China Returned to U.S. Ethanol Market in the First Half of 2021

China, the world’s third fuel ethanol consumption has bought roughly 200 million gallons of U.S. ethanol for the first half of 2021. The accelerated imports are among several positive signs for the ethanol sector which has been hard hit by years of oversupply and, more recently, a sharp drop in demand as the coronavirus pandemic slashed fuel use. Imports of 200 million gallons would eclipse China’s previous annual record of 198.1 million gallons (750 million liters) in 2016, accounting for an anomalously high 17% of total shipments. It had been 8% in the prior year, according to U.S. Census Bureau trade data.

“China actually has been buying U.S. ethanol. That’s something that they have not been doing over the past couple of years,” said analysts. “We do see, particularly in the area of ethanol, green shoots of recovery in 2021 for this business here,” he said after reported a stronger-than-expected fourth-quarter profit.

China has not traditionally been a large importer of ethanol, but tightening supplies of domestic corn used to make the biofuel coupled with a wide spread versus U.S. prices spurred the need for imports. “Domestic corn prices keep rising and ethanol prices in the (domestic) market remain high,” said a Chinese source with knowledge of the purchases, adding that some cargoes have arrived.

The demand for ethanol has also increased since it can be used as an alcohol in disinfectants, whose consumption has surged amid the coronavirus pandemic. “The supply gap is quite big also due to the epidemic, and can only be supplemented with imports,” the source said. The country mainly produces ethanol from corn and it is used to make alcoholic spirits, disinfectant alcohol, and fuel ethanol. China’s corn prices rallied over 30% in 2020 and have climbed further to a record this year. ADM did not disclose if it was among China’s suppliers.

Images by Jasper Juinen/Bloomberg

U.S. ethanol exports to China dropped off in 2017 when fuel ethanol import tariffs rose to 30% from 5%. Later that year, China announced its plan to implement a nationwide E10 mandate by the end of 2020, which would require a significant expansion of production capacity. That goal was suspended a year ago amid a sharp decline in corn stocks and limited output capacity, though fuel ethanol production still rose to a record 4.3 billion liters in 2019, up 43% from 2017.

In the first half of the 2019-20 corn marketing year, U.S. ethanol exports were on record pace. But the pandemic crushed exports in the second half ended August, and total shipments fell to a four-year low of 5.1 billion liters (1.3 billion gallons). Exports returned to average levels in the few months of 2020. In the fact that Canada is the top destination for U.S. ethanol, accounting for nearly a quarter of exports. Brazil had taken over the top spot late last decade, but the future of trade with the South American country is uncertain as its tariff-free import quota period expired.

China did not import any fuel ethanol in 2019, though when imports peaked in 2016, they accounted for about a quarter of annual fuel ethanol consumption. That remains the highest yearly share on record, and virtually all those 2016 imports were from the United States. China’s official tariffs on U.S. ethanol remain high, though early last year they were reduced from an effective 70% rate to 45% for importers that applied for tariff exclusions. It is not certain when the recent deals occurred, but the hefty duties combined with elevated U.S. ethanol prices make the biofuel awfully expensive for Chinese buyers.

Source: U.S. Census Bureau

Even as China increases its purchases, about 10% to 15% of U.S. ethanol production capacity remains idled due to poor margins, including two dry corn mills owned by ADM. Those two mills, could restart in the first half of this year if margins improve. Beijing suspended a nationwide rollout of ethanol in gasoline supplies in 2020 following a sharp decline in corn stocks. However, on December China’s energy regulator urged oil and gas companies to restore supplies of ethanol-blended gasoline following reports that firms had cut sales in parts of the country.