Is interest cooling in biofuels already?
Biofuels have become a focus for worldwide investment recently, but is the market sustainable? We investigate the questions being raised regarding an industry still in its infancy25/03/2008 | By Neil Baker
Soaring crude oil prices have made alternative biofuels a hot investment, but enthusiasm for the sector has cooled lately. Is this a bubble set to burst? Not likely, but now could be the time to look beyond the top five countries that lead this area.
Doomsayers point to the fact that growth in the biofuels sector slowed in the last quarter of 2007. Analysts at Ernst & Young blamed rising feedstock prices and a rapid expansion in capacity that may outstrip demand.
The firm’s Biofuels Country Attractiveness Indices rank the attractiveness of the top 15 global markets for investment in biofuels. Crude oil prices have reached record highs, which ought to have boosted demand in the industry. But toughening global conditions have resulted in a fall in investment across the Indices.
The areas hit hardest are the mainstream markets of the US, Brazil and Europe, says Jonathan Johns, Head of Renewable Energy at Ernst & Young. He now sees a period of consolidation where companies working in biofuels will need supply chain control and deep pockets to weather a downturn.
Here are the prospects for the top five markets, and a few outsiders to watch:
1 The US
The US is still top dog, but the market is slowing. High feedstock prices are hampering investment in biofuels. There are also problems with overcapacity and distribution. Essentially, the US has become a victim of its own success in this area: “Producers are facing difficulties transporting the biofuels along traditional fossil fuel networks, because of sheer volume.” Says Johns.
2 Brazil
Brazil is also suffering from higher feedstock prices and distribution problems. Domestic markets for biofuels are strong, but to make progress producers need deals with developed nations – that’s proving a tough nut to crack.
3 France
Europe might be slowing, but France is doing OK. Previously fourth in the top five, it leapfrogged Germany to take this spot. France is now the second biggest consumer of biofuel in the European Union – up 63 percent in a year. “There is immense potential for innovative biofuel projects in France,” says Philippe Favre, President of the Invest in France Agency.
4 Germany
Germany lost third place to France. The government’s announcement of full tax breaks for ethanol was good news, but most vehicles in Germany run on diesel, which is harder to blend with ethanol.
5 Spain
Growth here is expected to stall after the government did a fuel U–turn. It was going to make targets for biofuel use mandatory, but switched them to voluntary instead.
Looking outside the top five
The best news for investors came out of the UK, ranked number seven in the world by Ernst & Young. After three years of wrangling, the government has passed laws requiring fuel suppliers to make 2.5 percent of their total fuel sales from renewable sources during 2008–2009. “This will send a clear message to investors that the UK is serious about the future role of biofuels in driving the nation forward towards a lower carbon economy,” said Johns.
