How Traders Can Capture Value in Sustainable Fuels

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October 11, 2023

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by Tapio Melgin, Agata Mucha-Geppert, Xavier Veillard, and Andrew Warrell (McKinsey & Company) The sustainable-fuel market is nascent, complex, and growing fast. Traders that develop an in-depth understanding across different fuels, feedstocks, and regions can gain a competitive advantage.

As countries around the world seek to limit their carbon emissions, sustainable fuels will play an important role. This category consists of a broad range of low-carbon fuels, including biofuels, e-fuels, and chemical by-products (see sidebar, “Know your sustainable fuels”). Because sustainable fuels can fill gaps in decarbonization and complement electrification, demand is expected to triple over the next 20 years, reaching approximately 600 million metric tons (Mt) by 2050 (Exhibit 1).1 To date, completed advanced-biofuels projects and announced investment pipeline in sustainable-fuel capacity have reached $100 billion.2

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The sustainable-fuel market is still mostly nascent, characterized by complex regulations and interdependencies across sectors. Physical and regulatory constraints on feedstocks have resulted in price volatility; supply chain and infrastructure bottlenecks, variations in pricing across regions, and import and export rulings have added to this volatility. The mix of fuel types will evolve through 2050: road fuels have represented most of the demand and growth to date, but in the 2020s categories such as sustainable aviation fuel (SAF), renewable natural gas and synthetic natural gas, and bio- and e-methanol will make up a larger share. During the 2030s, technological advancements could spur growth in new advanced-biofuel pathways and e-fuels, complicating the global market while injecting much-needed capacity and liquidity.

Current market and development factors

A fascinating but challenging aspect of the sustainable-fuel market is the broad range of categories it encompasses (Exhibit 2). Biofuels account for the vast majority of the current market, but drop-in sustainable fuels and hydrogen-based e-fuels could reshape the landscape in the coming decades. The development of these fuels will be nonlinear: they will mature at different paces, and their specific uses could replace fossil fuels at different rates.

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Several factors will shape the market’s development over the next few decades. READ MORE

Report: How traders can capture value in sustainable fuels (Biobased Diesel Daily)

Excerpt from Biobased Diesel Daily: Andrew Warrell, a partner at McKinsey, added, “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.”

To seize these opportunities, 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 organizations 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 arbitrage.
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.

To read McKinsey’s findings in detail, click here. READ MORE