Naveen Thukral, NDTVProfit.com 14 Jan 08;
KUALA LUMPUR (Reuters) - For many of southeast Asia's struggling biofuel makers, the global debate over using crops for food or as transport fuel is irrelevant -- a surge in palm oil prices has brought the industry to a standstill.
Even oil prices at $100 a barrel aren't helping companies who have invested tens of millions of dollars into plants that convert Indonesian or Malaysian palm oil into near zero-pollution diesel -- at a cost some 30 percent higher than regular diesel.
Over a dozen biodiesel plant projects have been delayed, while many of those already built are operating at a fraction of their capacity, according to a survey conducted ahead of the Reuters Global Agriculture and Biofuels Summit on Jan. 14 and 15.
Economics aren't the only factor: demand from Europe has been hurt by accusations that farmers are clearing large swathes of tropical forests to make way for plantations; governments have dragged their heels on policies that would require large-scale biodiesel use in domestic fuel.
The halcyon days of 2005, when vegetable oil-based green fuels were cheaper than crude petroleum and Europe made big plans to use biofuel, are now a distant memory.
"The prospects of the biodiesel industry are very slim, unless feedstock prices come down and we see mandates and subsidies in place," said Singapore-based biofuels analyst Chris de Lavigne at consultancy Frost and Sullivan.
Malaysia, the world's second-largest palm oil producer, took the lead three years ago, licencing more than 90 companies to set up biodiesel projects with a capacity of nearly 10 million tonnes, or some 200,000 barrels per day (bpd) in oil terms.
Today, the country has just 7 plants running, most of them below capacity, with 2008 output likely to be less than 100,000 tonnes, according to a Reuters survey of biodiesel projects in Malaysia, Indonesia and Singapore.
The survey showed 14 projects with a combined capacity of more than 2 million tonnes have either been shelved or delayed.
At least 1 million tonnes in biodiesel capacities sit idle -- an estimated $250 million in investment, based on estimates that each 100,000 tonnes of capacity costs about $25 million to build.
In Singapore, Australia-based Natural Fuel's 600,000 tonne plant is running at just 10 percent of the capacity as surging raw material prices have turned margins negative, a market source close to the company told Reuters.
"I don't see any point in going ahead with biodiesel. We lose money," said an official of a Malaysian plantation company which has shelved plans to build a biodiesel plant.
PRICES SURGE
Palm oil, which soared by more than 50 percent last year, has extended gains to new records in recent weeks thanks to a cocktail of booming demand from the food sector in Asia, lower output in Malaysia due to flooding and surging global crude and vegetable oil markets.
Crude palm oil, the main ingredient for biodiesel, now costs just over $1,000 a tonne, while petroleum-based diesel fuel trades at about $780 a tonne in Singapore.
That grim reality made Finnish refiner Neste Oil's announcement in November that it would build the world's largest biodiesel unit in Singapore all the more surprising, especially as it plans to use mainly palm oil for feedstock.
"The bottom line is that biodiesel is much more expensive than diesel, and I don't see much activity at the regulatory level," said Peter Cockcroft, a regional energy expert.
While some consumer nations like South Korea have pushed through small mandates that require domestic fuel to contain a certain percentage of bio-material, major producers have proven surprisingly reluctant to stimulate local demand.
Malaysia, which heavily subsidises domestic retail fuel thanks to hefty oil and gas export revenues, has indefinitely put off plans to introduce palm-blended diesel in the domestic market as the country would rather make more money selling palm oil to the food industry.
On top of this, palm oil, which was once considered an answer to the world's growing appetite for alternative fuels, faces questions about sustainability.
In Europe, policy makers and environmentalists consider the rapid expansion in Southeast Asia's palm estates responsible for the destruction of tropical forests and wildlife. Malaysia's palm oil sales to Europe from January to November were down a fifth from a year ago.
Nevertheless, many investors are sticking with it in hope that prices and policy will turn in their favour.
"We believe that you don't build a commodity business according to the cycle, you go in for long-term strategy," said Nathan Mahalingam, managing director of Australia-listed Mission Biofuels, which is building a second plant in Malaysia.
But he said: "It is a ridiculous price situation to be in and times are going to be challenging."
