DJ Trading Of RIN Credits Increases As Ethanol Production Slows
Trading Of RIN Credits Increases
By: Ian Berry
From January 2009 Dow Jones Newswires
CHICAGO (Dow Jones)–Prices for a newly created renewable fuels credit have spiked recently, as refiners decide the credits make better economic sense than purchasing ethanol itself.
The credits, called renewable identification numbers, or RINs, started out trading at less than a penny after their 2005 creation, but now are at 12 to 13 cents for 2008 credits, having climbed during the past couple of weeks. The credits are administered by the Environmental Protection Agency as a way of tracking renewable fuel production.
The EPA had expected that production of renewable fuel would exceed the federal fuel mandate requirements “by a large margin,” creating a surplus of RINs “for at least the first few years of the program” and preventing a shortage, according to the agency’s Web site. But with ethanol plants closing or cutting back production, some analysts say the production could soon fall behind the mandate, which for 2009 is 11.1 billion gallons.
The little-known credits were noted by the U.S. Department of Agriculture in its supply-and-demand report for corn earlier this month. Among the bearish signs for ethanol demand, the USDA said that “recent increases in trading values for renewable identification numbers [RINs] that can be used in lieu of ethanol to meet mandated levels also indicate reduced demand for ethanol.”
The spike in RIN prices might be attracting speculators to the RIN market, analysts said. One market player said the spike in this paper substitute for ethanol could even prompt some idled ethanol plants to kick back into gear.
Refiners are turning to the credit system due to ethanol’s premium to gasoline, a situation that evolved during the last half of 2008 as crude oil and gasoline prices plunged.
“It is cheaper to buy RINs at 10 or 11 cents per gallon than it is to buy ethanol at a 60-cent premium to the gasoline market, even with the blenders’ credit,” said Rick Kment, ethanol analyst for DTN.
The federal blenders’ credit, which is intended to spur more ethanol production, provides a tax credit for each gallon of ethanol that is blended into gasoline. The credit was reduced to 45 cents, down from 51 cents, at the start of 2009.
A RIN consists of 38 letters and numbers and is tied to a gallon of renewable fuel. The system is designed to help producers and ethanol buyers track supply and demand for renewable fuels, and help the EPA track compliance with the mandate.
Each RIN number communicates various information about the renewable fuel, including when and where it was produced, and the type of renewable fuel. The numbers, which can exist electronically or on paper, are a currency that fuel producers can use to meet the Environmental Protection Agency’s renewable fuels mandate.
Kment and others said speculators have begun to recognize the opportunity in the nascent market and are becoming bigger players in it, although they say this is difficult to measure.
Patrick Kelly, fuels associate for the American Petroleum Institute, said the EPA has created a system conducive to speculation, in which “all you need to do is register with EPA and anyone can buy or sell RINs.”
But John Gelbard, chief executive of RINXchange - the only online exchange for RINs, which is owned by I.A. Englander, AgriFuel and Belzberg Technologies - said the market doesn’t lend itself well to speculation because, among other reasons, the RINs can’t be shorted.
“The [ethanol] buyers are the ones who buy them, generally because they need them. They basically retire them, because they’re sending them to the EPA to meet their obligation,” Gelbard said. “It doesn’t lend itself at this point so well to speculators, unless they only want to go long and just hoard them. And I haven’t seen much of that at all.”
He said the only “non-obligated parties” buying RINs on the exchange are brokers who buy them in smaller lots, aggregate them and mark the price up as they sell them in blocks.
Activity in a clearinghouse for RIN trading has risen drastically in recent weeks, said Clayton McMartin, president of Clean Fuels Clearinghouse, which runs a clearinghouse for RINs, called RINSTAR.
There were 41,000 trades on the RINSTAR platform in October and 42,000 in November, McMartin said. In December that number jumped to 95,000, and January is on a similar pace.
“There’s a lot of activity, no doubt,” McMartin said. “There’s increased liquidity in the marketplace.”
Uncertain Impact, Outlook
The problem, McMartin said, is that there is a finite number of RINs. The renewable fuels mandate remains, and many ethanol plants have either shut down or are idled.
The only way to produce a RIN is through production of biofuels.
“Consequently, ethanol plants will be starting back up,” McMartin said, as demand for RINs creates demand for ethanol itself. Trading of the RINs is open to anyone, but participants must register with the EPA, which regulates the program. Participants must report their RIN ownership and activity on a quarterly basis.
McMartin was unclear on when ethanol plants would increase production due to rising RINs, noting “this is our first dance.”
Another spike in RIN prices is possible as a deadline approaches at the end of February for refiners to state how they’ve met their 2008 renewable fuels requirement, Gelbard said.
Still, the market still faces uncertainty, as players wait to see the new Obama administration’s stance on renewable fuels. The industry also awaits new rules for the second phase of the federal Renewable Fuel Standard program, which officials had thought would be decided by the Bush administration.
Contact: 312-341-5778 or ian.berry@dowjones.com
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