Good morning, Denis. Thank you for agreeing to this interview. First, I would like to ask about your career journey so far.
I am from Moldova, although my father was born in Kazakhstan, and my mother was born in Ukraine. I attended high school in France and earned a bachelor’s degree in international finance and economics from the University of Toulouse, as well as a master’s degree in International Business and Commodities from the University of Paris Dauphine. I did executive programmes at INSEAD and Harvard during my career with Cargill.
I joined Cargill in 2011, after my studies, in their cocoa department in Amsterdam. I knew nothing about cocoa, but I spent a decade in it and never regretted it. Yes, it’s unique. It is a niche commodity with an interesting interplay among products, including beans, liquor, butter, and powder, all in quite different markets.
After ten years, I felt too much in my comfort zone and wanted to expand my perspectives and experience in other markets. Cargill offered me a position in bioenergy. I made the switch and immediately fell in love with it.
However, I craved a more entrepreneurial approach and wanted to widen my horizons. FincoEnergies offered me a position as Head Trader and Board Member. It meant that in addition to trading and risk management leadership, I could get involved in long-term strategy, building up the company and expanding its presence and impact.
Could you please tell me about FincoEnergies?
FincoEnergies is an independent supplier of (bio)fuels and decarbonisation services for the transport sector. We supply about a quarter of all the road fuels sold in the Netherlands. We are strong in maritime bio-bunkering services and are the largest independent biofuel supplier in the ARA (Antwerp, Rotterdam, Amsterdam) region. ARA and Singapore markets are today the largest marine biofuel hubs in the world. FincoEnergies also offers a variety of decarbonization products for customers in the voluntary market, such as environmental attribute certificates, which permit the cost of decarbonization to be shared among different market players.
We have approximately 270 people, and our head office is located in Rotterdam.
You started as a cocoa trader, focusing on the supply and demand (S&D) of just one commodity. With biofuels, you must master the S&Ds of various agricultural inputs, keep an eye on the competition from fossil fuels, and monitor rapidly changing government policy. How do you make sense of it all?
It is an intellectual puzzle with complex price discovery and dynamics.
You almost feel compelled to have an S&D for every single factor. However, once you see how big that puzzle is, you realise that it is impossible to have all the information you need to give you the confidence to make a trading decision.
You must understand that the market is a complex interaction of various priorities and markets while identifying what matters at a particular time. What should I focus on, and what is noise that I can ignore?
You must accept that there are known unknowns.
For example, a drought will impact crops and your S&D. How long will the drought last? How severe will it be? What are the alternative feedstocks? You must identify and focus on the price drivers.
However, if you identify a new energy directive as a significant price driver, you must understand the timelines and how different countries will implement it. You must also determine whether mandates or voluntary schemes are driving demand.
How does the biofuels market differ from the cocoa market?
You also have a unique setup of price drivers in the cocoa industry. On the supply side, you have the effects of climate, disease and government policies in West Africa. Demand primarily comes from the Northern Hemisphere, making cocoa a classic example of a south versus north commodity. You have some macroeconomic factors, but demand is largely inelastic. China has had a relatively limited impact on the cocoa market, as demand is not yet as substantial as in Europe or the United States.
Biofuels have three primary price drivers: feedstock availability, fossil fuel prices, and government policies related to climate change and environmental concerns. Biofuels are at the intersection of them all.
Traders often prefer to trade the arbitrages and differentials rather than the outright price. What differentials do you trade in biofuels?
One of the most exciting aspects of the biofuel market is its extensive portfolio of relative value opportunities. They come from different value drivers.
For example, you have different technical specifications. Some key aspects to consider include how biofuels perform in cold conditions and the transition from summer to winter.
Although a technical difference, it is not solely driven by technology. Instead, it is significantly related to the type of feedstock. What is the premium between winter and summer quality? You look at the feedstock S&D, but must also ask, what are the processing margins for different feedstocks?
What is the domestic EU production? What is the import price, and what qualities are available for import? You must make an S&D for each of them.
The second is the feedstock type. The regulation, in essence, is a target, somewhat like a glass that can be filled in different ways. I can fill it with different crop-based biodiesels, but in Europe, each country imposes a limit on the quantity. I can fill it with waste-based biodiesel, but most countries impose a maximum amount. You must understand how much of the glass has been filled so far, the price dynamics, and which biofuel was the most competitive.
