Features International Sugar Journal

Have undertakers gone to buy nails for the biofuels coffin?

The significant drop in crude oil prices in the recent past has certainly been a hammer-blow to the global biofuels sector. There are no suggestions from industry analysts that price will recover to their previous peak anytime soon to over US$100/barrel. The issue is not drop in demand for gasoline globally but rather that of oversupply of crude oil in the market. Saudi Arabia, according to analysts, wants to take out producers of shale oil from the market place who surfaced when prices were high and invariably diluted market share of major producers. With Iran back in the fold, free of sanctions imposed by USA, oil market is likely to be over supplied in the foreseeable future. Goldman Sachs has suggested that the crude oil price may drop to US$20/barrel in the coming year – currently it is hovering at around US$30/barrel. How long can the biofuels sector survive under this strain? 

Arguably, biofuels have been and continues to be in some measure globally, a politically-driven commodity. It is worth reminding ourselves that in response to rocketing oil prices in the ‘70s, the Brazilian government initiated the National Alcohol Programme ‘ProAlcool’ in 1975. The intention was to substitute gasoline with cane based ethanol in automobiles. Since then, the cane ethanol sector has ballooned to some 29 billion litres. The ProAlcool Programme was effectively a knee-jerk reaction by policy makers in response to the oil crisis.

In the USA, the Renewable Fuel Standard (RFS) program was created under the Energy Policy Act of 2005 (EPAct) when the crude oil price was around US$60/barrel. The mandate, which has been tweaked, has the goal of 36 billion gallons (163.7 bln litres) by 2022, with biofuels from conventional feedstock (i.e. corn) limited to 15 billion gallons and the remaining coming from advanced and cellulosic biofuels. While the latter two biofuels are in infancy stage, the conventional fuel ethanol sector in the country expanded rapidly after the act, overtaking Brazil as the major producer of ethanol.

The agribusiness giant Archer Daniels Midland, one on the top ethanol producer in US, is according to recent press reports, reviewing its operations, in particular its three “dry mills” processing corn kernels into ethanol. The three mills under review comprise 800 mln gallons of ADMs annual ethanol capacity. The plants are in Columbus, Nebraska, Cedar Rapids, Iowa, and Peoria, Illinois. A recent trading statement indicated that operating profit from ADM’s bioproducts division, which includes ethanol, dropped 79% in 2015 to US$149mln. ADM is not the only US company to struggle with ethanol currently. Valero said that adjusted operating profit from its 11 ethanol plants had fallen 75% in 2015 to US$192mln. While ethanol is acknowledged to be good for boosting octane and reducing tailpipe emissions, qualities that spur some sales irrespective of the mandate, the plunge in crude oil prices has made ethanol less appealing for this market as a gallon of wholesale ethanol now costs about 30 cents more than petrol even though it provides less energy.

Globally, some 127.7 billion litres of biofuels was produced in 2014. Of these, fuel ethanol accounted for 74% and biodiesel 23%.While ADM and other biofuel producers are unlikely to sell their plants when crude oil price is at around US$30/barrel, it is apparent that the industry will struggle along. Globally, government mandates and cross-subsidies will see to that – to protect investment and jobs. Even though investment in new plants in the biofuels sector has been declining over the past few years, as the survey of new build activity in the 2016 January issue of International Sugar Journal indicated, that sector continues to attract new investment. This is complemented by ongoing research in the production of cellulosic and drop-in biofuels. Undertakers are unlikely to be distracted anytime soon. But it is worth asking whether policy makers will acknowledge that biofuels are a stop-gap measure before disruptive technologies necessitate their demise?