Financial crisis hits biofuels industry hard

Rough waters

23 February 2009 00:00  [Source: ICB]

The US biofuels industry faces challenging times as the financial and economic crisis hits home

Ben Lefebvre & William Lemos/Houston

NATIONAL BIODIESEL Board (NBB) CEO Joe Jobe stood aboard a ferry chugging around the San Francisco Bay in California, US, early February, telling reporters what to expect for the industry in the coming year.

Passengers lurched slightly as they tried to get their sea legs on the boat, which ran on a 20% biodiesel mix, while Jobe explained how new state and federal fuel policies could lead the country to greater adoption of the renewable fuel.

"It's absolutely critical that we get sound, stable energy policy," Jobe said.

Most of those riding the Red and White ferry that day knew that energy policy out of Washington, D.C., US, has been choppy. Now, with a new administration in the White House looking at a wave of regulatory changes, industry watchers are wondering if biodiesel producers will find solid footing on dry land or be swamped completely.

The new federal Renewable Fuel Standard (RFS) calls for 500m gallons of biodiesel in 2009, and about 30 states are at some stage of either implementing or writing legislation on low-carbon fuel standards (LCFS) to lower greenhouse gas emissions.

Both of these legislative moves would stimulate domestic demand greatly, as US drivers consumed less than 1% of the 490m gallons the country produced in 2007.

But there is one caveat bothering the industry - how clean will the US government consider the renewable fuel?

There is not much argument that biodiesel, by itself, releases fewer greenhouse gas emissions than mineral diesel. Some estimates put the amount at 50% lower than normal diesel.

What concerns producers is the "indirect land use" factor, a measurement that takes into account such variables as where, when and how feedstocks are produced.

Right now, the US Environmental Protection Agency (EPA) is pretty tight-lipped as to how it will weigh indirect land use when measuring greenhouse gas emissions. NBB lobbyists are worried that biodiesel and petroleum-derived diesel will be held to different standards, putting the renewable fuel in danger of not being considered clean enough for use.

"Low-carbon fuel standards could be de facto [biodiesel] mandates, or they could ban biodiesel from the market," NBB states affairs director Shelby Neal told an audience at the National Biodiesel Conference & Expo in San Francisco in January.

Even if the regulatory winds go the industry's way, the current economic downturn will mean not all of them will reach shore. The weak economy, trade disputes in Europe and low petroleum diesel prices have sapped demand for US biodiesel.

While many at the conference were confident that the industry as a whole would weather the current economic malaise, the general consensus was that many of the small refineries that once dominated the industry would be lost.

Industry players producing soy methyl ester (SME) still face volatile commodity pricing for feedstock soybeans on one side and competitor crude oil on the other. Those who can are switching from the traditional soybean input to a variety of more stable sources for fuel making, including waste grease.

Even relatively sophisticated start-ups have fallen prey to current economics. In March 2008, Beatrice Biodiesel finished construction of a 50m gal/year SME biodiesel plant in Nebraska, one equipped with the latest technology.

By September of that year it declared bankruptcy without having produced a single gallon for the commercial market, a victim first of volatile feedstock pricing and then of tight credit. More established competitors picked its bones for deals on the technological assets it had trumpeted before its demise.

Still, some see hope. Will Thurmond, president of consulting group Emerging Markets Online, says the new RFS standards could provide a much-needed boost for the US producers still around to take advantage of them.

"The minimums for consumption in the US starting in 2009 suggest a possible turnaround in US markets for biodiesel today and in the next three years up to 2012," he says.

ETHANOL UNDER PRESSURE

The RFS is also seen as offering a glimmer of hope to the embattled US ethanol industry, which began 2009 in dire straits following the economic downturn in the fourth quarter of 2008.

Under the RFS, the US in 2009 is to consume 11.1bn gals of renewable fuels, up from 9bn gals in 2008.

Despite the prospects of higher demand, market sources predict consolidation and mothballing will dominate the sector in 2009, with tight credit and miniscule margins catapulting several mills toward bankruptcy.

The vulnerability of the US ethanol industry came under the spotlight in October 2008, when VeraSun Energy cited shrinking liquidity and filed for bankruptcy.

VeraSun, the country's second-largest producer, was only the first of a number of other suppliers that have halted production or sought bankruptcy protection since the fourth quarter of 2008.

Reports of ethanol mills going into Chapter 11 have peppered the news with almost predictable frequency, leaving some to wonder how many units will be left once the financial crisis is over.

The Renewable Fuels Association (RFA), which represents 90% of US producers, put ethanol nameplate capacity in February at 12.4bn gals/year, of which it said 2.0bn gallons, or 16%, was off line.

But the number could be higher. US top producer Archer Daniels Midland (ADM) in early February estimated that 21% of US capacity was off line. Still, ADM said the market remained oversupplied and the short-term outlook for the industry troublesome.

US agricultural and weather information service DTN, which tracks the US ethanol industry, listed 61 units as being either idled or with production "on hold" on its database. That accounts for nearly 32% of the existing 193 refineries listed by the RFA on its website.

Some of the units that halted production or went bankrupt had only been operational for a few months, while others called it quits even before they were able to produce a single gallon of ethanol.

One established ethanol producer in Iowa said the pressure on margins was significant for old mills running without major debt, let alone for the new units that started out highly leveraged in the last two years.

And the impact on margins could extend beyond 2009, even if the economy begins to show signs of improvement later this year.

The industry will go through a transition period that could last until 2012, and during which the number of US producers will be sharply reduced, says Alex Moglia, president of Illinois-based Moglia Advisors, which serves as financial advisors to companies in the alternative fuels industry.

Moglia predicts investors will also keep a tight lid on new projects in the months to come, snapping the trend of a sharp increase in ethanol capacity that the US saw in the last two years.

On the industrial ethanol side, the outlook for the industry mirrors the weakness of the general economy. US industrial ethanol demand in February was down by 20% from one year earlier amid reduced consumption in key end-markets such as the housing and automotive sectors, one producer says.

Demand for industrial ethanol has also dropped for any product where disposable income is involved, the source says, adding that staple markets, such as personal care, cleaners and detergents, are weakening as well.

Beverage ethanol stood out as the lone star for industry in early 2009. US demand for beverage ethanol rose by 7-8% in 2008 due largely to a displacement from imported, ultrapremium grade product to cheaper, domestically made premium grade.

However, the weak US economy was also likely to weigh on the beverage side in 2009, erasing prospects for continued growth in the sector, a beverage-grade producer says.

Beverage ethanol also involves disposable income, and consumers will eventually have to cut back if the economy does not improve, the source says.

Ben Lefebvre covers the US biodiesel industry for ICIS pricing and news from Houston, Texas, US. He previously reported on immigration issues for the Sun-Times News Group.

William Lemos is an ICIS pricing and news editor based in Houston, Texas, US. He follows the ethanol market in Brazil and in the US. William also covers the US olefins market.

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