US renewable diesel is approaching a breaking point. Things aren’t adding up. Let’s dive in with some highlights from my renewable diesel primer, now live on the @TheTerminal.

#OOTT, #RenewableDiesel, #RINs, #LCFS

🧵 (1/15)

Domestic production has tripled since 2019, reaching 95 kbd in 2022. My analysis of project timelines indicate supply could double this year and reach 320 kbd in 2025. (2/15)

US demand won’t keep up. Proposed volume mandates under the RFS only support about 143 kbd in 2023 and 167 kbd in 2025. I view this as the cap on domestic demand due to the role of RINs on producer margins. (3/15)

Margins are running out of steam. Feedstock scarcity puts upward pressure on costs. Diesel prices are cooling from 2022 highs. This increases the dependence on renewable credits. California’s LCFS prices have dropped significantly, and RINs could be next. (4/15)

RD production will continue to grow, just not at the rate project timelines imply. The days of 40+% returns are fading. I believe a margin reset is on the horizon, meaning lower returns and slower growth. (5/15)

Additional context below. The full primer is available to Terminal subscribers via blinks.bloomberg.com/news/stories/r…. (6/15)

Not all RD is the same. There are multiple production processes that use different feedstocks. Hydroprocessing (HEFA) leads due to low capital costs and similarities with petroleum refining. HEFA uses fats, oils and greases (FOG) as feedstock. (7/15)

FOG availability restricts HEFA’s scalability. 2021 US FOG supply (incl. edible portions) only supported 360 kbd of biofuels. 44% of that is already used by biofuels, including biodiesel. (8/15)

The @IEA projects if all of global FOG supply in 2027 went to biofuels, it could support 5 mbd. Key here is vegetable oils represent 85% of it. Used cooking oil, animal fats and residues only reach 680 kbd. Global diesel consumption is about 35 mpd, 4 mpd in the US. (9/15)

Veg oil's share is a challenge with scrutiny on feedstock sustainability. RD’s fundamental role is to reduce life-cycle emissions of heavy-duty transport. The EU’s RED has capped veg use in biofuels and they receive less support in carbon intensity-based policies (LCFS). (10/15)

Policy drives demand. The US has a nationwide program called the RFS, which awards RINs to RD producers. RINs hold a $2.85/gal value. CA, OR and WA also have state programs. CA’s LCFS awards $0.30/gal for soybean oil, $0.59/gal for used cooking oil. (11/15)

California consumed 81% of 3Q22 US RD. RD makes up 47% of the state’s sales. CA, OR and WA combine for 350 kbd of total diesel demand. Reminder, US RD project timelines indicate 345 kbd of capacity by 2025. (12/15)

This means more exports. Canada’s diesel demand is 615 kbd vs. EU’s of 3.8 mbd. Canada’s CFR sees RD as 6% of 2030 diesel sales (41 kbd). EU’s RED targets 14% biofuels in transport by 2030 vs. 8% in 2022. EU RD capacity also growing, expected to add about 150 kbd by 2030. (13/15)

Producing RD comes at a loss, absent RINs, LCFS and BTC. The loss on converting soybean oil to diesel is averaging $2.16 a gallon in 2023 (at 8.5 pounds a gallon) vs. the 10-year average of $1.15. This despite elevated diesel prices. (14/15)

Margins have held around $2/gal, but RINs have done the lifting. 87% of RIN movement since 2020 was to buoy RD margin. This could break if RINs become oversupplied with new RD production. (15/15).