Monday September 3, 2007
Palm biodiesel investments still viable?
AN Inconvenient Truth by Al Gore is a timely reminder of our fragile
ecosystem and the effect of global warming on everyday lives.
Whether or not it is true, some Governments are acknowledging the
potential threats arising from global warming and have taken measures to
address this issue.
The need to secure renewable energy such as wind, solar, hydro, and
biofuel is among top agendas.
Biofuel has potential for the widest reach, and is more economical than
other alternatives. Bioethanol and biodiesel are the two most common
biofuels used worldwide.
While palm biodiesel technology has existed for over two decades, it was
never commercialised due to cost constraints – mainly due to raw
material costs. This changed in the last two years with rising crude oil
prices and the Kyoto Protocol to reduce greenhouse gas emissions.
These led to a surge in biodiesel demand, and oil palm has the potential
to supply the bulk of the world's biodiesel requirements.
The Government has issued over 90 biodiesel licences to spur investments
into the country
Early last year, Malaysian entrepreneurs caught the biodiesel fever as
there were fat margins to be made.
Palm biodiesel was selling for over RM2,500 per tonne while its major
feedstock, palm oil, was trading at around RM1,400 per tonne, providing
biodiesel suppliers with net margins of at least RM500 per tonne.
The Malaysian government issued over 90 biodiesel licences with a total
capacity of over five million tonnes per annum to spur investments into
However, currently, only six biodiesel plants are operating in Malaysia
with capacities of 350,000 tonnes per annum.
The euphoria has fizzled out as palm oil prices skyrocketed by around
RM1,000 per tonne over the last year, in anticipation of dwindling
supply of global vegetable oils arising from biofuel demand.
Are palm biodiesel investments still viable?
The answer is a qualified no. The viability depends on three key
factors: sustained high(er) fossil fuel prices, willingness of developed
countries to continue tax subsidy programmes, and cheap raw materials.
As far as "tax subsidies" go, developed countries such as European Union
members impose heavy diesel taxes whereas biodiesel is generally
tax-exempt. This form of subsidy has provided cost advantages to
biodiesel suppliers. With CPO trading at RM2,400 per tonne presently, we
estimate the cost of producing palm biodiesel at RM3.00 per litre
(incorporating a 10% mark-up and transportation costs to Europe). This
compares to the cost of producing one litre of fossil diesel of around
However, with the imposition of fossil fuel taxes, the cost of fossil
diesel rises to RM3.10 per litre, making palm biodiesel theoretically
viable vis-à-vis fossil diesel (from a cost perspective).
However, in reality, palm biodiesel trades at about US$800 per tonne or
RM2.40 per litre, leaving negative margins for biodiesel suppliers in
The differences could have been pocketed by intermediaries, or due to
the preference of European buyers to use soy or rapeseed-based biodiesel
over palm biodiesel.
From a biodiesel supplier's perspective, the risk-return profile of
biodiesel investment is unfavourable and full of uncertainties as the
company has to contend with the vagaries in palm oil and fossil oil
prices, and potential policy changes on tax subsidies by importing
countries, as well as challenges posed by the non-governmental
organisation on environmental issues.
Based on our estimates, palm oil prices need to fall to RM2,000 per
tonne to make palm biodiesel investments viable again.
Judging from the anticipated tightness in global vegetable oil supply,
palm oil prices are unlikely to fall below RM2,000 per tonne over the
next 12 months.
However, we foresee palm oil prices coming under slight pressure to
trade between RM2,200 and RM2,400 per tonne over the next few months as
we enter seasonally high production months.
Nevertheless, there could be hope over the longer-term as Indonesia,
with its aggressive expansion programme to open 300,000ha to 500,000ha
of new oil palm plantations per year, could be the solution to making
biodiesel investment a viable venture.
These additional supplies should be quickly absorbed for biodiesel
requirements and we believe palm oil prices could be supported over the
long term with a floor price of around RM2,000 per tonne.
Given the recent plantation stock price corrections, value is emerging
among the small- and mid-cap stocks such as KL Kepong, Asiatic, TH
Plantations, Tradewinds Plantation, Hap Seng Consolidated and CB
Check for earlier Pacific Biofuel posts: http://pacbiofuel.blogspot.com/