Debang Securities released a research report saying that in the face of the severe challenge of global climate change, sustainable aviation fuel (SAF) as an effective means of aviation emission reduction, many countries and international organizations have introduced a series of policies to promote its development, referring to the huge market space of traditional aviation fuel, SAF substitution is expected to bring considerable market demand. Assuming that EU jet fuel consumption in 2025 can recover to 68.54 million tons before the epidemic in 2019, the EU SAF consumption is expected to reach 1.37 million tons that year, and according to IEA calculations, global consumption is expected to reach 2.08-4.15 million tons.

The main views of Debang Securities are as follows:

What is the importance of SAF?

The effect and importance of carbon reduction are prominent, and it has become the best means of aviation emission reduction. SAF is an alkane liquid fuel with a lower freezing point associated with the production of second-generation hydrocarbon-based biodiesel (HVO). Compared to conventional jet fuel, SAF can reduce CO2 emissions by up to 85% over its entire life cycle. Considering that the global carbon emission reduction task is still severe, the transportation sector is the fourth largest source of global greenhouse gas emissions, and the aviation industry is the second largest source of transportation emissions after land transportation, but the aviation industry is not like land transportation can directly reduce emissions through electric or hydrogen energy drive systems, so SAF, which has the advantages of high energy density, flexible preparation methods, and high compatibility with existing aviation power systems, is the best means to reduce carbon emissions in the global aviation industry. According to IATA, 65% of the aviation industry's net-zero contribution by 2050 will come from SAF, which is expected to open up a huge potential market space for SAF.

How big is the SAF market?

The policy has accelerated the growth of demand, and it is about to usher in two major demand inflection points. The policy-driven nature of the SAF industry is significant, and many countries around the world have intensively issued relevant support policies in recent years, and the SAF industry will go through the following three stages in the future:

The

first year opens - 2025 EU compulsory refueling: the EU has shifted from the previous recommended SAF refueling to the large-scale application of compulsory refueling, and the first blending ratio will be 2%, assuming that the EU aviation fuel consumption in 2025 can recover to 68.54 million tons before the epidemic in 2019, the EU SAF consumption is expected to reach 1.37 million tons that year, and according to the IEA's calculations, the global consumption is expected to reach 208-4.15 million tons.

Acceleration phase - CORSIA full mandatory rollout in 2027: 2027 will enter the second official stage of the Carbon Offset and Reduction Mechanism for the International Aviation Industry (CORSIA), when all ICAO member countries (including China, the United States, the United Kingdom, France, Russia and other 193 countries) will be mandatory to assume their carbon offset responsibilities, and it is expected that 2027 will be an important acceleration inflection point for the mandatory application of global SAF from regional to global. Global SAF consumption is expected to reach 3.38-8.54 million tonnes.

Final stage - 2050 consumption may be close to 360 million tons: In the longer term, IATA estimates that SAF consumption will need to reach 358 million tons in 2050 to meet the net-zero emission requirement, corresponding to a potential SAF market space of $752 billion at the current SAF price of about $2,101/tonne. Therefore, we are currently at the starting point of the SAF industry trend, and the global SAF demand and market size are expected to rise rapidly in the future.

How profitable is SAF?

The core of price lies in the supply and demand pattern, and the core of cost comes from the increase in yield. In terms of price, according to the data of the steel union, the price of SAF (FOB Europe) rose rapidly from 1,889 US dollars / ton in early November to the average price of nearly 2,100 US dollars / ton in December, while the price of raw material UCO fell from 6,800 yuan/ton to a short-term low of 6,300 yuan / ton in the same period. According to ICAO and the Orange Club Institute, the total SAF production capacity that has been commissioned and actually available worldwide is about 2 million tonnes, led by Neste, Diamond Green and World Energy. Due to the recent closure of Neste's Singapore plant due to equipment failure, and the Rotterdam plant has also affected production for several weeks due to fires, overseas force majeure has occurred frequently, and 9 proposed projects have been cancelled due to financial pressure this year, affecting the potential production capacity of more than 1 million tons in total, and the actual production capacity release in the future may be less than expected.

At the same time, China has Sinopec Zhenhai Refining & Chemical, Junheng Biological, Elcometer Environmental Protection, Haixin Energy Technology has SAF production capacity, with Peng Harrier Environmental Protection and BP shares of Lianyungang Jiaao with a total of about 600,000 tons of new production capacity has been put into operation this year, Sichuan Tianzhou, Haike Chemical and Haixin Energy are also expected to be put into production at the end of the year or early next year, the global industry pattern of SAF is expected to be reshaped, and the price side needs to pay attention to whether the resumption of overseas disturbance capacity and the progress of new production capacity can match the rhythm of demand release.

In terms of cost, raw materials, technical routes, etc. affect the cost of SAF, but the yield is the core variable that constitutes the scale effect, and the current mainstream process package yield has reached about 70%, so a relatively neutral profit calculation model is constructed, under the current SAF selling price and raw material price level, the after-tax profit of SAF without considering by-product sales has reached 2151 yuan/ton, and if by-product sales are considered, the profit can be further thickened. At the same time, the higher the yield, the lower the cost of raw materials and depreciation and amortization expenses per ton, which is expected to consolidate the scale advantage.

It is recommended to pay attention to the following targets: Haixin Energy (300072.SZ), Jiaao Environmental Protection (603822.SH), Peng Harrier Environmental Protection (300664.SZ), Excellence New Energy (688196.SH), Luculent Environment (301305.SZ), and Shangao Environmental Energy (000803.SZ).

Risk Warning: SAF-related policy promotion is less than expected, trade friction risks, and civil aviation-related fuel demand is less than expected.