Report Highlights:

China’s 2014 fuel ethanol production is forecast to reach 2.8 billion liters, up six percent from the previous year due to fuel consumption growth in provinces with a blend mandate. 2014 biodiesel production is forecast at 1.13 billion liters, an increase of only five percent from last year, as producers react to lower profits. Fuel ethanol production is lagging behind the government’s 12th five year plan due to shortage of non-grain feed stocks and policies that limit grain-based ethanol production. China imported a 10,500 ton shipment of ethanol in early 2014, reportedly as part of a trial study by a state oil company. Future imports, while economically viable, will require changes to national energy policies and regulations.

I. Executive Summary: 

China’s 2014 fuel ethanol production is estimated to reach 2.8 billion liters (2.2 million metric tons), up six percent from the previous year due to fuel consumption growth in provinces with a blend mandate. 2014 biodiesel production is forecast at 1.13 billion liters, an increase of only five percent from last year (compared to 18 percent growth in 2013) as producers react to lower profits. Biofuel production accounts for less than one percent of China’s liquid fuel production and is below targets set in the 12th Five Year Plan. Feedstock shortages have been the largest constraint on biofuel production. There have been no new policies or incentives announced for the sector in recent years. 

Most ethanol in China is still produced from grains (76 percent from corn and 14 percent from wheat). The government, concerned about maintaining self-sufficiency in grains, has promoted the use of cassava, sweet sorghum, and other non-food grain feed stocks in the biofuel sector. China’s first sweet sorghum ethanol plant started operation in June 2014 in Inner Mongolia, supplying fuel to three cities. Cassava and sweet sorghum now account for eight and one percent of ethanol production respectively. Cellulosic ethanol from corn cobs accounts for another one percent of production. 

China imported a 10,500 ton shipment of ethanol in early 2014, reportedly as trial by a state oil company to study the economics of importing ethanol. The trial proved that imports are feasible and economically viable, but resulted in scrutiny from the government as current regulations prevent the use of imported ethanol in the transportation sector. Future imports will require changes to both national energy policies and current rules and regulations governing China’s biofuels market. 

A trial biodiesel program for transportation fuel started in Hainan in 2010, but the trial program was only applied to two counties due to inconsistent feedstock supplies (primarily waste cooking oil). There have been no new policies or incentives announced for the sector in recent years. 

II. Policy and Programs 

The biofuel policies and support programs are unchanged from the previous year. 

China implemented fuel ethanol programs starting in the early 2000’s in response to abundant grain supplies, but switched course in 2008 when increasing domestic grain prices triggered concerns over possible shortages. Since then government policy has dictated that biofuel development not compete with crops intended for human or animal consumption. This policy has spurred research in alternative crops, such as sweet sorghum and cassava, which can grow on marginal land. These crops are unable to support large-scale industrial ethanol production at this time. 

There is currently only one cassava and one sweet sorghum plant producing fuel ethanol in China. The government reportedly approved an additional two plants in 2012 to be built in Zhejiang and Guangdong, but these plants would depend on imported cassava due to limited domestic supplies. It is unclear when, or whether, construction on these plants will begin. 

The National Energy Administration (NEA), under China’s National Development and Reform Commission, oversees the development of China’s energy sector. For biofuels, NEA’s main responsibility includes developing China’s overall energy strategic plan, drafting general laws and regulations, contributing to industry regulations, technology regulations and standards, and providing guidance on science and technology research. Bioenergy is viewed as one of the nation’s strategic emerging industries. China’s 12th Five Year Plan (2011-2015) set goals for increasing biomass and biofuel production and promoted the development of cellulosic ethanol and algae-based biodiesel. However, the government is expected to fall well short of these targets due to limited feedstock supplies and a desire to maintain self-sufficiency in grains. 

Ethanol 

The government tightly controls grain ethanol production and has reduced financial support for its production. China’s Ministry of Finance announced that it by 2015 it will remove the Value Added Tax rebate of 17 percent and impose a five percent consumption tax for grain-based ethanol production. The mandatory blend rate for gasoline in designated markets remains unchanged at 10 percent. In practice, the blend rate ranges between 8-12 percent according to industry sources. Ethanol is not allowed to be blended into fuel outside the designated markets. 

