Northeast Securities: Sustainable aviation fuel empowers the aviation industry to reduce carbon emissions, and the PtL route has broad future cost reduction potential

According to the Zhitong Finance APP, Northeast Securities has released a research report stating that sustainable aviation fuel (SAF) is a core tool for the aviation industry to achieve its carbon neutrality goal by 2050, and is expected to contribute 65% of carbon reduction. Currently, there is a significant global SAF production capacity gap, which needs to expand 60 times within 25 years to match the trillion-level market demand. On the policy front, the European Union and the UK have introduced mandatory blending policies, the United States is stimulating supply through tax reductions, and China will launch pilot refueling in 2024, marking the arrival of an industrial explosion point. It is recommended to focus on companies with raw material advantages in the HEFA route and those with leading technology reserves in the PtL route.

The main views of Northeast Securities are as follows:

Transforming waste resources into new life, empowering carbon reduction for the aviation industry

In terms of the industrial chain, the upstream raw materials for SAF consist of waste cooking oils, agricultural and forestry waste, urban solid waste, and industrial waste gas. The midstream production is divided into two stages: technology package licensing and construction implementation, while the downstream supplies to major global airlines through suppliers. In terms of cooperation models, SAF technology package manufacturers generally provide core process technology, catalysts, and solutions, and help SAF production companies optimize process paths, reduce costs, or shorten project cycles through technology licensing and other means. Currently, the suppliers of technology packages are mainly foreign, while domestic companies such as Jianlong Micro-Nano are focusing on breakthroughs in the heterogeneous catalysts for SAF. Production companies rely on their own raw material resources and engineering capabilities to implement technology and achieve large-scale SAF production. Currently, there are 11 SAF production processes that have obtained ASTM standard certification, and among the approved SAF production technology routes, only HEFA is currently the only technology route used for large-scale commercial production of SAF. Before SAF can be blended with traditional aviation fuel for carbon reduction, it must pass sustainability certification and airworthiness certification to ensure its carbon reduction properties and safety.

Strong policy drive, a new trillion-level track is emerging

According to IATA estimates, SAF needs to achieve nearly 60 times capacity expansion within 25 years, with the market size reaching the trillion RMB level. Although the current global SAF usage is still significantly below the IATA target, the intensive implementation of mandatory blending policies in multiple countries has paved the way for the explosion of SAF demand. In Europe and the UK, both regions will impose mandatory blending ratio requirements for SAF by 2025, and fuel suppliers or airlines that do not meet the SAF blending requirements will face fines; most SAF policies in the United States focus more on the supply side rather than the demand side, and the policy characteristics are mainly encouraging and supportive, primarily using economic means such as financial subsidies and tax reductions to stimulate SAF production; relevant departments in China have successively introduced laws, policies, and standards to support the development of the SAF industry, and China will begin pilot refueling of SAF in 2024, indicating a broad development space for the SAF industry in the future. In addition to the European Union, the UK, the United States, and China, many other countries or regions around the world have also launched related SAF industrial policies to jointly promote the continuous growth of global SAF demand.

The core of the HEFA route lies in raw material resources, while the PtL route has broad cost reduction space in the future

Currently, China's SAF industry is still in its early development stage, with limited production capacity, all of which are in the HEFA route, and the capacity is concentrated in companies such as Jiaao Environmental Protection, Haixin Energy Technology, and PYHB China's future SAF (Sustainable Aviation Fuel) construction capacity is relatively large, and the HEFA (Hydroprocessed Esters and Fatty Acids) route remains the most mainstream technical choice in the future SAF industry. The cost of raw materials is the core factor affecting the production cost of HEFA-based SAF. Under the constraints of raw materials, the core of the profitability of HEFA-based SAF companies lies in their ability to acquire raw materials and the prices at which they can obtain them. Shanhigh Environmental Energy is one of the main suppliers of UCO (Used Cooking Oil) raw materials. In the short to medium term, high-cost G+FT (Gas-to-Liquids), AtJ (Alcohol-to-Jet), and PtL (Power-to-Liquid) routes, if put into production, may to some extent push up SAF prices. Against this backdrop, companies that master raw material resources are expected to see an improvement in profitability. In terms of other processes, G+FT and AtJ processes require large-scale production to reduce costs, while PtL relies on technological advancements to lower raw material costs. In the long term, the PtL route has the greatest potential for cost reduction.

Risk Warning: Risks of policy progress not meeting expectations, risks of short-term structural overcapacity, etc