Latin America will supply an estimated 12% of the world’s waste and residue feedstock for advanced biofuels by 2030, equivalent to nearly 3 million tones.[1] [2] Unlike conventional fuels that are made out of extracting and refining fossil fuels from the earth’s crust, advanced biofuels are predominantly produced using vegetable oils (mostly soybean and rapeseed oil) or waste from plants and animals, known as biomass. With billions of dollars on the line and renewable diesel and sustainable aviation fuel (SAF) production jumping 112% by 2027, major energy players are rushing towards finding new affordable feedstock sources for their renewable refineries. [3]
In 2022, an increase in renewable fuel demand and tight feedstock supplies sent prices for oilseed crops to record highs. The U.S. is now looking to China to fill that gap, importing an estimated 370,000 tons of Used Cooking Oil (UCO) in 2023 from its Asian counterpart—some of which is reportedly not actually UCO, but disguised virgin oils. Renewable fuel projects are also facing high interest rates and shifting policy decisions, forcing some producers to put projects on hold until they can guarantee the bankability of their offtake agreements and secure long-term access to raw materials.
Renewable fuel producers struggling with the growing cost for oilseed crops are now facing the pressure to move away from feedstocks that compete with food industries or that have impacts on land use [4], which in turn is increasing demand for waste and residues. Waste and residue feedstocks—led by used cooking oil and animal fats—have a lower carbon intensity than vegetable oils, avoid competition with food sources and are eligible for the EU’s double-counting (i.e., counted twice against the renewable mandates). This allows them to generate tradable credits (known as RINS in the US) that make waste-based low carbon fuels more profitable for refineries. As producers move to secure new feedstock sources, having a pre-treatment unit that can handle a variety of different feedstocks will allow refineries to choose the most cost-effective input based on changing market prices.
Despite the appeal, the supply of waste and residue feedstocks is limited by nature and creates a bottleneck for the expansion of renewable fuels. The amount of used cooking oil (UCO) collected each year in Brazil, estimated at roughly 200k metric tons, varies based on the number of pao de queijos and picanhas that are consumed in Brazilian restaurants and coffee shops (among other foods), limiting the scalability of this feedstock. The quantity of animal fats destined to biofuel production in Brazil (which reached over 700,000 tons in 2021), is not only limited by competing industries such as soap and animal feed producers but is also dependent on the number of livestock that is processed by slaughterhouses each year. Nonetheless, the waste and residue market remains largely untapped in Latin America, with the majority of UCO being improperly discarded down the drain or sold in the informal market.
In fact, the leading producer of Sustainable Aviation Fuel (SAF) in the world, Neste, estimates that the global capacity for waste and residue collection is 40 million metric tons (MT) per year, but only an estimated 20 to 30 million tones is currently being collected. [5] That means that there is at least a 10-million-ton opportunity of waste feedstock that is underserved across the world. Americas Market Intelligence (AMI) predicts that at least 5% (500 KT metric tons) of that is in Latin America.
A sizeable portion of that can be found in five major cities that have more than 10 million inhabitants in their metropolitan area (about half the population of metropolitan New York), creating hubs of used cooking oil that can be collected within a relatively small distance and turned into fuel. Logistical inefficiencies, a large informal market, and a culture of improper UCO disposal creates an underserved market of over 200,000 tones of UCO. This is despite the fact that major cities are mostly already serviced by mid to large-scale UCO collectors, who make substantial margins buying UCO locally to sell either aboard or to local end users. Collectors with export licenses, which are the exception not the majority, have more profitable operations as the international spreads are larger. Leading UCO collectors such as Reoil (in Mexico City) or CM Coleta (Rio de Janeiro), are likely making millions of dollars of EBITA per year.
The region is also home to some of the biggest livestock producers in the world, including Bachoco (Mexico), JBS (regional) and Marfrig (regional). Roughly 50% of the weight of a live animal is not used for human consumption, paving the way for the rendering industry to process animal by-products to produce soap, pet food, animal feed and biofuels. Brazil alone has over 2 million tons of animal fats that is rendered each year, of which only 35% is destined to biofuels.[6] In August of 2022, American powerhouse Darling Ingredients Inc. (NYSE: DAR), who processes 10% of the world’s slaughtered animal byproducts, bought Brazil’s largest independent rendering company, FASA Group, for U$542 million. [7] Acquisitions are expected to accelerate in the near term as low-emission fuel producers seek to vertically integrate their supply chain. Feedstock providers with consolidated logistic operations, proximity to ports, low carbon intensity feedstocks and relatively cheap operating costs will be the main targets.
