30/04/2008 (The Wall Street Journal) - U.S. and European biofuel producers are singing the blues these days. But that’s nothing compared to the tsunami overwhelming Asian biofuel makers. The good news? There may actually be a silver lining to it all.
American ethanol refiners, swamped by rising feedstock prices and a capacity glut, have seen economics go south, even with federal subsidies. European biofuel producers are shuttering plants, complaining about unfair U.S. competition and higher feedstock prices.
But in Asia, where demand for transport fuel is growing much faster than in Western economies, biofuel producers still can’t catch a break. Our EC colleague Tom Wright reports today in the WSJ (sub reqd.) that biofuel producers across southeast Asia are shelving plans for tens of billions of dollars of investment in new refineries:
That is an unexpected reversal of fortune for the industry. Just a year ago, Asian companies were rushing to build biodiesel plants to take advantage of subsidies in Europe and the U.S. aimed at promoting the consumption of cleaner-burning fuels. Projects being built or planned were forecast to pump out five million metric tons of biodiesel a year upon completion, or about half of Europe’s total refining capacity in 2007. The Indonesian government boasted that $12.5 billion in new biofuel investments were in the pipeline for that country alone.
The main culprits? Higher raw material prices, a supply glut in Europe (a big export market), and increasing concerns over the environmental impact of biofuels, especially the southeast Asian variety, which often involves deforestation. The higher prices for key ingredients like palm oil are especially painful: Indonesia’s state oil company Petamina has slashed its biofuel blend from 5% to 1% in less than 2 years because the economics just don’t work anymore.
So what’s the upside? Palm oil has become an environmental pariah, and is costly, to boot. But there’s plenty of demand in other circles—like palm oil’s main use, cooking oil. In the end, global market distortions in biofuels might end up easing the food crisis. Says the paper:
Meanwhile, some Southeast Asian palm-oil producers are refocusing on more traditional products and markets. Palm oil is still much more widely used to make cooking oil, margarine and cosmetics than it is for biodiesel. With diets improving in China and India, cooking-oil demand has soared, driving up prices. With subsidized U.S. and European soybean oil still flowing into biodiesel, some palm-oil producers, including [Singapore-based palm-oil plantation owner] Wilmar International, have switched gears and are trying to exploit the opportunity to supply China and other Asian markets with cooking oil.
Asia’s woes are the latest indication–if biofuels can’t become commercially viable with oil over $100, the economically sensible option might be to jump from the fire back into the frying pan.