24 February 2009 00:00 [Source: ICB]
Continuing political inertia and lack of support for manufacturers in Europe are hitting the industry hard, bringing some players close to insolvency
FRUSTRATION HAS been mounting since the end of 2008 in the European biodiesel market over ongoing legislative uncertainty concerning product specification, taxation, mandated blending levels and provenance.
The start of 2009 has so far brought little comfort to the brokers that have seen trade levels drop off sharply. A decision taken to delay a vote in the German parliament regarding the future status of imported material, has also brought little joy, along with no firm feeling that a final decision on the import duty status of B99 US-origin material is around the corner (the 'B' signifies the amount of biodiesel - in this case 99%).
A major stumbling block for any national legislation is that it must conform with EU legislation and also not contravene any World Trade Organisation (WTO) law. Given that biofuels are an emerging field, new rulings are taken in these supranational bodies on a reasonably regular basis.
However, the slow decision-making speed of international bodies often hinders nations that want to get legislation passed into national law more rapidly.
The proposed German legislation would make imports of biodiesel, which had already received subsidies (for example, B99 from the US), ineligible to receive further German subsidies, or count towards mandated blending requirements.
The law also proposed that soy and palm-derived biodiesel should not be eligible for use in Germany until production of these products met sustainability criteria. No firm explanation of these criteria was given.
A vote had been scheduled for late January. However, the European Commission voiced concerns that the legislation would not be compatible with WTO law, and the German vote has been postponed pending a rewrite to address this.
Further complications have arisen from the timetabling of the final decision on sustainability criteria for biodiesel at an EU level, which may drag on well into the second or third quarter. The German legislation may be affected by this ruling, as its criteria must be compatible with those decided at EU level. So there is pressure on Germany, and any other country considering legislating on biofuels before EU decisions, to hold off.
A court case is also pending, with a decision expected in April, about the status of imports of biodiesel from the US, which have already picked up a subsidy before entering the EU.
At the moment, this B99 material is being sold significantly under the value of B100, non-US origin material. This is harming the production economics of European manufacturers, with production estimated to be running at a third of levels this time last year.
In the event of a decision against the import of B99 biodiesel, this material may no longer be eligible to pick up a second subsidy in Europe, or may not count towards blending mandates, or both. The main concern for market participants is that any decision and concomitant ruling on taxation might be retroactive.
Brokers and traders have reported that in the first quarter of 2009 they were seeing a tendency in the market for buyers to opt for B100 material which, despite being more expensive, was not at risk of being hit by any countervailing duty.
The bid to curtail cheap imports from the US has been called protectionist by US producers, with allegations that Europe is trying to protect their farmers and industry. Rapeseed farmers in Europe would be particularly hit by reduced production of biodiesel in Europe as rapeseed oil is a major feedstock.
Amandine Lacourt, project manager at the European Biodiesel Board (EBB), said: "The EU perspective is not protectionist but is aimed at creating a level playing field. Nowadays, there is a lot of discussion on biofuels sustainability at the EU level. Germany may have to wait for approval for its measures at an EU level. The climate change vote in December outlined big ideas, but it will take a while to get details in place. However, it is difficult for any member state to bypass the process."
While politicians debate the finer points of biofuels legislation, the feeling in the industry is that any decision would be better than the current state of uncertainty.
A biodiesel broker said: "This is incredibly frustrating and disappointing. It is clearly not at the top of their list of priorities, but until the situation is clarified German buyers dare not buy imported material."
Further confusion has been introduced into the German market in particular with a law emanating from the Secretary of the Environment recommending that the biofuel mandatory quota should be reduced from the current 6.25% to 5.25% for the remainder of 2009. This law comes into effect this month.
A spokesperson for the Association of German Biofuel Industry (VDB) says: "This is causing a lot of trouble in the biofuels market. Petroleum companies do not know how much they will be blending, nor when. Producers don't know how much or what kind of raw materials to buy. The whole market is in shock."
Germany is Europe's largest market for biodiesel. However, domestic production has run at reduced capacities as cheaper imported product has prevented manufacturers from achieving required margins.
The proposed German legislation is likely to be backdated to the start of 2009, with the result that there has been scarce buying interest out of Germany in any fatty acid methyl ester (FAME) products, which typically contain palm and soy oil derived methyl esters.
While rapeseed methyl ester (ROME) is more heavily used in the winter months anyway, because of its low cold filter plugging point (cfpp), it is more expensive than FAME blends and is therefore not used in the warmer months.
The climate of legislative uncertainty was harmful to trade levels and could hold back the development of this emergent industry, according to market sources.
Johannes Lackmann, chief executive at VDB, says: "Germany has a biofuels policy that is based on retroactive measures. We cannot work like this and urgently need a policy based on a long-term strategy."
Lackmann's sentiment is echoed across the industry, with market participants saying they had already resigned themselves to a slow first half of 2009.
While uncertainty is strongest around the German market, the unease has spread with the overall low liquidity levels seen.
While brokers lament the slow deal flow and traders find it difficult to take long-term positions, those with most to lose are arguably the investors in European biodiesel capacities. Rapeseed methyl ester has been selling below replacement cost for the start of 2009, with speculation from traders that producers do not have the facilities to store product, and need the income from selling volumes, even at a reduced price level.
If prices stay low then there is always the possibility of cutting output. However, biodiesel production in Europe already runs at a low level compared to capacity. Also, without income from product sales, there is a real risk of firms not being able to service their debt.
If biodiesel, and biofuels, generally, are to have a chance of becoming an economically viable product then investors must not be put off by a precarious legislative climate. The global economic downturn is bound to have many casualties, but hopefully the promising field of biofuels development will not be one of them.
AND THE RESULT OF ALL THIS MESS IS...
Switzerland-based biodiesel producer Biopetrol Industries expects to report a loss for 2008, and must take substantial restructuring measures to avoid insolvency.
The company forecast an operating loss of €11.5m ($14.7m) compared with a gain of €5.4m in 2007, but expects a 38% increase in annual sales to €300m.
"Since the middle of the fourth quarter, Biopetrol Industries has experienced drastically worsened market conditions in Europe and in particular in the important markets of Germany and the UK," the company said.
Because of its weaker financial situation, it is unable to pay the interest on a €75m bond it issued in February 2007.
The company blamed European and German energy policies for deteriorating market conditions. Biopetrol said the market for pure biodiesel (B100) had "completely collapsed".
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