Wednesday, March 14, 2007

ANALYSIS-Success derails biofuels bandwagon


06 Mar 2007 12:12:25 GMT
Source: Reuters
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(This is part of a series on renewable energy)

By Gerard Wynn and Muriel Boselli

LONDON/PARIS, March 6 (Reuters) - A global, government policy-fuelled
rush to produce biofuels is backfiring as it pushes up costs and makes
the environmentally-friendly alternative fuel far less competitive.

Made from plants, bioethanol and biodiesel emit fewer greenhouse gases
than fossil fuels and have been hailed as an answer to both climate
change and energy security. U.S. and European backing look to have
secured their long-term future.

But in the near term a looming biofuels glut plus falling rival crude
oil prices, down a fifth on last summer's highs, mean producers can less
easily pass on their spiralling costs.

The present dip will last until demand rebounds, perhaps as far off as
the end of the decade.

"The two key ingredients for a dynamic biofuel sector are sky-high crude
prices and cheap feedstocks," said Raffaello Garofalo, head of the
European Biodiesel Board (EBB).

European Union leaders are expected this week to agree a binding target
for the 27-nation bloc to get a tenth of its transport fuels from
biofuels by 2020.

Falling oil prices are hurting sales of biofuel which was barely
competitive before, pricking European and U.S. europhia built on
subsidies and ambitious targets.

Profits are still to be had but a continuing scramble for raw materials
like corn, soy and wheat will knock margins as producers re-negotiate
more pricey supply contracts.

Still thriving, however, is biofuels pioneer Brazil, which has a booming
domestic market where more than two-thirds of all new cars can run on
either gasoline or ethanol.

This contrasts with the United States and Europe, which are propping up
their less mature industries.

U.S. President George W. Bush visits Brazil this week and the world's
number two ethanol producer will lobby America, the number one, to end
ethanol tariffs. Brazil has support from an unlikely quarter -- the
International Energy Agency (IEA), energy adviser to 26 industrialised

Fatih Birol, chief economist at the IEA told Reuters that the U.S. and
Europe should scrap import duties on developing countries and in the
longer term reconsider all subsidies.


Biofuels costs will likely fall and demand and prices rise in Europe and
the U.S. as better infrastructure and economies of scale kick in over
the next two to three years, analysts say.

U.S. Democrats last week proposed a $15 billion energy plan, including
boosting the country's network of ethanol service stations, for example.

But biofuels future also depends on oil prices, and analysts cannot
guarantee crude oil will stay above the $60-$65 where it is trading now
and undercutting biofuels -- excluding subsidies -- outside Brazil,
according to the IEA.

Another factor is input cost: but sugar, corn, grain and palm oil prices
are all seen holding or rising in the near term.

A new generation of biofuels made from waste like straw and wood chips
would ease input shortages, but is not expected to be commercially
available before 2009 and possibly much later.

In the United States soaring demand is expected to beat farmers' efforts
to keep up, with high corn prices likely in the near-term, not least
after Bush in January asked Congress to back a near 5-fold increase in
the use of biofuels by 2017.

Top palm oil producer Malaysia said in February most of its 86 approved
biodiesel plant licences were unlikely to come on line in the next two
to three years because of the price squeeze.


The biofuels craze is risking a surplus in the United States and elsewhere.

Investors F&C, with 155 billion euros ($204.9 billion) under management,
says it has exited investments including the second biggest U.S. ethanol
producer VeraSun <VSE.N>, because of the prospective over-supply and
margin squeeze.

A glut is also expected in parts of Europe, where biofuels support is
switching from tax credits to blending targets, and notably Germany
where higher taxes have knocked sales by as much as a third this year so

"In the very short-term we have far too much production capacity," said
the EBB's Garofalo.

Elsewhere, Spanish energy firm Abengoa <ABG.MC> is mulling suspending
output at its biggest ethanol plant, partly on higher grain prices and
partly because the domestic market is saturated under present blending
labelling rules.

Oil major Total <TOTF.PA> has put on hold a biodiesel project with
Finnish refiner Neste Oil <NES1V.HE>, while prospective British ethanol
producer Ensus postponed last December plans to list on London's
Alternative Investment Market.

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