Biodiesel Takes Another Body Blow

Talk about getting kicked while you’re down. Already, the biodiesel industry has seen its margins squeezed since petroleum prices plummeted last fall. Now, the news coming out of Brussels earlier this week is that the European Union plans to slap punitive tariffs on imports of U.S. biodiesel for six months. The $400-$500 per ton duty will make U.S. biodiesel less attractive in the European market at a time when U.S. manufacturers need all the buyers they can get.

diesel-prices_eia1So, how bad off is the industry? Banking-sector, or government-bailout bad? Maybe. As the economy slumped last year, demand for diesel dropped with it. That sent the price of petroleum diesel and biodiesel down so low that manufacturers now can barely cover production costs, let alone capital costs. And profits? Forget it: “The pressure is really to a point that biodiesel processing using canola oil or soy oil is unprofitable these days,” said David Woodburn, an analyst with investment bank ThinkEquity Partners. “The revenue you get per gallon of soy biodiesel in most cases isn’t enough to cover the cost of feedstock plus processing.”

Seattle-based Imperium Renewables has felt the pain of the industry. The biodiesel refiner has canceled its planned initial public offering, laid off employees, and halted plans to build a biodiesel plant in Hawaii.

The so-called crush spread provides insight. It’s the difference between the price of soy oil, what manufacturers process into biodiesel, and the going price for the fuel on the market. In November last year, with the industry already under pressure, that spread was at 81 cents per gallon. By late February, it had sunk 30 percent to 56 cents per gallon.

The blender’s subsidy is at the heart of the EU’s punitive tariff. The subsidy gives a $1 per gallon tax credit to outfits that blend biodiesel into petroleum diesel usually in quantities between 1 percent and 10 percent. The EU governing body argues, rightly, that it gives U.S. biodiesel exporters an unfair advantage. While this subsidy no doubt has helped the U.S. biodiesel industry, it’s mainly been a boon for blenders, who market the fuel. They may pass some of that subsidy benefit back to manufacturers, but not all of it.

So U.S. biodiesel manufacturers have done the only thing they could: slow production. Rick Kment, a biofuels analyst with market researcher DTN, said U.S. biodiesel production is down to between 25 percent and 30 percent of capacity. A large portion of the plants aren’t standalone biodiesel producers — they also crush the soy beans to produce the oil. Instead of continuing the refining process to biodiesel, they sell the oil off midstream to the food industry, Mr. Kment said. That helps explain why there haven’t been as many plants shuttered as some might anticipate, given the industry’s pain.

The industry will continue to struggle as long as petroleum prices remain low and feedstock prices high. But that hasn’t stopped die-hard biodiesel supporters from believing in the industry. “Biodiesel is a movement now,” said Steve Bash, the founder of California-based Sacramento Biofuels Network, which buys biodiesel in bulk for its 250 members. “It’s about a perception of choices. And in the long run, it’s inevitable that we’ll need choices beyond petroleum.” In the near-term, biodiesel producers will benefit from the renewable fuel standard that requires 1 billion gallons of biomass-based diesel be sold annually in the U.S. by 2012, from 500 million gallons this year. So producers might not be as bad off as Wall Street financial firms, but they’re still not a pretty sight to behold.

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