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In a collective effort to reduce the aviation industry’s environmental footprint, Sustainable Aviation Fuel (SAF) has emerged as a pivotal solution. However, for airlines, sustainable fuels procurement operations are fraught with challenges, particularly in terms of budgeting and ensuring supply. As the industry is still in its early stages, the lack of transparent pricing, the volatility of feedstock costs and the complexities of predicting supply and demand patterns make it difficult for SAF producers and procurers to forecast expenses accurately. Our senior analyst and forecaster, Tore Alden, sheds light on some of the issues faced by the industry:
Here’s what Tore Alden has to say:
There are several challenges that the industry faces. The largest one is the lack of transparent pricing. A lot of the transactions that have occurred so far have been long-term off-take agreements, which don’t lend themselves to the same kind of transparency seen in more developed markets. This lack of transparency makes it difficult for facilities that want to expand or for groups that want to build new facilities to obtain financing, as it becomes tougher to put revenue projections together.
In addition to transparency, the price itself is also an issue. Anecdotally, we’ve heard that the price of SAF (Sustainable Aviation Fuel) is about two to three times the price of Jet A fuel. This creates a gap between the credit revenue generated from SAF production and the price, a gap that will need to narrow to make SAF more competitive. However, as production increases, this gap may naturally begin to close.
Capacity and production are another challenge, which is somewhat dependent on the first two issues. There have been many announcements for SAF capacity, and it seems the industry is keen on moving in that direction. Of the three problems, this is probably the easiest to solve. However, from an analyst’s perspective, it’s very much about determining the timing and level of production, especially considering that this is still in the very early stages.
There’s a lack of production capacity, at least, for now. The rapid but small-scale growth makes it difficult to predict when the ramp-up period will stabilize.
Compounding these challenges is the decline in the profitability of renewable diesel production that we’ve recently seen. Some companies have announced plans to produce SAF yet, they are now pausing their plans or delaying the opening of their SAF units. Such shifts make it challenging to predict exactly when the supply will come online. There are also a few facilities purpose-built for SAF production that can turn on or off depending on the economics, and the lack of price transparency makes understanding these shifts even more difficult.
The feedstocks used in SAF production currently are essentially the same as those used in renewable diesel production because the Hydroprocessed Esters and Fatty Acids (HEFA) pathway is the only one for which the Environmental Protection Agency (EPA) has provided guidance regarding new (Inflation Reduction Act) IRA credits. Other pathways that don’t use the same feedstocks will emerge, but for now, SAF and renewable diesel share the same feedstock mix—used cooking oil, tallow, and soybean oil are the main components. Since SAF is produced on the same distillation towers as renewable diesel, these feedstocks will continue to be used.
Over the last nine months, the US has started importing more low carbon intensity (low-CI) feedstocks than it traditionally has. For an analyst, this makes putting together a balance sheet easier, but it also comes with some risks. Currently, much of the low-CI imports are tallow from Australia and used cooking oil from China. As SAF programs expand globally, these trade flows might reverse. Australia, for instance, may set up its own SAF program and prefer to keep the value-added tallow from SAF production within its domestic economy rather than exporting it to the U.S. The U.S. industry, which has partly grown due to the availability of low-CI feedstocks from other countries, may face challenges if these trade flows reverse as other countries establish their own SAF production.
That said, countries like Brazil, which is a large agricultural producer, may continue to export low-CI feedstocks to the US, even if they establish SAF mandates.
Feedstock prices have been very volatile over the last few years. The percentage increase in prices during this period was similar to the increase seen during the buildout of biodiesel capacity. The recent decline from these highs is also similar to what was observed during the biodiesel buildout. Currently, volatility has decreased, with the realized volatility for soybean oil futures now below its long-term average. However, the growth in demand from biofuels has significantly increased the usage of soybean oil. While things appear stable now, changes in biofuel policy in other countries or issues with U.S. crop production, especially in South America, could see volatility return in a big way. The demand for biofuel feedstocks has narrowed the excess supply, which has traditionally kept soybean oil volatility low. Soybean oil is the primary price setter for other feedstocks, although low-CI feedstocks generate more credit revenue.
If there are problems with South American crops or if trade flows reverse, we could see a return of significant volatility. For instance, in the first week of July, soybean oil rallied six cents in a week due to a hurricane in the Gulf, which was much more volatile than it had been. This kind of movement reflects the hidden upside price risk that remains in the market, even as prices and volatility have recently decreased.
In our analysis, we try to get as complete a picture of the fundamentals as possible. We have balance sheets for all the major feedstock producers for SAF and other biofuels. A key part of our modeling process is analyzing trade flows, which we see as the first step in our price forecasting process. Trade flows give us an initial sense of whether the world has enough of a particular feedstock or needs more. If there’s enough or too much, prices will likely move lower, and we then assess how much lower they might go. Conversely, if there isn’t enough, prices will move higher, and we dive into the fundamentals to determine how much higher they might rise, etc.
Fastmarkets’ analysis and forecasting services take a comprehensive view, incorporating pertinent and market-reflective raw material price data and supply trends. Our projections are crafted to assist you in negotiating futures contracts, reducing risk and enhancing profit margins.
In addition to price predictions, we also provide credit price forecasting and margin analysis. With this data at your disposal, you can implement strategies to significantly boost your profits.
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