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A Narrowing RIN Price Spread Is Bullish For The Darling Ingredients-Valero JV

Jun. 01, 2020 7:55 AM ETDarling Ingredients Inc. (DAR), VLO7 Comments
Tristan R. Brown profile picture
Tristan R. Brown


  • The Darling Ingredients-Valero Energy joint venture Diamond Green Diesel is undergoing a major expansion of its renewable diesel production capacity.
  • This expansion is occurring even as demand for biomass-based diesel (biodiesel and renewable diesel) is remaining flat under the federal biofuels blending mandate.
  • A situation is developing in the ethanol sector that will increase demand for biomass-based diesel under the mandate despite the lack of explicit demand growth.
  • The narrowing of the price differential between D4 and D6 RINs will increase demand for biomass-based diesel even as the JV causes existing U.S. renewable diesel production capacity to double.

Last November I wrote an article about the law in California (and now also Oregon) that is driving the expansion of the Darling Ingredients (NYSE:DAR) and Valero Energy (NYSE:VLO) renewable diesel joint venture Diamond Green Diesel [DGD]. That law, the Low Carbon Fuel Standard [LCFS], provides a large subsidy to low-carbon fuels that operates as a function of their carbon intensity, and that subsidy has contributed to the impressive profit margins that have been achieved by DGD. More recently, however, a changing dynamic in the national transportation fuel market is setting up a situation that will further benefit the JV during a critical phase in its expansion.

DGD produces a biofuel that is popularly known as "renewable diesel" via the reaction of lipid feedstocks (e.g., animal processing residues, used cooking oil, distillers' corn oil, etc.) with hydrogen. The resulting biofuel is a hydrocarbon that meets the same D975 technical specification as ULSD despite not being refined from petroleum. DGD has long been the major producer in the U.S. renewable diesel market, and it is in the process of greatly increasing its scale as part of a multi-phase expansion process. The first phase saw DGD's production capacity increase from 160 million gallons per year [MGY] to 275 MGY. The second phase, which is on track for completion in 2021, will see that volume increase still more to 675 MGY. (A third phase is being considered that would add a second facility with a total capacity of 400 MGY.)

The first expansion phase was recently completed without any major problems. The second phase is financially riskier due to the sheer scale of the production volume increase that will occur. U.S. renewable diesel capacity in 2019 totaled only 394 MGY, meaning that the new volume from the second phase alone will exceed all existing U.S. production capacity combined. The

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Tristan R. Brown profile picture
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