Global biodiesel prices likely to decline due to massive European investments - report

Biodiesel prices will fall when European governments make fuel blending compulsory and as production quadruples over the next four years, according to Goldman Sachs Group Inc, the most profitable securities firm.

The fuel made from vegetable oils has averaged €780 (US$982) a tonne this year and will drop 18% to €640 a tonne when governments mandate set proportions for blending the fuel with conventional diesel. European biodiesel production may increase almost fourfold to 12 million tonnes by 2010 on an estimated €3 billion (US$3.8) worth of capital investment, Goldman Sachs said.

"Production capacity is expected to increase considerably in the coming years due to low barriers to entry," London-based analysts Mariano Alarco, Jason Channell and Stephen Benson said in an October 23 report. "The likely winners will be large, low-cost, multifeedstock vegetable oil processors in advantaged logistical locations."

Consumer and government interest in biofuels is driven by a desire to replace fossil fuels because of soaring oil prices, and to limit greenhouse gases blamed for global warming. Government support programmes are the main driver of industry growth, the Goldman analysts added.

Biodiesel made in the US and Europe is not competitive without a vast range of subsidies (earlier post). Made from low yielding crops such as rapeseed or soya, without any government support, the price of oil would have to reach US$110 a barrel for this type of biodiesel to be attractive, the analysts said. Palm oil based biodiesel survives oil prices as low as US$55:
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Biofuels based on tropical crops (such as ethanol from sugarcane and biodiesel from palm oil) can compete when the oil price is as low as $50 a barrel, according to Michael Coleman, who helps run Merchant Commodity Fund in Singapore. Crude oil rose $1.67 to $61.02 a barrel at 12:38pm on Saturday in New York. Oil has declined 22% from a record high of $78.40 per barrel in July.

Global production of ethanol, made from sugar and starch crops and blended with gasoline, is expected to grow 13% by 2010 and continue to dominate the biofuel market, according to Goldman Sachs. Global biodiesel production is forecast to grow 35%, led by Europe, where half of new cars sold run on diesel, of which there is a shortage.

Demand for biofuels has driven up prices of feedstocks in the past year. Rapeseed, used to make biodiesel, has advanced 11 percent in Paris. Sugar in London has climbed 23 percent.

European biodiesel sales may increase almost threefold to reach $10 billion by 2010, spurred by tax breaks and the blending requirements, the bank said. Food producers such as Suedzucker AG of Germany and Danisco A/S of Denmark will dominate the market based on their expansion plans.

The bank's predictions follow those of Morgan Stanley, which in July said European biodiesel sales will be 17 billion euros by 2015.

Both banks based predictions on sustained government support.

"Current fiscal support for the industry will continue in the short term, with a transition to biodiesel blending obligations across the EU markets in the medium term," Goldman said. The analysts were not available for comment today.

The European Union is targeting 5.75 percent biofuel content for every tank of vehicle fuel by 2010. Most member nations are implementing the targets through subsidies and other fiscal support programs for the industry. Germany is introducing a 2 percent compulsory blending requirement for ethanol and 5 percent for biodiesel by 2007.

Goldman Sachs says biodiesel companies will have the highest financial leverage among all biofuels players because capital costs are "relatively low" and technology "relatively simple." It forecasts production expansion will peak in 2008.

The support programs are spurring the establishment of biofuel companies across Europe, such as D1 Oils Plc and EOP Biopetrol AG. Five of the seven companies in the EU have listed their shares on the market over the last 14 months, representing 90 percent of the market capitalization, Goldman said.

The bank rated D1 Oils Plc a "buy" and Biopetrol Industries AG a "buy/neutral" on Oct. 16.