E.U. biodiesel industry feels sting of subsidies

by World Grain Staff
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There h is tense competition for shares of f the European biodiesel market, which is the biggest in the world. But the European Biodiesel Board (EBB) says unfair market advantages provided to importers have damaged the industry.

Statistics for 2008 show that 3 million tonnes of installed capacity remains idle due to the lack of a viable market for biodiesel in member states. Petrotec Ag, a biodiesel producer based in Borken, Germany, reported that a number of biodiesel firms have either closed plants during the second quarter or filed for insolvency, and many still producing are operating well below capacity.

With its own industry suffering, Europe has emerged, ironically, as a strong market for U.S. biodiesel producers. A combination of factors, including usage mandates outstripping E.U. production capacity, and the relative weakness of the dollar against the Euro, has spurred imports.

Many companies in America are eyeing Europe as a way to sell more fuel. New York Harbor-based Innovation Fuels announced in August that it had shipped its first load of biodiesel (B99), the first ever from that locale, to Rotterdam, Netherlands for sale and distribution into the European market. Positioning itself to gain sales leverage through a global outreach, CEO John Fox said the company has targeted export markets from the beginning. It recently acquired North American Biodiesel, a project under development in Milwaukee, Wisconsin, U.S., to provide deep-water international access via leasehold at the Port of Milwaukee, which is located on the western shore of Lake Michigan. This is a strategic export location for the company since most of the biodiesel produced in the U.S. originates in the Midwest.

"While the market in the U.S. is improving, global markets have been stronger," Fox said.

The U.S. exported some 1 million tonnes of biodiesel to the E.U. in 2007. The U.S. B99 subsidy gives American biodiesel exporters a $220-per-tonne to $295-per-tonne cost advantage over European biodiesel.

Europe remains the world’s largest producer and consumer of biodiesel, manufacturing 68% of the world’s methyl esters in 2007, despite the rapid growth of players abroad. The U.S. industry, in particular, has grown exponentially in the last four years. American production tripled in 2005, tripled again in 2006 and doubled in 2007 to reach 450 million gallons (1.7 billion liters).

Amandine Alourt, a spokesperson for the EBB, said the U.S. has grown its industry at the expense of foreign markets.

"We do not necessarily want to see the subsidy eliminated, but we would like to see it changed to promote U.S. consumption of its own biodiesel," Alourt said. "Producers in Europe are not eligible for any subsidies when they export biodiesel."

Petrotec does not view the $1-pergallon tax credit for U.S. producers as undercutting the ability to sell into their own market.

"We basically consider that a fair trade," said Falk von Kriegsheim, director of investor and public relations for Petrotec. "That tax incentive was designed to promote the growth of their domestic industry, which we are supportive of in Europe. The ‘splash-and-dash’ practice, however, that involves biodiesel produced outside the United States, is not good for anyone except traders and brokers. The U.S. taxpayer gives money away through the chimney to clever brokers and traders, and their own industry suffers."

U.S. producers also are harmed by the fact that the splash-and-dash situation means cheap biodiesel made in South America or Southeast Asia also receives the subsidy and can undercut their ability compete for export markets. The splashand-dash loophole allows biodiesel produced abroad and shipped to the U.S., where it is blended with a splash of regular diesel, to receive U.S. tax credits. The fuel is then shipped to Europe, where it is sold below market rates.

"It’s the ‘holy drop’ of mineral diesel that makes almost the entire volume of a foreign biodiesel shipment eligible for the tax credit," Fox said. "I am confident that Congress is going to close this loophole in the near future."

Kriegsheim believes there is an essential difference between the splash-anddash shipments and fuel originating from U.S. producers themselves.

The EBB, however, has a more rigid position. It said a fair trade scenario will only occur when the U.S. eliminates the subsidization of all biodiesel exported off its shores and only financially supports biofuel consumed domestically.

"Biodiesel exported from the United States to Europe is eligible for subsidies instituted by the E.U., whereas European producers are not eligible for benefits if they choose to market their fuel outside of Europe," Alourt said.

The European Commission announced in June that it had begun an official investigation into the "dumping" and "subsidization schemes" it says are practiced by the U.S.

