Markus Auers and Beth Hilbourn
While the U.S. federal government shutdown consumed much of the headlines over the last several weeks, it does not mean that changes haven’t been brewing in Washington D.C. In fact, the Trump Administration continues to make a variety of moves, including some which will have important impacts on the petroleum industry. Certainly last week’s recognition of Venezuela’s National Assembly leader, Juan Guaido, in his claims to the Presidency of that oil nation and the sanctions announced yesterday against PDVSA are the headline developments, especially in regards to how they might impact the Venezuelan petroleum industry and crude imports to the U.S. This is a subject we are following closely and will address in upcoming blogs; however, today we focus on a developing issue related to another South American country which could have important implications for a segment of the U.S. petroleum industry. Argentina has recently been the top exporter of biodiesel to the U.S. but tariffs initiated by the Trump Administration brought these exports to a screeching halt in 2018. Though these tariffs have certainly benefited U.S. producers of biodiesel and seem to be in line with the Administration’s policies on trade, recent developments suggest that things could change in the coming months.
“I Never Invited Them In” – Trump’s Tariffs Back Out Argentine Biodiesel
From humble beginnings, Argentina rapidly grew into the largest foreign supplier of biodiesel to the U.S. The country began producing soybeans, the main feedstock for Argentine biodiesel, in the 1970s. With genetically modified soybeans becoming commercialized in the 1990s, Argentina’s soybean production was able to increase substantially. Growth continued after the turn of the century, with soybeans consisting of over 60% of harvested Argentine land at present. As biofuels grew in popularity, Argentina saw an opportunity to capitalize as the Argentine soy market was suffering after China decreased purchases of Argentine soy oil. In 2007, production of biodiesel started increasing rapidly. By 2011, Argentina was the World’s number one biodiesel producer. At the time, a majority of Argentine biodiesel was exported to the EU, particularly Spain. When the EU placed tariffs on Argentine biodiesel in 2012, Argentina needed to find a new buyer of biodiesel so they turned to the U.S. As interest in renewable fuels increased, demand for foreign biodiesel in the U.S. grew and Argentina became the largest supplier of those imports. As seen in Figure 1, in 2015, the U.S. imported 23 MBPD of biodiesel, of which 55% came from Argentina, with total biodiesel imports doubling to 46 MBPD in 2016, with 63% coming from Argentina.
When Trump took office in 2017, U.S. biodiesel producers urged the Administration to take action against foreign producers of biodiesel, claiming below-market rates from imports were impacting the domestic producers. This request seemed to be in line with the Administration’s focus on fair trade. Indonesia and Argentina in particular were singled out as subsidies for biodiesel producers in these countries allowed them to sell at below market rates. Starting in mid-2017, the Administration began to take action by placing anti-dumping duties on biodiesel imports from Argentina. This brought those imports to a screeching halt. As Argentine imports made up a significant portion of the biodiesel consumed in the U.S., someone had to pick up the slack in order to meet demand. This allowed for substantial growth in domestic production, as seen in Figure 2, with 2018 being a record year for U.S. biodiesel production.
“I Had to Let it Happen, I Had to Change” – A Change of Direction on Tariffs?
The U.S. Department of Commerce announced in November that there was reason for a “changed circumstance” review of the taxes levied against Argentine biodiesel imports. While concerning to U.S. producers, the Department of Commerce has some reason to review the tariffs as Argentina recently raised export taxes on biodiesel bringing them within three percentage points of soybean oil compared to the 27 percent gap between the products when the U.S. initially levied the tariffs. Reviews of this nature, though relatively uncommon, are not without precedent. U.S. law allows the Department of Commerce 24 months after a final determination to initiate a review if “good cause” is demonstrated. Overall, the review process should be completed within 270 days, meaning a final decision should be made by August.
Having access to U.S. markets is of major concern for Argentine producers as the Argentinian government favors small producers for domestic consumption forcing large producers to rely on exporting the fuel, primarily to the U.S. and EU. In December 2018, the EU decided to levy anti-subsidy tariffs against Argentine biodiesel, leaving producers without an export home though the EU is currently negotiating with the Argentinian government and the Argentine Chamber of Biofuels (CARBIO).
“I Kept My Promise” – Political Pressure From Both Sides/What’s Next?
The U.S. Department of Commerce’s decision to review the tariffs, though somewhat of a surprise, has not gone unnoticed by domestic producers. Shortly after announcing the review, three trade groups, The National Biodiesel Board, the American Soybean Association, and the National Renderers Association wrote to President Trump urging him to make sure the review process is rigorous and fair. To some producers, Trump’s close relationship with long-time acquaintance and Argentinian President, Mauricio Macri, may be concerning. As of now, the U.S. biodiesel market provides 60,000 jobs and is poised to provide many more if domestic production continues to increase. Domestic producers are adamant that a removal of the tariffs imposed on Argentine imports would stifle growth, cost jobs, and hurt soybean farmers, who’ve also faced the consequences of other trade policies. Additionally, there are fears that, once the anti-dumping duties are removed, Argentina will revert back to the policies that allowed them to sell at below market rates. So what happens next? Just as with much of the other drama taking place in Washington D.C., the only answer we can give now is “stay tuned” (and maybe enjoy watching Madonna in perhaps her best film role in “Evita” to pass the time).
TM&C constantly monitors changes and projected changes in pricing and supply and demand across the globe for all petroleum products. Our projections take into account new rules and regulations, technological advancements, production and transportation costs, demographics, changes in consumer behavior, and other factors impacting supply and demand. We include our independent analyses of these impacts in our semiannual Crude and Refined Products Outlook, and this subject will be discussed in detail in the next edition of this publication which is scheduled to be released in February. Alternative fuels such as biodiesel are playing a growing role in both U.S. and global refined product markets, and we address those impacts in particular detail in the Outlook. We also do significant work assisting biodiesel producers and consumers as they attempt to navigate changing rules and market dynamics. For more information on our Outlook, any of our other forecast products or our consulting capabilities in the alternative fuel or other petroleum sectors, please send us an email or give us a call.