Soaring costs of raw materials, massive overcapacity and political uncertainty hit profits
The surge in biofuels is faltering in the face of soaring raw materials costs and a massive amount of overcapacity in both bioethanol and biodiesel, an investigation by Chemistry World has revealed.
For the first time since the investment boom in biofuels started around five years ago output is going up more rapidly than consumption. With supply set to far outstrip demand this year and cereal and oilseed prices already 20-30 per cent higher than a year ago, biofuels firms are bracing for a big fall in profits.
Furthermore politicians are now joining environmental NGOs in questioning the sustainability of growing crops for energy use. EU officials have indicated that they could reconsider plans for a mandatory 10 per cent market share for biofuels in the EU by 2020.
In the US growth in demand for bioethanol, which has tripled over the last five years, is showing signs of levelling out. With profits in the bioethanol business declining, farmers are switching from the cultivation of corn, the main crop for bioethanol production, to soya and wheat.
Even in Brazil, which with the US dominates global bioethanol production, falling ethanol prices are prompting processors to use the energy in sugarcane more for making and selling electricity than for fuels for automobiles.
Biofuel producers in Europe are probably struggling the most. Many have been running plants at a loss since the middle of last year. Consequently production facilities have been closed and investment plans shelved.
’We’re going through a very difficult phase at the moment,’ says Rob Vierhout, secretary general of the European Bioethanol Fuel Association (eBIO). ’Bioethanol production in Europe will grow by around 15 per cent this year but that will compare with 70 per cent last year. It will also mean that there will be a lot of excess capacity with output of around 2 billion litres against capacity of about 3.2 billion.’
Biodiesel production in Europe is likely to decline this year mainly because of problems in Germany, which is by far the EU’s biggest biodiesel market. Not only have biodiesel producers in Germany had to deal with higher costs for rapeseed oil, their main raw material, but also with higher taxes. In order to curb the overcapacity in the sector, the German government has raised the levy on biodiesel by nearly 20 per cent - to only 20 percent below that for conventional diesel.
The higher taxes have made biodiesel uncompetitive in the road haulage sector where it had been gaining share as an unblended fuel because of its high cetane number or combustion quality. In 2007 consumption by trucks made up over half of 3.3 million tonnes of pure biodiesel sales in Germany, according to the German biodiesel association (VDB).
’We expect sales of pure biodiesel for trucks to go down by about 40 percent this year,’ says Karin Retzlaff, VDB’s assistant managing director. ’We have around 5 million tonnes of production capacity in biodiesel in Germany so the overcapacity will get much worse.’
German biodiesel producers have also been severely affected by a flood of subsidised US imports. Low-cost supplies of Latin American or Southeast Asian biodiesel are being shipped to the US to be blended with conventional diesel in order to qualify for a tax credit of $1 per gallon. The blended biodiesel is then re-exported to Europe where as much as 600,000 tonnes out of a total of 1 million tonnes last year was sold in Germany, according to VDB.
Imports of Brazilian bioethanol, now estimated by eBIO to have around a third of European sales, have been driving down prices in Europe making bioethanol production unprofitable. Abengoa, Europe’s biggest bioethanol producer, has shut down a plant in Salamanca in Spain, one of its three facilities in the country. Verbio of Germany has halted output at a 200,000 tonne-a-year plant in Schwedt, eastern Germany, after reporting a 254.5 million euro loss last year. Agrana has postponed the opening of a new 240 million litre-a-year unit in Austria until a fall in wheat prices makes it economic.
Nonetheless, biofuel producers in Europe are still relatively optimistic about an upturn in the market once the EU’s 27 members states start to implement a European biofuels directive which sets a target of 5.75 per cent of biofuels in transportation fuels by 2010.
On the horizon is the introduction of technologies for making second generation biofuels from cellulose in biomass instead of from starches, sugars and vegetable oils as with the current generation. Once they are fully commercialised in four or five years the new generation should offer biofuel producers far more attractive margins.