The following news article has been published by the Financial Times on 28-Oct 2019, written by Sun Yu, editor on the China economics desk of the FT. The article has been reduced for editorial purposes. The full article can be found here.
China is likely to miss a deadline for enforcing the mandatory use of ethanol-blended petrol nationwide by 2020. Two years after Beijing unveiled its plan for the compulsory use of E10, or petrol with 10 per cent ethanol content, across the country, just three north-eastern provinces, home to a vibrant corn ethanol industry, and the northern city of Tianjin have hit the target.
While a number of provinces have experimented with ethanol fuel — which Beijing considers more environmentally friendly — progress is limited, underlining the challenges facing China’s leadership in meeting policy objectives when they are at odds with local interest groups.
Nationwide use of ethanol in fuel would increase China’s annual corn consumption by at least 45m tonnes, or 18 per cent of national output last year, estimates Liu Lei, an analyst at Luzheng Futures. “Both farmers and traders are hoping for China’s ethanol fuel policy to materialise so corn prices can pick up,” said Mr Liu, “but that scenario is not going to happen in the foreseeable future.”
In the central province of Henan, E10 accounted for 57 per cent of petrol consumption last year even though local governments made it mandatory to use ethanol fuel in 2004, according to Jiang Shoulin, general manager of Sinopec Luoyang, a subsidiary of the state-owned oil company. The rules were promulgated most recently in Taiyuan, a northern city that implemented the E10 mandate on October 1. However, interviews with a dozen local petrol stations show none of them is providing ethanol-blended gas. “Taiyuan isn’t ready for E10,” said one service station owner.
Many plants are running at a low capacity because of a lack of orders. In addition, the country is grappling with a shortage of supply. According to US Department of Agriculture data, China is expected to produce 3.4m tonnes of fuel ethanol this year, far from the 15m tonnes needed to honour its E10 promise. In part, that reflects the high cost of producing ethanol.
The Singapore-based Asian Clean Fuels Association estimates that full implementation of E10 in China would cost almost $43bn to upgrade refineries and petrol stations. A shift to the nationwide use of E10 is also opposed by producers of MTBE — a key ingredient in standard gasoline that is excluded from ethanol-blended gasoline. Switching to ethanol fuel would pose a big risk to MTBE-producing factories, which are large taxpayers and employers in many provinces. “China’s petrochemical industry will suffer significant losses if we can’t find a solution,” said Zong Baoning, a researcher at Sinopec, the nation’s largest oil refiner and a big MTBE producer. State-owned energy companies are also reluctant to pay for the E10 bill. “How can we be active in developing ethanol fuel when we couldn’t benefit from it?” asked an official at CNOOC, the nation’s third-largest oil company.
There are no subsidies for refineries to upgrade their facilities or compensation for closing down MTBE capacity. This threatens to make ethanol a lossmaking business, prompting oil firms to delay the release of E10 in many places, said the CNOOC official. The policy inertia is shattering hopes that China’s corn demand will receive a boost from the E10 mandate. Analysts said the futures market had stopped pricing in a surge in ethanol fuel use in the next 12 months.