlap
Ethanol - Brazil (LHC) & Thailand Exports By Country, Average 2011-2012 (As % of total volume exported, RHC)

BMI View: Asia is one of the most dynamic continents in terms of production and use of ethanol. Buoyed by supportive government policies and strict mandates, Thailand and the Philippines are at the forefront of the region. Meanwhile, rising prices and low availability of ethanol feedstock prices hampers the development of a domestic biofuel industry in South and North Asia.

Asia is one of the most dynamic continents in terms of production and interest into the development of biofuels, and especially ethanol. Asia's rising focus on biofuels is mainly being driven by steady rise in energy demand and growing pressure on their trade balance, as most countries are largely dependent on oil imports, and are committed to reduce greenhouse gas emissions. Abundant feedstock in some countries and strong government support for increasing domestic value added products to the sector are also behind the boom of the industry.

Buoyed by supportive government policies and strict mandates, Thailand and the Philippines are at the forefront of the ethanol production and consumption (as % of total fuel oil use) in Asia. Thailand has the largest blending rate in the region, as it is now filling its E10 mandate.

Thailand is a large producer of sugarcane, one of the highest-yielding biofuel feedstocks in the world today (up to 90 tons/ha/year, resulting in more than 6 000 litres of ethanol) and can be produced at a relatively low cost. Emission savings from sugar ethanol are considerably higher than those achieved by most other biofuels produced from starch and vegetable oil. The government now supports second-generation molasses-based ethanol production from cane bagasse. As a result of strong production potential, we expect Thailand's ethanol exports to grow significantly in the coming years, with the Philippines, Japan and South Korea as its largest clients.

Select Countries - Biofuel Blending Mandates & Programmes
Ethanol Mandate Ethanol Actual Blend Biodiesel Mandate Biodiesel Actual Blend Ethanol Mandate, Goal
Australia E6 in New South Wales 2.5% B5 in New South Wales 3-4% E5 mandate nationally has recently been presented to the Australian Federal Parliament
China E10 in 10 provinces* 8-12% none E15 by 2020
India E5 2-3% Moving to E10 as soon as production is in place, and ultimately has set a goal of E20 by 2017
Indonesia E3 (depending on industries) 0 B10 (depending on industries) 4-5% E15 and B20 by 2025
Japan na 0.1% na 0% Replacing fossil fuels with 500,000 kls (oil basis) of biofuels for the transportation sector by 2017
Malaysia na 0% B5 5% Moving towards B10 blend, no date given
Philippines E10 6-7% B5 (from end 2013) 3-5% B20 AND E20 by 2030
South Korea B2-2.5
Thailand E10 10% B5 4-6% B7 mandate in 2014
Vietnam E5 by end 2014
Note: 'E' refer to ethanol blending mandate and 'B' to biodiesel blending mandates. *10 Provinces in China: Heilongjian, Jilin, Liaoning, Anhui, Henan, Guangxi, Hubei, Hebei, Shandong and Jiangsu. Source: BMI, USDA, EIA

While Thailand and the Philippines were committed to their long-term goals, other South and South East Asian countries got caught up in mandates and logistics issues. Problems such as feedstock, production under-capacity, lack of investment in operations, and the political environment, hinder the march toward fulfilling these mandates. Five years after the implementation of the E5 blending mandate in India, oil companies have sourced just 440 million liters of ethanol against a target of 1.05 billion liters for the 5% mix. The blended petrol is available only in 13 out of 28 states, and even there, the extent of blending is just 2%. The recurring disputes between sugarcane farmers and sugar mills over the pricing of sugarcane and its products, and the low profitability of the sugar sector in the past years also weigh heavily capacity investment and the development of the sector. Despite delays in implementing its National Policy on Biofuels, we expect India to eventually enforce a mandatory 5% blend of ethanol with petrol rule in the coming years, as the country struggles to reduce its energy import bill. However, we see India's goal to achieve the E20 blending by 2017 as overly optimistic.

