Renewable Fuels' operating environment
The most important external factors affecting the financial result of the Renewable Fuels reporting segment are the price differential between different types of vegetable oil, the margins offered by conventional biodiesel, the absolute prices of various raw materials, and the quality premium commanded by renewable diesel over conventional biodiesel.
While Neste Oil’s NExBTL renewable diesel differs significantly from conventional biodiesel in terms of its product properties, demand for the fuel is linked to the overall development of the biodiesel market. Read more about the differences between NExBTL renewable diesel and conventional biodiesel in the Annual Report’s section on Renewable Fuels.
Steady growth in demand for biodiesel
World demand for biodiesel stood at around 21 million tons in 2011. Demand is expected to grow steadily in 2012, as a result of rising levels of mandated content and growing demand for fossil diesel. By 2020, the global market for biodiesel is projected to virtually double, to over 40 million t/a, of which Europe will probably account for around half. Biodiesel imports into Europe from Argentina and Southeast Asia in particular have grown significantly over the last three years.
European overcapacity in conventional biodiesel continued to be an issue in 2011, but there were a number of major plant closures during the year and construction of new plants declined. Despite overcapacity, product prices fell at a slower rate than raw material prices during the second half of the year, which improved biodiesel margins for the year as a whole compared to 2010. The margins for winter-grade biodiesel in particular were good, which benefited Neste Oil, as the cold weather properties of its renewable diesel are better than those of conventional biodiesel.
Lower renewable raw material prices
Prices for the vegetable oil used in producing renewable diesel declined in 2011, as a result of the uncertain growth prospects facing the global economy. This drop was expected, as vegetable oil prices had risen to high levels during the latter half of 2010.
Downward price pressure was particularly evident in respect of palm oil because of the growth in production that has taken place in Southeast Asia. Supply outstripped demand and led to stocks of palm oil in Malaysia reaching record-high levels.
Rapeseed oil prices did not drop as significantly as those for palm oil, as the European oilseed rape harvest was smaller than expected. In fact, the harvest in Germany, which is the largest consumer of rapeseed oil, was the worst for many years. The price differential between rapeseed oil and palm oil during the second half widened significantly beyond the long-term average of USD 200/t. Neste Oil is able to benefit from the price differentials between different raw materials, as the company’s production process based on its proprietary NExBTL technology is very flexible in terms of raw material inputs. This enables Neste Oil to make use of raw materials, such as palm oil, waste animal fat, and various sidestreams rather than the rapeseed oil typically used by European biodiesel producers. Read more about Neste Oil's renewable raw material base.
The decline in vegetable oil prices is not expected to continue in 2012, unless economic growth slows down significantly. Harvest prospects will continue to have a major impact on vegetable oil prices in 2012. The price differential between rapeseed oil and palm oil is predicted to remain close to the long-term average, at least at the beginning of the year.
As a result of increased demand, the price of waste animal fat approached that of vegetable oil during 2011.
Sustainability driving legislative developments
Legislation designed to support the use of renewable energy sources and biofuels has been developed around the world for a number of years. A shift from financial incentives to mandated biofuel usage has been typical of recent years. As the volume of fuel used and produced has risen, sustainability criteria have assumed an increasing role in the legislative process.
A number of European Union member states moved ahead in drafting legislation to comply with the sustainability requirements of the EU’s Renewable Energy Directive in 2011.
Implementation of sustainability legislation covering biofuels also continued in the US during 2011. All biofuels sold in the US will need to comply with new criteria and reporting requirements established by the country’s environmental authorities. Biofuels have been officially classified into various categories based on how much greenhouse gas emissions can be reduced through their usage. The authorities have established greenhouse gas emission reduction figures for soybean oil, animal fat, and rapeseed oil so far. The authorities issued a proposal stating that palm oil would not meet Advanced Biofuel criteria in respect of reducing greenhouse gas emissions. The final decision on the matter will probably be taken during 2012.
A national biomandate came into force in Canada in summer 2011, and work on drafting sustainability legislation at provincial level is ongoing. Alberta was the first province to introduce the legislation.