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Weak oil and imports turn EU biofuel boom to gloom - analysis

  European euphoria over biofuel has ended after slumping oil prices and cheap imports battered the sector last year, while the credit crisis has made the outlook even gloomier.

Producers say the fall in oil prices at a far quicker pace than agricultural costs has endangered the sector by slashing margins, although conditions differ between countries depending on the amount and means of government aid.

Many companies across the European Union have abandoned or halted biofuel projects and more damage will occur if oil prices do not rise significantly in 2009 and the bloc does not manage to protect its market, producers and analysts said.

“If conditions remain as they are now, it’s going to be a tricky year,” said Philippe Tillous-Borde, chairman of France’s Diester Industrie, which controls 30% of the 27-member bloc’s biodiesel market. “With a barrel between $25 and $60 the situation is fragile for makers due to a scissors effect,” he said. He stressed his company did not need to worry as it had diversified activities.

US crude oil was trading at around $38 a barrel on Tuesday, roughly a third of the price six months ago. Over the same period the price of rapeseed, the main component of biodiesel, fell some 30% in Europe, the same as the drop in wheat, which is used for ethanol. The price of sugar, also used for ethanol in the region, was little changed.

US IMPORTS BLAMED

European producers of biodiesel -- by far the main biofuel made in the bloc -- also blamed their troubles on cheap subsidized imports, mainly from the United States. Biodiesel imports from the United States into Europe are larger than from any other country and nearly doubled last year to more than 1.5 million tons from 820,000 tons in 2007.

These quickly became direct competitors for European makers, notably in France, Europe’s second largest biofuel maker, where refiners must blend a fixed amount of the plant-based fuels to avoid paying a fine but do not have to buy the local product.

“Refiners are required to use biofuels but they can buy it anywhere and US imports’ prices are now about equal to local ones,” said Alain Duchene, head of the sole biodiesel plant of British chemical firm Ineos, in the town of Verdun.

Ineos has already canceled two new units and halted one in recent months because of the drop in margins and Duchene said output at his plant would probably have to be cut this year.

The European Commission, the EU executive, plans next month to propose imposing anti-dumping duties on US biodiesel, a measure that could provisionally take effect a month later, sources familiar with the proposal told Reuters last week. Until that happens imports of so-called B99 -- biodiesel blended with small amounts of mineral diesel in the United States -- will continue to weigh on European producers.

US imports already led to a fall in Italian biodiesel output last year and meant the 2009 outlook was uncertain, Maria Rosaria Di Somma, head of the makers’ group said. “Our companies are trying to tackle the situation of crisis, of falling oil prices, but they absolutely cannot fight off B99 imports,” she said. “Some plants will be forced to close, some new projects will never see the light,” she added.

MOOD CHANGED

The European Union has long encouraged the production of so-called ‘green’ biofuels -- once hailed as a way of reducing the world’s reliance on crude oil and slowing climate change. But the mood changed after several reports cast doubts on the final environmental impact of biofuels when taking account of the energy spent to grow the plants, the chemical products used to boost yields and the water they consume. They were also blamed for the surge in food prices.

France, which had put in place a system to boost production of biofuels, notably by granting tax advantages on output, decided last year to cut them by 2012. In Germany, Europe’s largest biodiesel maker, after promoting pure biodiesel with generous tax breaks on sales at petrol stations which boosted consumption, the government reversed its policy, throwing the sector into turmoil.

“The market for pure biodiesel has collapsed because of the rising taxes,” Johannes Lackmann, chief executive of biofuels industry association VDB said. “This means many producers of biofuels will be pushed into insolvency.”

Of the association’s 33 plants, about 20% have stopped production and VDB estimates the country’s biodiesel industry is working at below 60% of its five million ton annual capacity with no improvement in sight.

The German ethanol sector has been doing better, supported by a rise in government targets for blending with gasoline. Production rose 46% to more than 450,000 tons in 2008, the German industry association BDBE said this month.

The global financial crisis is expected to slow the development of biofuels, mainly in eastern Europe, with small companies or new markets having a hard time finding fresh money.

“The growth slowdown certainly makes it more difficult (for biofuel producers) to get a bank loan,” Adam Walski, agricultural markets economist at Poland’s BGZ Bank said. Analysts said the Polish sector lacked state aid and the low exchange rate made technology imports too expensive. “This is going to influence the investment pace. It has to, there are no miracles,” said Krzysztof Biernat, from the Polish technology platform, an organization that groups biofuels producers and researchers. (Reuters)