Debon Securities: The prominent carbon reduction effect and importance of SAF industry policy driving attributes

Dongfang Securities releases a research report stating that in the face of the severe challenge of global climate change, Sustainable Aviation Fuel (SAF) is an effective means of reducing aviation emissions. Multiple countries and international organizations have introduced a series of policies to promote its development. Referring to the huge market space of traditional aviation fuel, the substitution of SAF is expected to bring considerable market demand. The EU has shifted from recommending the addition of SAF to mandatory addition on a large scale, with the initial blending ratio set at 2%. Assuming that the EU's aviation fuel consumption in 2025 can recover to the pre-epidemic level of 68.54 million tons in 2019, it is expected that the EU's SAF consumption that year will reach 1.37 million tons. According to IEA estimates, global consumption at that time is expected to reach 2.08-4.15 million tons. The main points of Dongfang Securities are as follows: Why is SAF important? The carbon reduction effect and importance of SAF are prominent, making it the best means of reducing aviation emissions. SAF is a paraffin liquid fuel with lower freezing point produced in the process of second-generation hydrocarbon-based biodiesel (HVO) production. Compared with traditional petroleum aviation kerosene, SAF can reduce carbon dioxide emissions by up to 85% throughout its lifecycle. Considering the ongoing global carbon reduction tasks, the transport sector is the fourth largest source of global greenhouse gas emissions, with the aviation industry being the second largest emissions source after ground transportation. Unlike ground transportation, the aviation industry cannot directly reduce emissions through electric or hydrogen-powered systems. Therefore, SAF, which has advantages such as high energy density, flexible preparation methods, and high compatibility with existing aviation power systems, is currently the best means of reducing carbon emissions in the global aviation industry. According to IATA predictions, 65% of the aviation industry's net zero emissions contributions 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 space? Policy-driven demand growth will accelerate, and two major demand turning points are approaching. The policy-driven nature of the SAF industry is significant, with multiple countries globally releasing relevant support policies in recent years. In the future, the SAF industry will go through the following three major stages: First year Mandatory addition in the EU in 2025: The EU has shifted from recommending the addition of SAF to mandatory addition on a large scale, with the initial blending ratio set at 2%. Assuming that the EU's aviation fuel consumption in 2025 can recover to the pre-epidemic level of 68.54 million tons in 2019, it is expected that the EU's SAF consumption that year will reach 1.37 million tons. According to IEA estimates, global consumption at that time is expected to reach 2.08-4.15 million tons. Acceleration stage Comprehensive promotion of CORSIA in 2027: In 2027, the international aviation industry's Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA) will enter the second formal stage, when all ICAO member states (including 193 countries such as China, the United States, the United Kingdom, France, and Russia) will be required to assume their carbon offsetting responsibilities. It is estimated that 2027 will be an important turning point for the global mandatory application of SAF, shifting from regional to global. Global SAF consumption is expected to reach 3.38-8.54 million tons. Final stage Consumption in 2050 could reach nearly 360 million tons: in the longer term, according to IATA forecasts, SAF consumption will need to reach 358 million tons by 2050 to meet the requirements for net zero emissions. Based on the current price of SAF at around $2101 per ton, the potential market space for SAF amounts to $752 billion. Therefore, the SAF industry is currently at the beginning of a trend, and the global demand and market size for SAF are expected to grow rapidly in the future. How profitable is SAF? The price core lies in the supply and demand structure, while the cost core comes from yield improvement. In terms of price, according to Steel Union data, the price of SAF (FOB Europe) rose rapidly from an average of $1889 per ton in early November to close to $2100 per ton in December. During the same period, the price of raw material UCO dropped from $6800 per ton to a low of $6300 per ton. This round of price increases may reflect a tightening trend in the supply and demand of SAF. According to ICAO and the Orange Research Institute, the total global capacity of SAF that is already in production and available is about 2 million tons, mainly led by Neste, Diamond Green, and World Energy. Due to recent equipment failures at Neste's Singapore plant and production disruptions at the Rotterdam plant due to a fire, with nine planned projects cancelled due to financial pressures this year, the total impact on potential capacity is over 1 million tons. The actual release of capacity in the future may not meet expectations. At the same time, China's Sinopec Zhenhai Refining & Chemical, Junheng Bio, Yigao Environmental, and Beijing Haixin Energy Technology have SAF production capacity. With the additional new capacity of about 600,000 tons from Penyao Environmental Protection and BP's joint venture Jiangsu Lianyungang Port Jiaoao, Sichuan Tianzhou, Haik Chemical, and Beijing Haixin Energy Technology also expected to start production at the end of this year or early next year, the global industry structure of SAF is expected to be reshaped. Concerns on the price end should focus on whether overseas production disruptions can be resumed and whether the pace of new production capacity release can match the pace of demand release. In terms of costs, raw materials, technological routes, and other factors affect SAF costs, but yield is the most critical variable in achieving economies of scale. The current mainstream process can achieve a yield of around 70%. Based on this, a relatively neutral profit calculation model has been constructed. At the current SAF selling price and raw material price levels, SAF after-tax profits can already reach 2151 yuan per ton, without considering the sale of by-products, and can further increase profits. With higher yields, theoretically lower raw material costs and depreciation expenses per ton, size advantages can be consolidated. Considering that current SAF prices may already have a certain profit margin, production companies with higher yield advantages are expected to benefit more. Recommendations to watch: Beijing Haixin Energy Technology (300072.SZ), Zhejiang Jiaao Enprotech Stock (603822.SH), Penyao Environmental Protection(300664.SZ), Longyan Zhuoyue New Energy(688196.SH), Shenzhen Lions King Hi-Tech(301305.SZ), Shandong High Speed Renewable Energy(000803.SZ).Risk warning: SAF-related policy promotion is not as expected, trade friction risk, and civil aviation-related fuel demand is lower than expected.