12/07/07--EU Biodiesel Bubble Set To Burst?

LONDON (Agtrader)--German biodiesel plants could be shut and dismantled at the end of this year because the country's taxes on biofuels are hitting sales, the head of renewable fuels industry association BBK has said.

"About 55 percent of Germany's biodiesel production capacity is currently idle," said association president Peter Schrum. "At the end of this year, I believe a large number of German biodiesel plants will be dismantled and sold abroad."

This had brought an almost complete collapse in sales of biodiesel at petrol stations, he said: "Sales of biodiesel in the B100 (petrol station) market have almost totally stopped."

"We have lost our price advantage over fossil diesel and the biodiesel industry is facing closure."

"I believe a considerable number of German biodiesel plants will be shut at the end of this year. They will be sold abroad to regions such as North America."

"Dismantling is now being planned by several companies. I would not be surprised if half the existing capacity is dismantled at the end of this year."

The first German biodiesel plant was sold to the U.S. in the spring.

Schrum said as many as four small producers had declared insolvency this year and he suspected more would follow suit.

Germany currently has about four million tonnes of annual biodiesel production capacity.

Biodiesel needs to be about 12 percent cheaper than fossil diesel as vehicles consume more and need more overhauls. "We have lost this price difference," he said.

Germany is scheduled to increase biodiesel taxes from 9 euro cents a litre to 15 cents in January 2008.

The association is pressing the government to replace it's plan for automatic annual rises in biodiesel taxes with a more flexible system based on keeping a suitable price difference between fossil and biodiesel as crude oil prices fluctuate.

Production of huge volumes of rapeseed meal was also threatened by the cut in biodiesel output, he said.

German biodiesel is largely made from rapeseed oil, the rapeseed meal produced as a by-product is a major source of animal feed.

"About 40 percent of German (animal feed oilmeal) proteins is about to collapse," he said.

"Feed producers would have to purchase more expensive soymeal, which would in turn push meat and butter prices up."

What the implications are if this scenario were carried out are uncertain as Germany, Europe and the rest of the world already have a record large rapeseed crop in the ground to feed the anticipated huge increase in demand from the ethanol industry. Oil World forecasts worldwide rapeseed production in 2007 at 51.6 mln t, up from the 47.2 mln t of last year, with EU-27 production at 17.8 (16.1) mln t, of which German production is expected to be 5.3-5.5 mln t.

Meanwhile the EU is seeing a huge increase in imports of cheap biodiesel from abroad, particularly the US, Brazil and Asia.

The problem with biodiesel production in Europe is that it is largely based on the production from locally grown crops such as rapeseed and sunflower. These low-yielding oil crops can in no way compete with much more suitable plants grown in America and the South, such as jatropha, palm, soybean or pongamia oil. This year, a series of biodiesel plants in Indonesia, Malaysia and Brazil will come online that will produce the biofuel at a fraction of the cost of that produced in Europe. Even with trade barriers on imported biodiesel, the fuels from the South will drive locally produced biodiesel out of the market.

Meanwhile the US have discovered a clever little loophole which is allowing heavily subsidized biodiesel from the U.S. to flood into Europe. According to the Verbands der Deutschen Biokraftstoffindustrie (Union of the German Biofuel Industry), American producers have exported 200,000 tonnes of biodiesel to the EU since the start of this year. A new export-subsidy scheme facilitates these flows.

Agra-Europe, the EU press service for agricultural matters, says that the U.S. producers enjoy tax-credits worth 26 eurocents per litre if they mix biodiesel into regular diesel. The scheme is exploited to the maximum in that only a minimal amount petro-diesel is added to biodiesel, so that the subsidy can be obtained. This biodiesel-diesel mix is then exported to Europe. The rule applies to the very small local American biodiesel market, but was in fact created to boost exports to the EU. Because of the fact that the American rule is valid for the domestic market too, the European Commission cannot make a case against these veiled export-subsidies with the World Trade Organisation (WTO).

The European Biodiesel industry associations have filed complaints with the EU Commission and are demanding a complete overview of the entire supply chain and trade flows. In the same context, both the Swedish, French, Dutch and Spanish governments have called for a study by the OECD on biodiesel subsidies to show the effects of U.S. export-subsidies. The study should become the basis for litigation.

Spain’s new biofuels obligation will not help national producers unless refined U.S. biodiesel is prevented from entering European markets at below the cost of raw vegetable oil in Europe, said the APPA, Spain's renewable energy association. Crude soy oil used as a biodiesel feedstock currently costs upwards of €600 per tonne, leading to a refined cost of €750/tonne, while refined US biodiesel is said to be available in Spain at €600-650.

The APPA wants the Spanish government to deny U.S. biodiesel imports from the tax break offered to biofuels in Spain. A dozen biodiesel plants were in operation in Spain by the end of last year and several dozen more are planned.