"The European Commission has been able to confirm dumping and subsidy practices are hurting domestic producers here," Kriegsheim said. "They are currently conducting intensive research and will issue a report within the first quarter of 2009."

It is alleged that the volumes and the prices of the imported biodiesel, among other consequences, had a negative impact on the market share held and the level of prices charged by European producers. This resulted in "substantial adverse effects on the overall performance and the financial situation of the community industry," according to the report from the European Commission filed on June 13.

Against this background, it will be essential that countervailing measures targeting B99 imports are imposed by the E.U. authorities in a reasonable timeframe.

"We need to see this situation changing rapidly because our industry is really suffering," Alourt said. "If the United States does not close this loophole on their own, we hope that the European Commission will institute measures that protect our industry from highly subsidized imports."

He said the B99 subsidization scheme breaches World Trade Organization (WTO) rules and threatens the concept of international trade in biodiesel. EBB stated that it will be necessary to re-establish promptly a level playing field, ensuring the "harmonious development of the E.U. and international biodiesel markets."

The main volume of imports from the U.S. to Europe involves splash-and-dash scenarios rather than coming from domestic producers themselves, Fox said.

"Producers in Europe are less affected by the $1-per-gallon tax credit than they say they are," Fox said. "I think the National Biodiesel Board (NBB) accurately depicts the situation in Europe — their industry is primarily driven by rapeseed oil, which is usually the most expensive feedstock for biodiesel production, and the dollar is weak, which makes buying U.S. goods attractive."

As a company with stakes in the European market, Fox said he is not concerned about the potential "countervailing measures" that might be imposed on imports.

"I am actually supportive of the work that the European Commission is doing," he said. "I think they are going to find that there is fair competition, and that’s good for the European consumer."

While EBB reports that the industry is the victim of serious injury because of unfair trade, feedstock prices and the food-versus-fuel debate have hurt the industry as well. The NBB has argued that imports have been a scapegoat for a more diverse group of problems.

Nevertheless, some companies have managed to sustain themselves and even find success. In fact, Petrotec reports that they have recently increased production. Historically, most of their transesterification has taken place in winter with the fuel being sold in the summer, meaning that the fuel had to be stored for long periods of time.

"We have been able to drive up production without having to store fuel…we’re selling it right away as a blend component," Kriegsheim said. Oil companies have an incentive to blend more volumes of biodiesel because it is considerably cheaper than oil.

Kriegsheim confirms that the rising price of rapeseed (canola) oil has been devastating for producers. Because Petrotec uses mostly recycled greases in its process, the company has been able to avoid some of the feedstock purchasing pressures associated with virgin oils.

Its production platform is a marketing strategy for Petrotec. Because biodiesel made from used oils is much less carbon heavy, the company uses this as a sales pitch.

"Yellow grease is in many ways the most sustainable feedstock," Kriegsheim said. "It has a good carbon footprint, so we are able to get a premium price. Big Oil sees it as a way to fulfill their blending requirements in a sustainable way."

Petrotec sold most of its output to oil companies with interests in the B5 blending market.

"It’s a marketing argument for the oil companies to be able to say that they are using biodiesel made with nonedible oils in their blending activities," Kriegsheim said. "Big Oil has already started to look at anti-carbon initiatives; they are going to be forced by law to diminish their output of VOCS per year starting very soon."

Even though cheap imports are making it hard for European producers to compete in their own market, there is an optimistic forecast concerning production and marketing factors for the coming months.

The trend in oil prices on the German biodiesel market provided slight relief, since the price difference between biodiesel and fossil diesel at filling stations reached the 10-eurocent level necessary for sales of biodiesel in the B100 market.

Petrotec reported that the price per barrel of crude oil WTI fell 20% within the space of six weeks, a tonne of palm oil has become 27% cheaper, and the price of rapeseed oil is down 13%.

"We expect falling price levels for the remainder of the year," Kriegsheim said.

Nicholas Zeman is a correspondent for World Grain and Biofuels Business magazines. He can be reached at nicholas.zeman@und.edu.