Crisis in European biodiesel industry, as Brazil and Argentina produce at full capacity

The European biodiesel industry is going through a deep crisis. In several countries, including in biodiesel leader Germany, generous tax exemptions are being lifted and the green fuel now has to compete on the free market with petro-diesel. None of the major biodiesel producers on the continent succeeds in producing an affordable fuel. The result: demand has dropped considerably and plants are operating well below their capacity. Some are warning the industry faces collapse.

At the same time, Brazil and Argentina are going full steam ahead in producing plant-based diesel substitutes that are cheaper than the fossil fuel variant. And obviously much less costly to make than European biodiesel. Argentina can make biodiesel for US$0.22 a liter, according to Argentine agribusiness consulting firm Abaceb. Petro-diesel before taxes currently costs around US$0.42 per liter in Europe. Biodiesel made from rapeseed - the most commonly used feedstock - before taxes but with agricultural subsidies comes at around US$0.70.

In Europe, many new biodiesel plants have been built in recent years, but many of them have hardly any markets in which to sell, as several countries have been slow to implement promises to increase biofuel use. "We have been promised a market but it is not yet there," said Raffaello Garofalo, secretary general of the European Biodiesel Board, an industry association. "It will come, but in the short term we have to go through a desert."

Much of the European biodiesel industry is working under its capacity, Garofalo said, although no precise figures are available. Biodiesel sales in the biggest consuming country, Germany, have fallen dramatically this year after Berlin actually started taxing biofuels at a time when the EU wants to promote green fuel consumption. An overview of the crisis as it affects producers across Europe:
bioenergy :: biofuels :: energy :: sustainability :: biodiesel :: Germany :: UK :: Brazil :: Argentina ::

Medium-term prospects appeared excellent following the decision by EU leaders on March 9 for a strategic cut in greenhouse gases by using more renewable energy.

But several important countries including Britain, Italy and Spain have not fully implemented past promises to raise biofuel use, Garofalo said. Germany's biofuel tax showed the country was putting financial considerations above the environment, he added.

"Biodiesel is suffering from overcapacity because it is much easier to build production plants than it is to pass legislation," Garofalo said. "If there is no legislative support on taxation or binding targets, there is no real market for biodiesel."

In Europe, biodiesel is more expensive to produce than diesel from fossil fuels, and it needs tax breaks or a legal requirement to blend it with fossil fuels at oil refineries to encourage its use.

Germany
Germany's biodiesel industry is facing a crisis, with sales at gas pumps down by about 30 to 40 percent compared with last December, said Petra Sprick, chief executive of the biofuels industry association Verband Deutscher Betoningenieure, or VDB. "Sales in the petrol station market have collapsed this year," she said. "Our price attraction has gone."

Germany is the EU's largest biodiesel producer, with production capacity rising to 3.2 million tons in 2006 from 2 million tons in 2005.

But the German government said it could not afford the loss of revenues as drivers switched from regular diesel, which is heavily taxed, and Berlin started taxing biodiesel in August 2006. For a time, high fossil fuel prices cushioned the effect of the new tax, but falling fossil fuel prices mean drivers now have no incentive to buy biodiesel.

Because vehicles consume more biodiesel than fossil fuels and need more engine overhauls, biodiesel must be cheaper, she said. "If the government further raises taxes on biodiesel in 2008 as it plans, the whole industry will close down," she said. "This would be a tragedy at a time we need biofuels to cut greenhouse gas."

High prices for rapeseed oil, the main component of biodiesel in Germany, mean that biodiesel is being produced at a loss, she said. Germany had introduced compulsory blending of biodiesel with fossil fuels from January, but this is only expected to generate demand for 1.5 million tons annually.

German production is being cut and the first biodiesel refinery in the country, BioWerk Kleisthohe, has actually stopped production at its 6,500-ton-a- year plant.

"We just cannot sell any biodiesel this year," said BioWerk's chief executive, Thomas Vahle. "The new tax means it is just not competitive." "I just do not understand the politicians," he added. "They say it is so important to stop global warming and then introduce a tax to stop me selling my biodiesel, which protects the environment."

Shares in German biodiesel companies have fallen this year as the problems became apparent. One producer, Verbio, issued a profit warning on Monday because of low sales and high costs, causing its share price to fall 40 percent at one point.

On Thursday, Verbio's shares closed up 12 cents, or 1.7 percent, at €7.04, or $9.38. The shares were issued in October at €14.50.

Britain
Biodiesel producers in Britain also have problems. The largest British producer, Biofuels, announced this month that due to unfavorable market conditions it had restricted production to 25 percent of capacity in January and February and output would remain low for the immediate future.

The company, which operates a 250,000-ton-a-year plant in north England, has seen its stock price fall to around 15 pence, or $.30, compared with more than 200 pence in May last year.

Another key producer, D1 Oils, has also said it is operating below capacity due to difficult market conditions.

Many in the sector were disappointed that Gordon Brown, the British chancellor of the Exchequer, did not improve incentives in a budget introduced Wednesday.

Britain is phasing in a rule mandating that from April 2008, biofuels must make up at least 2.5 percent of oil company sales.

Brazil and Argentina
On the other side of the Atlantic, a crisis is in the making on tax and trade barriers as well, between Argentina and Brazil. But here it is precisely because biodiesel can be produced in a competitive way.

