Demand for sustainable fuels expected to triple over next 20 years

The report, titled 'How traders can capture value in sustainable fuels', considers the interconnected regulatory, geopolitical and technological factors which are creating a fragmented landscape of interconnected low-carbon fuel markets, spanning biofuels, e-fuels and chemicals by-products. The report details opportunities for traders which invest in understanding these markets at an early stage and describes four core competencies required to do so.

Tapio Melgin, Partner at McKinsey, said: “Since sustainable fuels can fill gaps in decarbonisation and complement electrification, demand is expected to skyrocket in coming years. However, these markets are far from straightforward. With such complex market fundamentals, traders should seek to understand which markets will increase in liquidity, which arbitrage plays to explore across products, which storage hubs to invest in, and which offtakes to secure in order to gain access to supply. Winning traders will build and enhance selected capabilities to keep pace with the market’s evolution.”

Andrew Warrell, Partner at McKinsey, said: “The successful sustainable fuels trading team will need to have a broad level of expertise across many different commodities and understand their interplay in different markets and products. To date, road fuels have represented most of the demand and growth, but in the 2020s, categories such as sustainable aviation fuel (SAF), renewable natural and synthetic natural gas, and bio- and e-methanol will make up a larger share. In the 2030s and beyond, new technologies could complicate the market even more – those who entrench themselves early will be best placed to keep pace with developments.”

McKinsey outlines four core competencies that will be critical to traders’ success:

• Build a regulatory intelligence team: The regulatory landscape among countries and regions varies dramatically and is evolving rapidly. Traders that develop a deep understanding of local market regulations, credit qualifications, future trends, and potential changes will be better placed to shape their trading strategies and secure offtakes or supply arrangements.
• Develop global trade flow models: Gaining an understanding of global trade flows, while feasible in the current context, will be far more difficult in the coming years. Winning traders will model how fast each commodity will grow and in which market it will likely clear, anticipate shifts, and monitor key changes in logistics capability and access within regions.
• Enhance origination capabilities: A robust origination function would be needed to secure offtakes or supply agreements for specific feedstocks and products that offer competitive flow advantages. Trading organisations attracted by the dynamic nature and growth in sustainable fuels could try to anticipate how the market will evolve and identify inconsistencies in pricing across products or over time, offering opportunities for market arbitrages.
• Strengthen the trading team: The interdependencies of feedstock, fuel, and credit prices within sustainable fuels and across other sectors are complex. Successful traders will need to model correlations between products and explore arbitrage opportunities across specifications, location, and timing. The trading team will need to have a broad level of expertise across many different commodities and understand their interplay in different markets and products.

In addition to the core competencies, the report outlines the main types of sustainable fuels of concern, the state of the current market and development factors, competing policy approaches in the EU and North America, and the outlook for global trade flows through to 2050.

Read the article online at: https://www.hydrocarbonengineering.com/clean-fuels/13102023/demand-for-sustainable-fuels-expected-to-triple-over-next-20-years/