Although the use of waste and residue feedstock will remain robust through 2050, new pathways and 3rd generation feedstocks (i.e., algae) will need to be developed to sustain the growth in renewable fuels. Renewable fuels of non-biological origin (RNFBO) – which includes hydrogen and e-fuels produced via electrolysis using renewable power, are also expected to account for nearly 70% of the feedstocks by 2050, up from less than 1% today. The biggest challenge for e-fuels will be accessing abundant, affordable, and clean electricity to produce green hydrogen that can mix with the carbon captured. Only Brazil and Chile have the renewable scale to do so at this moment. Other feedstocks, such as lignocellulosic residues, novel vegetable oils and crop rotations will also play a substantial role.
Investancia, a dutch-based impact reforestation company is a leading developer of novel vegetable oils in Latin America. Using degraded cattle land in Paraguay and Brazil, the company is piloting the growth of Pongamia and Acrocomia trees that produce an oily substance that can be used for biofuels. Australian-backed Nuseed, an agricultural company, is piloting the plantation of Carinata as a cover crop in Argentina, allowing farmers to oxygenate their soil and generate a new source of income after their main harvest season is complete. International players are taking heed. In July 2023, Bunge bought Chacraservicios, an Argentine oilseed company developing Camelina cover crops in Latin America. A month later, in August 2023, Cargill signaled it was seeking to buy Brazil’s soy crusher Granol, a deal that would include crushing and biodiesel plants in three different states.[8]
Looking ahead, feedstocks with the lowest lifecycle emissions, a byproduct of how the feedstocks are generated and the distance to the renewable refinery, will fare best. This will include tree-based feedstocks grown in degraded land, where trees can capture CO2 from the atmosphere during their growth period while simultaneously avoiding competition with food sources. Tree-based feedstock providers such as Investancia are well positioned to capitalize on this trend.
By late in this decade, Latin America should become a major feedstock provider for biofuels across the world. By then, there will likely be a global trade of biocrude, a step further in the collection process which would include transforming the biomass collected into a material that can go directly into renewable refineries without the need for a pre-treatment unit. Alder Fuels in the U.S. is already piloting the production of renewable crude oil in Colorado via the use of woody-biomass. [4] Companies in Latin America that can follow this business model should see higher margins—it does, however, depend on the common underlying factor: affordable feedstocks.
Whether it is helping companies secure a long-term feedstock supply for renewable fuels, breaking down the market size and value chain of leading feedstock suppliers in a country, finding the optimal location for an advanced biofuel plant, or conducting competitive intelligence on industry leaders, AMI has over 20 years’ experience in Latin America’s energy sector. AMI has a proven track record of helping both multinationals and investors understand the changing market dynamics to ensure a successful low-carbon strategy in the region.
SOURCES
[1] AMI analysis excludes imports. [2] Sustainable fuels are fuels produced using biomass or electricity instead of fossil fuels. This includes primarily renewable diesel, sustainable aviation fuel (SAF) and renewable natural gas (RNG). [3] IEA, AMI Analysis [4] A high indirect-land-use change (ILUC) feedstock is one whose expanded production area occurs on high carbon-stick land. As of now, only palm oil is defined as such in the EU’s Renewable Energy Directive II (RED II). [5] February 8, 2023.Reuters, “Finland’s Neste flags need for new materials in rush for sustainable jet fuel.” [6] Agência Nacional do Petróleo, Gás Natural e Biocombustíveis[7] Darling Ingredients, August 2022, “Darling Ingredients Inc. Completes Acquisition of Brazil’s Largest Independent Rendering Company, FASA Group”
[8] Reuters, August 2023, “Brazil unit of Cargill makes binding offer for soy crusher Granol” https://www.nasdaq.com/articles/brazil-unit-of-cargill-makes-binding-offer-for-soy-crusher-granol [9] Aviation Week, July 17 2023: “Alder Begins Pilot-Scale Renewable Crude Production.” https://aviationweek.com/aerospace/emerging-technologies/alder-begins-pilot-scale-renewable-crude-production
