OREANDA-NEWS. July 18, 2016. Recently, chatter has grown increasingly loud about Indian buying interest for seaborne, imported ethanol. Apart from more business done there, there has also been a flurry of new players hoping to jump onto the bandwagon.

This is reminiscent of similar fervor among market participants last year, when China’s ethanol imports jumped manifold almost overnight, resulting in a surge of traders knocking on the Middle Kingdom’s door.

And it appears there is good reason to be optimistic about India. According to US Census Bureau data compiled by S&P Global Platts, the United States exported more than 100,000 cu m of ethanol into India within a span of just three months.

Nine cargoes totaling 102,597 cu m were reported leaving US ports between February and April, with the largest being a 54,912 cu m parcel of undenatured fuel-grade product shipped in April. Highlighting the significance of such volumes, total ethanol imports into India amounted to less than 62,000 cu m during the 2013/2014 financial year.

One reason frequently cited for India’s growing interest in ethanol is a renewed commitment at governmental level towards using biofuels. Indeed, various ministers have made been talking about improving the viability of the ethanol blending mandate.

While India’s mandate has been in place for a decade already, with the current target at 10%, the results have been mixed, with the US Department of Agriculture estimating the actual blend ratio at a paltry 1.8%.

Might India finally emulate China, its northern neighbor and regional rival, and re-embrace ethanol on a larger scale?

Those hoping that India will massively increase its uptake of imported ethanol will be sorely disappointed. The Indian government currently does not allow using imported ethanol for gasoline blending as it weighs on further on the country’s trade deficit.

One of the two main rationales for India’s ethanol mandate is to reduce the country’s hefty fuel import bill and reduce foreign currency outflows. Currently, India spends up to Rupee 7 trillion (\\$104 billion) per year on crude imports, road transport minister Nitin Gadkari said recently.

To further boost ethanol self-sufficiency, the government has also expressed interest on harnessing second-generation technologies to obtain ethanol from biomass, with the hope of stretching the ethanol blending ratio as far as 22.5% eventually.

The other key motivation behind the ethanol mandate is to boost the livelihood of sugar cane farmers, especially during bumper crop seasons. Excess supplies, that would otherwise weigh on sugar prices and hence farmers’ income, could then be diverted towards ethanol production instead.

The plight of India’s agricultural sector has become a thorny political issue, and successive governments have resisted further trade liberalization in this regard.

Furthermore, it is interesting to note that unlike in China, and in spite of worsening air pollution in its emission control has not been a major factor in pushing the ethanol mandate forward, and it is unlikely that the government will allow imported ethanol being used for gasoline blending on environmental grounds, notwithstanding the aforementioned reasons.

Unlike the Philippines or even China, the blending ratio would in all likelihood stay well below the 10% target if there isn’t enough domestic ethanol to meet the mandate. That said, not all hope is lost for ethanol sellers wishing to enter the world’s second most-populous nation.

As ever-increasing volumes of domestic product are diverted into gasoline blending, there is set to be a widening shortfall of ethanol used as a feedstock by Indian chemical manufacturers to manufacture downstream products such as ethyl acetate.

This is the main demand driver leading the USDA to project that ethanol imports to India will reach at least 440,000 cu m this year, and even 600,000 cu m next year, which would make India the second-largest ethanol import in Asia.

The current situation is especially advantageous to American ethanol producers in search of new markets overseas as domestic demand reaches a bottleneck due to the blend wall. While industrial customers would very much prefer Brazilian sugar-based grade B ethanol for its superior quality, the surging Real and domestic supply tightness have placed Brazilian prices beyond reach. The same goes for product from neighboring Pakistan, where FOB prices are now heard to be even higher than CIF India.

With a significant cost advantage over its rivals, the US is definitely well-placed to meet the requirements of price-sensitive buyers in India, who have proved willing to purchase substantial quantities of anhydrous fuel-grade ethanol.

In conclusion, India is unlikely going to be the next China in terms of the impact it will have in ethanol, but it will certainly be thirsty enough to soak up some of the supply glut that we are seeing in the US.

Platts Kingsman sugar analyst Navneet Iyenger contributed additional research.