Construction of fuel ethanol plants is subject to approval from central or provincial governments. In provinces with a mandated blend for fuel ethanol, the provincial government issues regulations on the production and distribution of the fuel ethanol. By regulation, each of the 7 fuel ethanol plants has a designated distribution market in one or several provinces. As of 2014, the mandate blend program fully covers 6 provinces and covers another 30 cities in 5 other provinces. Regulations require state petroleum companies in these provinces to purchase and blend fuel ethanol from the designated plants. 

Deteriorating air quality in China has become attracted widespread public attention and concern in recent years. The government is under pressure to improve air quality by measures such as reducing coal use, improving fuel quality for vehicles, and reducing industrial and construction related pollution. The transportation sector has been identified as a key pollution source in urban areas. The biofuel industry is advocating the use of ethanol to reduce emission pollutants. However, current ethanol production capacity is constrained by a lack of non-grain feed stocks and would have trouble servicing additional provinces or cities. Current regulations and policies tightly control the production, sale and distribution of ethanol, and do not allow for the use of imported ethanol.

Biodiesel

There continues to be no national or provincial mandate for biodiesel usage due to limited production. In 2010, China removed a five percent consumption tax to stimulate biodiesel production.

III. Ethanol

Fuel Ethanol Production

China’s 2014 fuel ethanol production is estimated at 2.8 billion liters (2.20 million metric tons), up 6 percent from the previous year in response to increased fuel consumption in provinces with blend mandates. The mandated blend in designated provinces is 10 percent, while in practice the blend rate for ethanol in gasoline is between 8 and12 percent. According to industry sources, the blending rate falls to eight percent if ethanol production is lower than expected.

China currently has 7 plants licensed for fuel ethanol production (using corn, wheat, cassava, sweet sorghum and corn cobs). Corn accounted for 76 percent of fuel ethanol production in 2014, and another 14 percent came from wheat. The government is encouraging development of non-food grain feed stocks, such as cassava and sweet sorghum. However, these crops still compete with food crops for land, and only one cassava and one sweet sorghum ethanol plant are approved for production by the government. Currently 8 percent of fuel ethanol is produced using cassava, and less than 1 percent is produced from sweet sorghum. An additional 1 percent of fuel ethanol production is cellulosic ethanol based on corn cobs. Fuel ethanol production accounted for less than one percent of China’s liquid fuel production in 2014.

The 11th Five-Year Plan (2006-2010) set goals for expanding non-grain based ethanol production, targeting cassava and sweet sorghum. The world’s first cassava ethanol plant was built in Guangxi in 2007 with an annual production capacity of 200,000 tons. A sweet sorghum ethanol plant (50,000 tons capacity) was completed in Inner Mongolia in 2012. In June 2014, the plant started to supply fuel to 3 cities in the province. Based on the fuel market size and the 10 percent blending rate for the three cities, the plant is expected to supply 20,000 tons of fuel ethanol annually by 2015 according to industry sources.

A Historical Look at China’s Fuel Ethanol Production

Year

 Production Quantity

 % Increase from Previous Year

 2003

 25.3 million liters (or 20,000 MT/year)

 

 2004

 380.1 million liters (or 300,000 MT/year)

 1400%

 2005

 1,165.6 million liters (or 920,000 MT/year)

 206%

 2006

 1,647.1 million liters (or 1,300,000 MT/year)

 41%

 2007

 1,736 million liters (or 1,370,000 MT/year)

 5%

 2008

 2,002 million liters or (1,580,000 MT/year)

 13%

 2009

 2,179 million liters (or 1,720,000 MT/year)

 8%

 2010

 2,128 million liters ( or 1,680,000 MT/year)

 -2%

 2011

 2,255 million liters ( or 1,780,000 MT/year)

 6%

 2012

 2,509 million liters ( or 1,980,000 MT/year)

 11%

 2013

 2,635 million liters ( or 2,080,000 MT/year)

 5%

 2014

 2,787 million liters (or 2,200,000 MT/year)

 6%

 2015

 2,914 million liters (or 2,300,000 MT/year)

 5%

Overall Ethanol Production 

2013 ethanol production is estimated at 7.85 billion liters (6.2 million metric tons). Ethanol used for beverages and hard liquor accounts for 35 percent, with ethanol for fuel and other industrial chemicals accounting for the other 65 percent, or 5.07 billion liters. While fuel ethanol production grew 5 percent in 2013, other industrial use of ethanol is estimated down 2 percent due to China’s economic slowdown. Ethanol use for beverages and hard liquor is estimated to have declined 5 percent from the previous year due to the government’s anti-corruption campaign that targeted banquets. 

