OUTLOOK '10: Bloated biodiesel industry on EU life support

29 December 2009 12:00  [Source: ICIS news]

By Florian Neuhof

LONDON (ICIS news)--The European biodiesel industry is no stranger in the hallways of bureaucratic power in Brussels.

In March 2009, lobbying by the European Biodiesel Board (EBB) led to the implementation of punitive import tariff on biodiesel coming into the EU from the US, which the EBB argued was subsidied.

Then, in November, the board followed up this success with the announcement that it was to push for measures to stamp out the alleged practice of circumventing those tariffs by changing blend levels or re-routing US product via third countries.

In the closing days of 2009, the EBB voiced further disgruntlement. Argentinean biodiesel producers, it claimed, where unfairly advantaged by taxes that incentivised the export of finished product over the shipping over soybean oil feedstock.

The board is likely to take further action on these “differentiated export taxes” (DETs) in January, by which time its official anti-circumvention complaint on US biodiesel should have been made to the EU.

Heavy lobbying is common fare in EU politics, especially when the subject at hand is even remotely related to agriculture. Yet the EBB’s vigorous defence of its members’ interests also highlights their vulnerability.

Germany, Europe's biggest biodiesel market, is a case in point. The industry grew on the back of low taxation on B100 pure biodiesel, as well as government funding for plants built in eastern Germany.

When the government started raising those taxes in 2008, sales took a nosedive. Industry body Verband der Deutschen Biokraftstoffindustrie (VDB) estimates that the amount of B100 sold in the German market in 2009 was down to 230,000 tonnes, from a peak of 1.84m tonnes in 2007. 

The government has backed off a proposed further tax increase. But the fact remains that an industry reared on generous handouts is now hopelessly bloated, as vast overcapacity is undernourished by flagging demand. And without protectionist measures, European producers are struggling to compete with cheaper rivals abroad.

It remains to be seen how European producers will fare in 2010. But the new year holds some promise at least.

For a start, market sources predict that the EBB protestations will most likely bear fruit over the course of the year. Market participants believe that success in abolishing DETs could lead to a firming of prices.

In addition, imported feedstock could become cheaper. After soybean production in Argentina and Brazil slipped by 17% in 2009 compared to the previous year, the US Department of Agriculture (USDA) now expects at 30% increase in output in 2010. Cheaper feedstock would help producers improve their thin margins.

Yet it remains to be seen how much of this feedstock finds its way to Europe. Starting in January, Argentinean diesel will be blended with 5% biodiesel. The mandate has the potential to make an impact on the market.

An estimated 700,000 tonnes of soybean methyl Ester (SME) biodiesel will flow out of domestic use next year, much of which would otherwise have been earmarked for export into Europe. One producer said his outlook for vegoil feedstock is tight.

In Europe, more mandates are coming into effect from 1 January as well, or are being increased. Spain is introducing a 3% blending mandate and Italy is raising its levels by half a percent to 3.5%.

In the UK, diesel is required to contain 3.5% biofuels from April onwards. While some market participants do not believe that this will offset overcapacity to a significant degree, others think it will support prices.

Despite its support of the industry in the past, not everything the EU does receives a favourable reception from producers in Europe.

The Renewable Energy Directive and the Fuel Quality Directive, agreed as part of the EU's climate change and energy package in December 2008, require the European Commission to compile a report "reviewing the impact of indirect land-use change on greenhouse gas emissions" and to seek ways to minimise it.

The deadline for the report is 30 June. There is much speculation in the market that palm oil, the feedstock of palm methyl ester (PME), will not be classified as renewable under the new guidelines.

Resulting uncertainty has acted as a deterrent for potential buyers. “A few weeks ago it would have been profitable to sell FAME,” says one producer, referring to the fatty acid methyl ester biodiesel, of which palm oil is a major component.

“But there were no buyers, as no one is willing to take on product which might not be usable under new regulation,” added the producer.

Like it or not, legislation is set to dominate the industry for some time yet.

For more on biodiesell visit ICIS chemical intelligence
To discuss issues facing the chemical industry go to ICIS connect

By Florian Neuhof
+44 20 8652 3214





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