Requires registration
Higher costs, lower returns and squeezed margins offer withering prospects for producers
by Dan Coatsworth
Short-term prospects for biofuel producers continue to look unappealing despite the UK joining a growing number of countries mandating the use of renewable fuels in petrol. Rising feedstock prices and an expected supply surplus of ethanol have put the squeeze on margins.
All petrol and diesel sold at UK pumps has to include at least 2.5% biofuels. The target will rise to 5% by 2010, but industry commentators are already suggesting this will not happen. The European Commission looked to be backing down from its 10% target of biofuels in petrol and diesel by 2020, in light of a global food crisis. On Monday, it denied a change in strategy, insisting plans were still in place.
Changing outlooks
In the past two years, tens of thousands of farmers have switched from producing food to fuel. This has been blamed for the rise in world food prices, prompting calls for political intervention to reassess the benefits of biofuels.
Corn stocks have risen by 12% in the past year, but selling prices remain at record highs of around $6 a bushel. For companies such as GTL Resources this is bad news, as its primary feedstock to make ethanol is corn. As a result, stockbroker Ambrian has more than halved its 2009 pre-tax profit forecast for GTL to $4.5 million. It had previously thought GTL would maintain earnings next year at the same level as 2008, forecast to be $10.7 million.
‘We’re taking a cautious view on GTL for the short term,’ says Ambrian analyst Richard Lucas. ‘The ethanol price has started to recover from lows seen last year, but it continues to trade at a discount to gasoline. Historically it has tended to trade at a premium. It’s the sustained high corn price that is really the concern for GTL now.’
The launch of GTL’s new 50 million-gallon plant next year will be the catalyst for recovering earnings as it will double annual production, says Lucas. Although GTL is increasing ethanol supplies, the wider market expansion should have peaked by 2010, helping to match supply and demand more closely. Lucas attributes this trend forecast to a sudden drop in new ethanol plants, having seen substantial new projects announced in 2006 and 2007, but barely any this year.
Unlike the UK, where there is now a blanket requirement for fuel to contain at least 2.5% biofuels, the US – where GTL is based – has left it to individual states to decide on enforcing a similar rule. That said, the US Energy Act became law last December, with a federal target of 36 billion gallons of ethanol to be used as fuel by 2022. Malaysia had planned to mandate biofuel blends but considerations have been delayed because of rising palm oil prices, a key feedstock used by the country’s biofuel producers. This is also why MyFuel, a Malaysia-based biofuel specialist, has postponed its Aim flotation, originally scheduled for December 2007.
Progress with lower-grade waste
Further north in Asia, Aim-quoted China Biodiesel has taken action to control feedstock pricing issues. It has technology that lets it use lower-grade waste animal or vegetable oils as raw material, rather than virgin vegetable oils typically used by Western biofuel manufacturers. Unfortunately it didn’t escape the price pressures completely. Pre-tax profit for 2007, reported on Monday, showed a 57% drop to RMB16.79 million due to increased raw material costs.
Even feedstock producers are finding life hard. D1 Oils announced plans earlier this month to stop biofuels refinery operations in the UK, having struggled to compete against cheap US imports. However, its feedstock business is also underperforming. It wrote off some of its Jatropha plantations – shrubs used to produce oil – because of poor management and failure of seeds to germinate in Zambia.