Imagine you can only use a certain quantity of crop-based biofuels in a specific country, and it’s already May. If someone has already filled that quota, there will be zero demand for crop-based biofuels. Their value could collapse versus waste-based biodiesel. You must almost have an S&D for each feedstock type.
The third arbitrage is between the different types of bio tickets that reflect different feedstock types.
If I buy biofuel today and blend it into road fuels, I will generate a certain amount of compliance. Suppose I paid an $800 per tonne premium for FAME biodiesel versus diesel. Let’s assume, for the sake of example, that it generates 80 compliance tickets. This means that I created compliance tickets at a cost equivalent to $10.
However, the market is not necessarily trading at $10 per ticket, because bio tickets reflect a variety of factors. Electric vehicles can contribute to the target, as can biogas or other technologies such as HVO. The ticket price could be $12 or $13.
By blending the biofuel into the system, I create a cheaper compliance ticket than if I were to buy it. So, there is a value there that’s called the blending margin. It changes constantly. It could be $3 today and $5 tomorrow.
However, the blending margin depends on the feedstock. A crop-based biofuel would not have the same spread as a biofuel based on waste.
So, you can imagine how many different relative value positions you could take between the biofuel qualities, the bio tickets, and any interplay of these biofuel tickets versus biofuel proof of sustainability. This phenomenon occurs across various European countries. Each country has its dynamics.
There is always a price disconnect somewhere. The question is, how early can you identify it? How quickly can you put a finger on a fair value, and how quickly can you transition to it?
What are the leading EU and US trade flows?
The EU biodiesel sector has a domestic supply of rapeseed, while the ethanol sector utilises a variety of domestically grown feedstocks, including sugar beets, wheat, and corn. The EU imports a lot of feedstocks from abroad. It also imports biofuels.
The EU sees meeting climate objectives as a key priority. That’s why the focus is on transforming waste streams into usable energy sources. We also see a strong growth in the voluntary market demand, adding to the puzzle of price interactions.
The EU imports biofuels primarily from China, Indonesia and Malaysia. It imports some soy-based biodiesel from Argentina, but the EU capped the volume after an anti-dumping investigation.
US biofuel production capacity has increased enormously in the last couple of years. They do have some imports, but fewer than in Europe. The US exports ethanol widely across different regions, and some biodiesel production is also exported to the UK due to favourable tariffs.
When discussing feedstocks, the world needs feedstocks from everywhere, especially those derived from waste. As we expand the use of biofuels globally, we need to find more sources of waste material.
Are you optimistic about the future of biofuels, or are you concerned about the impact of electric vehicles?
Electrification is a positive outcome in terms of energy efficiency, although the method of producing electricity is crucial. We should electrify where possible and where it is efficient. If we look at private passenger cars, electrification is likely the future.
However, we are far from having only electric vehicles, particularly when considering heavy-duty vehicles. It will take time to get there, especially when considering the ICE fleet’s current size. It will take many years, even in wealthy countries that can afford to install charging infrastructure.
We need something that helps us transition from where we are to where we should be. We cannot put all our hopes on electrification and do nothing in the meantime. Biofuels play an immediate role and serve as your transitory agent. They contribute to climate decarbonisation while you journey to get where you want to be.
Biofuels may be a longer-term solution for heavy-duty road vehicles, maritime shipping, and aviation. Just one per cent of trucks in Europe are electrified, and the average lifespan of trucks is substantially longer than that of private passenger cars. We need a solution. We can explore compressed natural (bio) gas or liquefied natural (bio) gas, but we see that biofuels have an essential role to play in the long term.
It is a whole different ballgame when you look at maritime and aviation. You cannot electrify long-haul flights unless we make an enormous technological breakthrough. The batteries occupy a significant amount of space, are too heavy, and have limited autonomy. Biofuel is presently the most economically and technologically available alternative to decarbonise the sustainable aviation sector, with e-fuels (e-SAF) likely to play an increasingly important role in the coming years.
Regarding the maritime sector, biofuels are among the most competitive in terms of price. They are a drop-in fuel that requires no substantial adaptations to existing infrastructure.
Thank you, Denis, for your time and input.
The above is an extract from the second edition of my book, Commodity Conversations – An Introduction to Trading in Agricultural Commodities, available on Amazon.
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