Vietnam is set to roll its E5 mandate by the end 2014 in five large cities and two provinces, and nationwide by 2015. We are dubious on the country's ability to ramp up supply to fill the mandate, as Vietnam's current six ethanol plants are operating largely below capacity due to the lack of feedstock availability and poor production margins.

Some Overlap
Ethanol - Brazil (LHC) & Thailand Exports By Country, Average 2011-2012 (As % of total volume exported, RHC)

China: Ethanol Production Growth Capped

China is the largest consumer of ethanol in the region and relatively self-sufficient, but severe constraints to production growth is threatening the sector's medium-term outlook.

China is committed to reduce its reliance on fossil fuel and limit factors related to climate change, as the country is battling with severe environmental pollution. Its biofuel policy has been relatively successful so far, as ethanol production has recorded robust growth and matches domestic consumption. The country has blend mandates in selected provinces, and overall blending averages around 10% according to local sources.

However, we are cautious on the future development of grain and cassava based ethanol production in the coming years. We see the government's goal to reach fuel ethanol production of 4mn litres by 2015 (compared with 2.5mn litres in 2012) as too optimistic, given the country's severe resources constraints and soaring grains production deficits. In fact, the government maintains a tight grip on the grain processing sector, including ethanol, and is lowering financial support for grain-based ethanol production (it cut subsidies for fuel ethanol production from USc19/litre in 2009 to USc6/litre in 2012).

China's ethanol production could soar once advanced biofuels are developed, as the country is at the forefront of research in non-food based ethanol, including crop waste, industrial gas waste or animal residue. This could take years to materialise however.

Ethanol Supply & Demand Estimates (Mn Litres)
2006 2007 2008 2009 2010 2011 2012e 2013f 2014f
Brazil Production 17,782 22,557 27,140 26,105 27,965 22,893 23,509 26,572 28,963
Consumption 13,723 17,573 21,062 24,548 24,267 21,090 20,805 23,775 26,078
China Production 3,801 3,923 4,082 3,953 4,333 4,675 4,450 4,550 4,700
Consumption 3,801 3,790 3,970 3,845 4,177 4,630 4,405 4,510 4,665
India Production 1,898 2,398 2,150 1,073 1,522 1,681 2,154 2,064 1,906
Consumption 1,640 1,750 1,940 1,780 1,780 1,995 2,015 2,405 2,110
Thailand Production 153 206 351 416 439 533 670 943 1,013
Consumption 132 176 326 411 392 391 410 820 850
Japan Production 207 195 198 234 194 185 191 190 190
Consumption 358 362 372 419 413 422 426 432 432
Source: BMI, EIA, USDA

Japan And South Korea: Limited Use Of Fuel Ethanol

Japan and South Korea have a long tradition of alcohol production geared toward the food and beverage industry, and the increase in fuel ethanol demand is a new and limited phenomenon. Neither country has blending mandates. South Korea's limited efforts that have been implemented to introduce biofuels into the transport sector have been far concentrated on the development of biodiesel, as two-thirds of its transportation industry relies on diesel as a fuel source. In Japan, the actual blend rate is at a negligible 0.1%. Japan has currently a non-compulsory target of 3% ethanol in gasoline, and plans to introduce 500mn litres of ethanol by 2017 and 1.8bn litres by 2020, the equivalent of 8-9% of Brazil's 2012 fuel ethanol production. Should Japan implement that plan, the country would need to significantly ramp up fuel ethanol imports.

We see limited consumption growth of fuel ethanol in the coming years in these two countries, as they do not seem to be willing to take the path of compulsory blending mandates, while fuel ethanol supply is very limited if not inexistent. Both countries, along with China, now focus research and development of advanced biofuels, which would not compete with food supply. However, the Japanese government estimates it would take about five years before commercial production of ethanol from non-food products would be economically viable.

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This article is tagged to:
Sector: Agribusiness
Geography: Asia, China, Indonesia, India, Japan, South Korea
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