Brazil soy oil is the number one ingredient used in making biodiesel. Soy oil companies think Argentina's cheaper costs will cut them out of the market, especially the export markets.

"We're going to convince the government that they have to gun for Argentina on this issue, play tough," said Carlo Lovatelli, president of the Brazilian Vegetable Oils Industry Association, or Abiove.

"Biodiesel investments are heading to Argentina and not Brazil because it makes more sense to produce it there than here because of tax and trade incentives. We can be importing biodiesel from Argentina very soon," Lovatelli said.

Brazil wants to become the world's hub for biofuels. It's already the world's leading sugarcane ethanol producer and just entered into a partnership with the U.S. to promote world ethanol use. Brazil President Luiz Inacio Lula da Silva has said repeatedly that Brazil's agricultural revolution depends on a future where "we plant and harvest fuel."

While Brazil's ethanol program is mature and growing, the biodiesel segment is "crawling," Lovatelli said, adding that major companies such as Bunge prefer to invest in Argentina and are leaving Brazil behind. Miguel Biegai, a biodiesel analyst for Safras & Mercado, an agribusiness consulting firm, said Lovatelli has a point.
"Brazil can import from Argentina. I'm sure they can make biodiesel for less," Biegai said.

Brazil produces biodiesel at roughly $0.50 a liter, or 1.40 Brazilian reals on the low end, according to Safras & Mercado. Production costs can be as high as BLR1.60 a liter. Argentina can make it for $0.22 a liter, according to Argentine agribusiness consulting firm Abaceb.

In early February, Argentine President Nestor Kirchner signed an executive order to create a national biofuel law designed to make Argentina a biodiesel exporter. Kirchner put a low 5% export tax on biofuels, compared with a 24% export tax on soyoil. That makes it more beneficial for soyoil companies to sell their soyoil to fuel refineries for export than it does to export pure soybean oil for human consumption, Lovatelli said.

Domestic demand is also assured as Argentina's Biofuels Act mandates a 5% content of biodiesel or ethanol in the nation's fuel by 2010. The measure also provides tax breaks for companies investing in the sector. Santa Fe Province, which dominates soybean production and processing, has also offered a host of tax breaks to stimulate biofuel production.

But analysts here say Argentina is much more interested in exporting. Argentina wants to export biodiesel to the European and U.S. biofuels market, while its rival to the north is worried that Argentina's cheaper product will simply cut Brazil out of the export market and surely make investing difficult.

"We are only now realizing that there are a lot of opportunities to export biodiesel, but this is not ethanol. This is a very young segment and investments are being made contrary to what competing interests say," said Oswaldo Oliva Neto, chief of the Strategic Planning Department of the Presidential Palace.

Archer Daniels Midland is building a biodiesel plant in Mato Grosso state and state oil firm Petrobras is investing millions in a fuel called H-Bio, which is a blend of refined soyoil with diesel (earlier post).

Lovatelli, who also has ties to Brazil-based oilseed and biodiesel giant, Bunge, said Abiove would be lobbying Lula's office and the Foreign Relations Ministry on making biodiesel more attractive for corporate investors. Current investments aren't enough.
Brazil's current biodiesel program was designed as a social program. It gives benefits to biodiesel makers who buy raw materials from poor family farmers from the north east. The benefits of this 'Social Fuel Seal' policy include complete tax exemption on all biodiesel made from oilseeds purchased on family farms in that region (earlier post).

Brazil law will require a 2% mixture of biofuels in all diesel by 2008, or 850 million liters. Most of that biodiesel will be made from soyoil, a product Brazil and Argentina have in abundance.

"As a biodiesel producer, Argentina simply has the benefits of better logistics, better policies, and increased capacity," said Biegai.

Other market players suggest that some companies contracted by Brazil's National Petroleum Agency, or ANP, to produce and sell biodiesel will be unable to supply the tax-free oils to make biodiesel. Companies that participate in the ANP biodiesel auctions are required to sell biodiesel made from oilseeds purchased from family farmers.

If companies have to declare they are making the fuel from soyoil, most of it produced on large commercial farms, they'd have to pay a tax, raising their costs. Those costs would be passed on to the consumer and could make biodiesel as expensive as diesel fuel.

Should those companies be unable to meet the ANP requirements, Argentina would likely be called in to fill in the gaps.

Nevertheless, Brazil is expected to supply the 850 million liters required by 2008. The years beyond are anybody's guess.

Neto said the government has no plans on changing the current tax structure for biodiesel production. Whether the industry can convince Brasilia to go after Argentina, however, will be known in the months ahead.

Given the Argentine strategy to become a biofuels exporter, it is unlikely Brasilia negotiators will get very far with Kirchner.

More information:
International Herald Tribune (Paris): EU biodiesel firms blame politicians as demand falls - Politicians blamed for not delivering promised tax relief - March 22, 2007.

Market Watch: Brazil soy industryprepares for biodiesel war with Argentina - March 25, 2007.

Biopact: Brazil to quadruple biodiesel output by 2008, aiming to reduce rural poverty - August 16, 2006

Biopact: An in-depth look at Brazil's "Social Fuel Seal" - March 23, 2007