China has a reported 160 ethanol plants nationwide using a variety of feedstocks such as grains (corn and wheat), tubers (cassava and sweet potatoes), and molasses. Corn and cassava are the main feedstocks, accounting for 70 percent and 25 percent, respectively. Molasses (from cane or beet sugar plants) accounts for the remaining five percent. 

Ethanol Trade 

There continues to be a five percent temporary import tariff on denatured ethanol (HS code: 220720) in 2014. This tariff has been lowered over the past few years (it was 30 percent in 2009) to encourage additional imports of by-products and raw materials. Imports of denatured ethanol are only allowed to be used in the chemical processing sector. The government tightly controls fuel distribution and does not currently allow imported denatured fuel ethanol to be used in the transportation sector. 

In January 2014, Chinese media reported a shipment of U.S. denatured ethanol arrived in Zhenjiang port, Jiangsu province. The imports totaled 10,500 tons (13.3 million liters). According to trade contacts, the estimated cost for the fuel ethanol is RMB 7,318 per ton (including a 5 percent tariff rate, 17 percent VAT and 5 percent consumption tax). This import price is higher than the price for anhydrous ethanol in the domestic market (RMB 6,250 - 6,750 per ton in February 2014), but lower than the government set price for fuel ethanol. Under current regulations, only the 7 fuel state designated ethanol plants are allowed to sell fuel ethanol to state oil monopolies, such as Sinopec or PetroChina, at a fixed rate of 91.1 percent of the current gasoline price. 

According to trade contacts, the ethanol imported in January 2014 was part of a trial to study the economics and trading channels for ethanol. The trial proved that imports are feasible and economically viable, but resulted in scrutiny from the government as current regulations prevent the use of imported ethanol in the transportation sector. Future imports will require changes to both national energy policies and current rules and regulations governing China’s biofuels market. The government has been reluctant to change course despite the need for imported fuel and pressing air pollution challenges, citing a desire to protect domestic ethanol which is currently operating at only 40 percent capacity. High domestic corn prices and sluggish industrial and beverage demand for ethanol have hurt ethanol producers in China in recent years. Government officials also cite concerns over possible price and supply volatility as a reason not to utilize imported ethanol. 

The tariff structure for ethanol is unchanged in 2014. For undenatured ethanol, the import tariff remains at 40 percent. There is a value added tax for imports of 17 percent, and a consumption tax of five percent for both denatured and undenatured ethanol. In 2012 China eliminated import tariffs for ethanol (undenatured and denatured), as well as biodiesel, from ten ASEAN countries plus Chile, Singapore, and Pakistan due to free trade agreements with these countries. 

Tax and tariffs on ethanol and biodiesel

Tariff and Taxes on Ethanol Trade

 HS#

 

 Import Tariff Rate

 VAT on Import

 Consumption Import Tax

 VAT Rebate on Export

 220710

 Undenatured

 40%

 17%

 5%

 0%

 220720

 Denatured

 5%*

 17%

 5%

 0%

 Tariff and Taxes on Biodiesel Trade

 HS#

 

 Import Tariff Rate

 VAT on Import

 VAT Rebate on Export

 382600

 Biodiesel and mixtures

 6.5%

 17%

 0%

 For biodiesel from ASEAN countries, the Tariff rate is zero since 2012

For biodiesel from ASEAN countries, the Tariff rate is zero since 2012 

IV. Biodiesel 

2014 bio-diesel production is forecast to rise five percent to 1.13 billion liters (1 million metric tons). The rise in biodiesel imports in 2014 is lowering the profit margin for domestic producers and leading to slower production growth. Biodiesel production in 2013 is estimated to have increased 18 percent year-on-year due to the government crackdown on the illegal use of recycled cooking oil for human consumption. The crackdown contributed to a rise in additional feed stock supply for biodiesel producers. Most biodiesel production is based on waste cooking oil. 

Biodiesel production capacity is estimated at 4 billion liters, unchanged from the previous year. The number of biodiesel plants stands unchanged at 53. The capacity utilization rate for the sector is estimated at only 28 percent, due in part to the lack of large scale collection of waste cooking oil. There is still a large market for waste cooking oil (also known as “gutter oil”) for illegal food use despite government efforts to crackdown on the practice. This creates competition for waste oil, making it more difficult for biodiesel facilities to obtain feedstock.

