INSIGHT: US ethanol moving to China by various means, including ship-to-ship transfers

LONDON (ICIS)–Trans-shipments of ethanol from the US to China are taking place in renewed efforts to thwart US-China tariffs, including ship-to-ship transfers, several sources in Asia and Europe have confirmed.

Importing US ethanol into China carries a penalty of up to 70%, one of a slew of tariffs introduced since 2017, representing a much wider business and trading spat between Beijing and Washington.

Trans-shipments, including ship-to-ship transfers are not unlawful. In fact some companies specialise in facilitating these important trading exchanges.

But where transfers are also used to re-issue origin documents, there are questions over the legal legitimacy of such moves.

Ethanol is a key US export. And in 2016 4.7m bbls were exported to China – 17% of total ethanol exports including fuel and other grades like beverage or industrial ethanol.

By November 2018, an unknown fraction of the previous glut of US ethanol exports to China was reaching the Asian powerhouse tariff-free, through a similar but less direct scheme.

US ethanol shipments were unloaded at intermediate port trading hubs in countries such as Malaysia or the Philippines. After this, material was placed in tanks where certificates of origin could be re-issued.

Loaded onto a new ship, such re-routed volumes continue to reach China tariff free.

Blending US material with that from other Asian origins can also be a way of getting some US ethanol to China, sources have said.

But now, direct ship-to-ship transfers, are taking place.

“It is definitely going on, one hundred percent, but to a much lesser degree,” said one source specialising in biofuels shipments globally.

A second source, also involved in moving biofuel products in the region’s seas, identified ship-to-ship transfers on vessels chartered by an Asia-based oil firm.

Port transfers, considered by many traders a perfectly legal work-around to the tariffs, are still the most common and ongoing way for US material to reach China.

Other examples have been shared with ICIS by sources.

A recent delivery includes a 40,000 tonne parcel of US fuel grade ethanol discharged in February at Yizheng in China.

The vessel stopped in Malaysia or Indonesia, and the certificate of origin was re-issued, according to a source in Asia.

But in the past month, an increasing number of board-to-board transfers have been taking place on US ethanol parcels over 10,000 tonnes in size.

“There are companies that are already doing trans-shipments [this way],” said a source earlier in March when asked.

US-China talks gave traders hope at the time that the two countries would soon reach a trade resolution that would see tariffs lifted.

“They are re-establishing bills of lading and re-selling to Chinese [buyers], skewing [the] course of transit to avoid tariffs. Both governments know what is going on, but are turning a blind eye as it is in both’s interest to a large extent,” they added, confirming this involved ship-to-ship transfers.

“We tracked a couple of ships doing ethanol into China locally, and it turned out they had done board-to-board transfers in Malaysia, then [were] moving it on to China” said another shipping source, also operating in the region.

Both ships lead back to the same company, the source added.

Other ways to mitigate tariffs are still more widespread – but these are also more costly in a market where sellers are working harder to offload product after years of growing production.

The following graph shows US fuel ethanol nameplate capacity increases accelerating from 2014:

CHINA BUYING POWER MATTERS
The US is one of the largest ethanol producers in the world, alongside Brazil.

China’s demand for the biofuel in recent years has, meanwhile, been unprecedented.

Tied to Beijing’s plan to introduce an ethanol blending mandate in 2020, China is unlikely to produce sufficient ethanol to meet these obligations by 2020 at current domestic production rates, market participants in Asia have said previously.

By 2015, China had become the US’s most important ethanol buyer market; the country saw production quickly expand, as the opportunity to sell ethanol to China was realised.

Since tariffs were introduced and ramped up in 2018, those selling Latin American ethanol from countries like Brazil have been quick to expand market share in Asia.

Mercosur sources told ICIS last year that the new trade barrier between China and the US was a perfect opportunity for Latin America to achieve closer trade ties with China.

REACHING THE BUYERS
US ethanol has also reached China’s docks in various guises since tariffs were introduced; albeit in slimmer volumes, and through time-consuming, more expensive routes.

A source told ICIS in November that US product was on its way to China, via Singapore and possibly even ports in Africa if rates along those routes were favourable. This was almost entirely via unloading and re-loading from port tanks and facilities, allowing issuance of certificates.

“You’ll see import volumes to China go back up by next year,” they said at the time. That is because it will begin to include US ethanol again, the source added. Ship-to-ship transfers, on the other hand, have only been heard of since February.

While those ship-to-ship transfer movements may have worked for a few months, other sources doubt its continuance, with one trader’s vessel heard sequestered at sea.

“I’d be surprised if anyone was still trying to do [those kinds of transfers] anymore,” said a US Gulf Coast-based ethanol trader this week.

Disrupted logistics sending ethanol from the production region in the US Midwest to coastal ports for export, and combined with the Houston Ship Channel congestion resulting from the ITC terminal fire, US-produced gasoline components hitting foreign destinations are likely to be stymied, at least for the next several weeks.

“[Products] are getting delayed left and right on the ship channel, but the biggest problem is getting trains from the Midwest [to ports],” the trader added.

Although official trade data from both China and the US show ethanol imports from the US almost completely dried up after May 2018, when a second, deeper set of tariffs was introduced; volumes arriving in China from ports like Malaysia and Indonesia shot up.

US ethanol exports to those transport hubs did the same, leaving many to draw a conclusion that has been borne out by shipping and ethanol trader sources.

China’s trade data showed the last major fuel ethanol imports from the US took place around May 2018, when about 96.6m litres were imported. In that month alone, no ethanol shipments from either Indonesia or Malaysia were recorded.

Then, in July 2018, 35.6m litres of ethanol imports into China were from Indonesia while in August 60.1m litres were moved from Malaysia to China.

CHANGE COMES IN FLEETS
At the same time many buyers in other parts of the world have seen tariffs as an opportunity to import more US ethanol, which can be sold at competitive prices in Africa, Europe and elsewhere in Asia.

Even with anti-dumping tariffs introduced on US ethanol imports to Europe in 2013, EU imports of US ethanol have swelled since 2017

Mandates across Asia are also re-shaping routes and trade hubs.

Used cooking oil methyl ester (UCOME), a biodiesel made from used cooking oil, is increasingly arriving in Europe via India. Mandates there have biofuel, oil players and shippers asking if it will also become a key ethanol and biofuel import destination.

Even though ethanol production in India grew in 2018, according to sources, a rare import shipment of fuel ethanol was seen earlier this year.

US ethanol exports to India have also gradually increased on average.

Another shift in China-US tariffs, widely anticipated by market participants, could even see US ethanol sellers maintain and care for some of their expanded export markets. The risk of relying so heavily on China may have been learned for US producers.

Still, expect significantly more ethanol to flow west from the US to China the moment Beijing and Washington kiss and make up.

By Clare Pennington, Izham Ahmad, Steven McGinn