INSIGHT: The US biodiesel industry - its rise and fall

23 December 2009 16:06  [Source: ICIS news]

By Ben Lefebvre

A biodiesel plant under constructionHOUSTON (ICIS news)--The rise and crash of the US biodiesel industry offers plenty of lessons.

At its height in August 2008, the industry boasted nearly 180 refiners pumping out 78m gallons during the month. Established businesses were in the game – ADM with its 85m gal/year plant in North Dakota – and so were new faces – John Plaza with his 105m gal/year Imperium Renewables in Washington.

Less than two years later, the overall industry is running at 15% of total capacity and is not expected to survive without government rescue.

Amid the wreckage, three general rules of business can be recognised. We offer these for your holiday reading pleasure. 

Commandment 1: No mature industry shall rely exclusively on hypothetical government aid for its survival, for the US government can be a finicky government.

For years, biodiesel refiners baked the following assumptions into their business plans: If the US Congress continued to annually approval the $1/gal blending credit, and if the US Environmental Protection Agency (EPA) implemented the mandates for renewable fuel usage it originally announced in 2005, then biodiesel refining would be a viable commercial venture.

Well, as of the end of December, Congress decided it would not vote on the tax credit issue until 2010, and the EPA has not yet implemented mandates. Both of these things may occur in the first quarter of 2010, but that would be too late for refiners with a thin cash cushion and thinner demand.

“Even if the tax credit is done retroactively, you’re looking at potentially at three or four lost months of production,” said National Biodiesel Board (NBB) spokesman Michael Frohlich. “A lot of plants will close their doors.” 

Biodiesel producers point out that they were only seeking to help the government decrease the amount of foreign oil imported into the US and to help the country reduce its carbon emissions. The government failed to live up to its promise of mandates, leaving refiners high and dry, producers have said.

Critics contend that too many business speculators jumped into the biodiesel pool without first looking for the bottom. The easy credit available in the mid-2000s made it easy for anyone with half a plan to start a refinery with the hopes the government would create the market later.

An NBB-sponsored report postulates that the industry, emasculated by the recession, would functionally cease to exist if the government did not extend the tax credits.

In the first eight months of 2009, US biodiesel refiners produced 313m gal of the renewable fuel, according to Energy Information Administration (EIA). That was down nearly 40% from the same period of the year before.

Lesson 2: Thou shalt not over-invest in first-generation technology whilst the next generation is at the doorstep.

When the EPA announced in 2005 it would (eventually) implement renewable fuel standards, its draft proposal called for 1bn gal of first-generation biodiesel - the stuff made from food crops and animal fats - per year as of 2012, with no increases planned afterward.

From that announcement, investors dove in, eventually creating 2.7bn gal/year in first-generation biodiesel production. The idea was to sell to Europe while waiting for the EPA to make good on its proposal (See Commandment 3 below) and then gravitate toward the new domestic market. 

The vast majority of US refiners settled in the Midwest - soybean country - to take advantage of what would become the industry’s main feedstock. But as biodiesel producers soon found out, commodity prices can be volatile thing.

Soybean oil, the main biodiesel feedstock, was 22.35 cents/lb in January 2006. In February 2008, near the height of the commodity bubble, it hit a high of 68.15 cents/lb. It then fell to 32.56 cents/lb when that bubble popped in November. By that time, soy-biodiesel producers had tanks full of high-priced fuel just as demand - and prices - cratered amid the recession.

To make matters worse, many refiners were not integrated with their raw material sources, meaning they had no control and could not profit from swings in raw material costs. They had to pass along changes in soy and tallow prices to buyers, which caused biodiesel prices to fluctuate week to week. 

Since then, the government and researchers became more serious about developing the next generation of biodiesel, fuel made from non-food crops such as algae, leaving the first generation behind.

“Conventional soy-based biodiesel -it’s hard to understand what major innovations will take place that will let it stand on its own,” said Nathaniel Greene, director of renewable energy policy at the National Resources Defence Council (NRDC). “The federal government’s efforts and money is best spent is getting advanced industries out of the lab and into commercialization.”

Second- and third-generation biodiesel is still too expensive to market - estimates generally put algae-based biodiesel at $5-10/gal to produce. But look at the flow of government research money and it is not hard to see which way the feds think the future lay.

Since July 2009, the US energy and agricultural departments doled out $600m to speed the development of advance biofuels producers. In an indication of where the government thinks the action is, the departments also awarded $2.4bn in grants to develop the nascent US electric car battery industry. 

Soy-and-fats-based biodiesel producers got nothing.

Now that first generation of producers, with their huge asset holdings, finds itself almost an afterthought, with a shrunken market and shrinking prospects. 

Lesson 3: Thou shalt not place all of thine sales eggs in one market, for the EU is a jealous market.

For a while, US biodiesel refiners were shipping about 80% of their product across the Atlantic to be blended into the EU fuel supply. The biodiesel made in Germany, France and other EU countries is among the most expensive in the world, thanks to hefty taxes (18 cents/litre in Germany, the region’s top producer), making it easy for subsidised US refiners to undercut the competition’s prices.

This scenario was popular with US producers, who sold three times more volume in Europe than they sold at home. EU buyers also liked the situation, since they could meet government renewable fuel mandates at subsidised prices.

Who did not like this state of affairs? Some US citizens, who felt that their tax dollars were funding energy independence in Europe. More importantly, European biodiesel producers were not happy with losing market share on their home turf to subsidised US product. About 60% of the biodiesel bought in 2008 was from across the Atlantic, according to European Biodiesel Board (EBB) statistics.

The EBB called foul, and the European Commission went right to the red card on US players - anti-dumping and countervailing duties (read: tariffs) so high that the US was effectively ejected from the game.

Producers who depended on the European trade scrambled to establish themselves in the few states or industries in US with mandates in place. Unfortunately, they found that the few suppliers who had made in-roads in the domestic market early, Renewable Energy Group (REG) the giant among them, were not giving up ground. 

After the tariffs, the deluge. In March, US producer Nova Biosource filed for bankruptcy and sold off its assets and producer Imperium shut down its 100m gal/year refinery near Seattle and laid off the majority of its workforce (the refinery came back online in November as the company sold material to Canada -then an explosion in December forced it back down, strengthening the feeling that God may not care for biodiesel).

Many more refiners went out of business. The largest US producer, Greenhunter, haemorrhaged money before idling its 105m gal/year refinery in Houston that it is now trying to sell.

Due to a loophole in the Commission’s ruling, some US refiners are still sending low blends of biodiesel to Europe, delaying their ends. The EBB has noticed this. Expect another complaint soon.

The way things are looking now, anyone still looking to attend the industry’s 2010 conference in Texas in should not have a problem finding a room.

($1 = €0.70)

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Doris de Guzman examines alternative processing, new technology, R&D and other sustainability initiatives in her Green Chemistry blog

By: Ben Lefebvre
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