There is no official mandate for biodiesel use in transport fuel and biodiesel cannot be sold to state owned gas stations. A trial biodiesel program for transportation fuel started in Hainan in 2010, but the trial program was only applied to two counties due to inconsistent feedstock supplies (primarily waste cooking oil). Most biodiesel for road transportation is sold at private gas stations in small cities or the countryside. Biodiesel use for road transportation is estimated to account for 30 percent of overall production. An additional 50 percent is used in the industrial sector and 20 percent is used for agricultural machinery and fishing boats.

Overall diesel use for the transportation sector is estimated at 142 billion liters for 2014, up six percent from the previous year. Diesel for transportation accounts for 63 percent of total diesel use. Biodiesel production accounts for 0.2 percent of total diesel use. China is unlikely to start any mandated use of biodiesel for transport fuel in the near future given the limited scale of biodiesel production at this time.

Biodiesel imports exploded in 2013, growing over 700 percent to 159 million liters. The increase was caused by a fall in palm oil prices and the elimination in 2013 of China’s 0.8 RMB/liter consumption tax on biodiesel imports. In 2012 China eliminated import tariffs for ethanol and biodiesel from ten ASEAN countries plus Chile, Singapore, and Pakistan due to free trade agreements with these countries. The vast majority of biodiesel imports have come from Indonesia, and this trend is expected to continue in 2014.

Imports of petroleum oil containing up to 30 percent biodiesel (HS code of 271020) surged in 2013 as a result of the elimination of the consumption tax for biodiesel. Trade contacts reported that most imports under this tariff line had very low biodiesel content (around 1-2 percent) and that this was added in order to avoid consumption taxes. The government cracked down on this practice in 2014, and imports under this tariff line have fallen as a result. Post’s biodiesel tables do not include imports under this tariff line due to their low level of biodiesel content.

China exported 85,000 liters of biodiesel in 2013. The biodiesel was reportedly processed from gutter oil by a manufacturer in Shandong province and used for jet fuel by the importing country.

Vehicle and Fuel Use

The number of civilian vehicles in China reached 126.7 million units in 2013, up 15.8 percent year-on-year, according to China National Statistical Yearbook data. Passenger vehicles in 2013 reached 105.62 million units, up 18 percent year-on-year. The China Auto industry Association forecasts that vehicle sales in 2014 will grow at a rate of 8-10 percent as the economy expands and vehicles becomes more affordable for Chinese households. Sales of civilian vehicles (passenger vehicles, trucks, and “other”) reached 11.68 million units during the first half of 2014, up 8.4 percent year-on-year. Truck sales have been hurt by the economic slowdown, while passenger vehicle sales continue to show strong growth.

The government encourages the purchase of electric vehicles and other “new energy” vehicles to reduce fossil fuel use and improve air quality. The State Council announced in July, 2014, that the purchase tax (10 percent or more) for new energy vehicles will be removed to promote their use. The State Council also announced that month that at least 30 percent of new vehicles purchase by the central government, and certain select municipal governments and institutions, must be new energy vehicles. New energy vehicles must account for 15 percent of purchases in 2014 in Beijing, Tianjin, Hebei, Yangtze River Delta (Shanghai region) and Pearl River Delta (Guangzhou region) as part of a campaign to tackle heavy air pollution in these regions. For all other government agencies and institutions, new energy vehicles must account for at least 10 percent of new vehicle purchases in 2014. This requirement increases to 20 and 30 percent respectively in 2015 and 2016.

Total diesel consumption in 2013 is estimated at 211,491 million liters, while gasoline consumption is estimated at 119,775 million liters. Post forecasts that gasoline and diesel consumption will increase by six percent in 2014 due to steady, but slower, economic growth. There are no official growth projections for fuel use.

V. Advanced Biofuels

Cellulosic ethanol production is forecast to reach 42 million liters (33,000 tons) in 2014, up 3 percent from the previous year. China’s only commercial cellulosic ethanol plant has an annual capacity for 63.4 million liters (50,000 tons), and uses corn cobs. The plant has supplied ethanol for seven cities in Shandong province since October 2012. Other ethanol plants are reportedly preparing to build demonstration-scale cellulosic ethanol projects using a variety of feedstocks, such as corn stover and wheat straw. Planned production capacity exceeds 10,000 tons per plant. It is unclear when these demonstration projects will be completed