OUTLOOK '08: Europe biofuels strive for resilience

02 January 2008 12:45  [Source: ICIS news]

By Alex Martinos and Charles Shaw

 

LONDON (ICIS news)--After the rollercoaster ride of 2007, the forthcoming year will see the European biofuels sector search for stability. But not everyone is optimistic.

 

Among the key issues will be the tension between food and fuel uses for cereals and vegetable oils, the rising prices of which have caused European producers to cut biodiesel production.

 

Cheaper imports from the Americas, which have suppressed European prices, could also continue, further squeezing producers.

 

Cereal prices will remain the dominant factor in the European fuel ethanol market after rising values forced most producers to close plants in 2007. These will not be able to reopen unless prices drop significantly, something seen as unlikely.

 

Negative press over bioethanol's impact on food prices could grow, but industry sources said this was unlikely to impact increasing demand created by government-imposed blending standards. 

 

On biodiesel, European producers remained pessimistic as vegetable oil prices, which have squeezed production margins in 2007, would likely continue to rise in 2008.

 

Much of European biodiesel output is based on rapeseed oil, and soaring prices of the raw material have seen the price of rapeseed methyl ester (RME) biodiesel surge from around $1,000/tonne (€685/tonne) to near $1,500/tonne FOB (free on board) NWE (northwest Europe) in the final quarter of 2007, according to global chemical market intelligence service ICIS pricing.

 

Despite the surge, RME prices have not risen fast enough to outpace soaring vegetable oil costs, forcing many producers to cut production rates or shut down altogether. In recent months, Germany operator Petrotec and Swedish producer Lantmannen were among those opting to mothball plants.

 

Biodiesel traders are confident that, as one put it, rapeseed oil prices will keep “going through the roof,” and they expect RME numbers to follow suit.

 

The growing problems plaguing the production of biodiesel from vegetable oils have spurred investment in so-called “second generation” production, based on waste and non-food sources, which is likely to play a growing role in 2008, according to market sources.

 

But the near-term outlook for conventional European producers remains uncertain. A Scandinavian producer said the scarcity and expense of rapeseed oil was likely to remain a problem in 2008, adding “it looks pretty bad”.

 

In the fast growing and rapidly changing biofuels sector, fiscal and regulatory changes can have far-reaching effects.

 

Industry insiders say that fiscal changes, such as the increase in taxation on biodiesel in Germany from 1 January 2008, are likely to continue to reshape the marketplace.

 

Similarly, changes to blending mandates for both biodiesel and ethanol could provide incentives for the expansion of European production.

 

UK-based Flex Fuels Energy recently announced that it has received final approval for its plans to build a 200,000 tonne/year biodiesel plant in Cardiff, Wales.

 

Flex Fuels expects the current low levels of demand for biodiesel in the UK to grow considerably after the introduction of the UK renewable transport fuel obligation (RFTO) legislation, saying that its proposed new plant will be poised to meet this growth.

 

Under the RFTO, suppliers will be required to initially blend 2.5% by volume of biofuels into all road transport fuels from April 2008, which will increase to 5% in April 2010. Similar developments are expected across the continent.

 

However, in the eyes of most biodiesel players, the most significant legislative issue in 2008 will surround the question of subsidised US imports in the European market.

 

In 2007 European producers, represented by the European Biodiesel Board (EBB) have complained vociferously that hundreds of thousands of tonnes of B99 biodiesel imports, benefiting from US subsidies, have been imported to the EU, suppressing prices.

 

Many now hope that 2008 will see a shift in the American legislative stance, to close what the EBB sees as an unfair loophole.

 

One European player said that the issue was “certainly going to be a big player next year,” adding that all eyes in the industry would be on the lobbying efforts of the EBB, and the deliberations of the US Congress, which is considering the extension or termination of the current subsidy regime, due to expire at the end of 2008.

 

But for now, the outlook on so-called “splash and dash” imports is unclear. 

 

Imported ethanol, predominantly from Brazil, has also continued to hit the European market. European sellers producing from cereal feedstock could not compete with Brazil’s cheaper, sugar cane-based product.

 

Much of the focus early in 2008 will be on Brazil’s sugar cane outlook.

 

Brazil plans to expand production in its central-south crop area, which accounts for about 85% of total yield, by 7-8%, while most analysts forecast a strong crop plantation aided by good-to-fair rainfall in the all-important December-April growth period.

 

With the sugar/ethanol ratio also set to improve, industry observers see a likely increase in Brazilian ethanol yield in 2008, something that would see export prices remain competitive, and its dominance in the European market unchallenged. 

 

($1 = €0.69)

 

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By: Alex Martinos
+44 208 652 3214

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