Biofuel demand strong but some projects risky

29 June 2006 17:32  [Source: ICIS news]

MADRID (ICIS news)--Biofuels demand is so strong that there would have to be a major shift in consumption to trigger an overcapacity crisis but some projects could be of doubtful commercial viability, market observers said on Thursday.

“There is wild demand for biofuels right now and while there are huge investment commitments, they are not enough to meet upcoming demand,” a leading industry executive said. “Therefore, I don’t see any risks for a bubble in the medium term.”

Robert Outram, analyst with research firm Frost & Sullivan, said the world’s energy needs are so huge that there cannot be an oversupply of oil-derived products.

While some market observers have said the industry could suffer if oil prices were to fall, many market sources said Brent benchmark prices would have to plummet to cripple demand for renewable fuels.

Boosted by the developed world’s policies to lower carbon emissions and find fuel alternatives to expensive crude oil, the biofuels industry is growing at a frantic pace.

In Europe, production is expected to triple by 2009, boosted by the European Commission’s 5.75% blend requirement, which is seen rising to an 8% mandate by 2015. In the US and Asia, growth is also expected to boom in coming years, boosted by similar blending requirements.

However, Graham Prince, head of communications at D1 Oils, acknowledged that the company would struggle if oil prices fell to $35 a barrel.

He said it would be difficult to price fuels competitively, adding that the company was diversifying its crops portfolio to price its biodiesel more competitively.

Though many obervers saw little risk for a biofuel crisis similar to the one that burst the dot-coms industry bubble in 2000, some said that the biofuels hype was overvaluing some company stocks and spurring questionable business ventures.

“There could be a bubble in terms of business projects that won’t go anywhere,” warned Alberto Alonso, a fund manager with Spanish investment brokerage Safei, adding that biofuel technology was still very green, posing risks.

“Many companies are announcing big projects but when you ask for more information they are uncertain about when they’ll be ready or how they will make them work,” he said. “They seem to be selling a bit of hot air.”

By: Ivan Castano Freeman
+44 20 8652 3214

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