Finland's top refiner Neste Oil will formally open its Singapore biodiesel plant, the world's largest, next week, even as the outlook for the renewable fuel remains bleak amidst soaring feedstock prices and uncertain regional demand.
The Singapore plant, which cost 550 million euros (S$967.9 million) and has an annual capacity of 800,000 tonnes, started production in November. It uses palm oil, palm oil products and animal fat as feedstocks.
Biodiesel producers are facing an uphill battle with rising palm oil prices, Chris De Lavigne, vice president of Industrial Practices at Frost & Sullivan, said.
Multi-year high cost of the key feedstock is resulting in the fuel becoming more expensive than the regular one, leaving producers of the blended oil struggling to find buyers.
"It's going to take a fair while before Neste gets their return on investment on the Singapore plant, but they may have a few things up their sleeves, and there's still a chance of them doing something successful," De Lavigne added.
"But for the standard players, they are going to find it really tough-going. I don't know how they're going to survive."
Palm oil prices are set to mark a third year of gains in 2011, according to a Reuters survey, extending a rally since the last quarter of 2010 as erratic weather patterns disrupt production and tighten stocks at a time of resilient demand.
The benchmark May crude palm oil contract on the Bursa Malaysia Derivatives Exchange hit a near three-year high at 3,967 ringgit, or $1,308, a tonne last month, on worries over the impact of weather on output.
Supplies are also shrinking. Palm oil output in Malaysia, the world's second-largest producer, hit its lowest levels in January in a year, while for top producer Indonesia, efforts to reduce forest clearance to avoid greenhouse gas emissions could potentially limit industry expansion.
The higher price of biodiesel versus fossil fuels has also curbed demand.
Petroleum-based diesel or gas oil GO-SIN with 500 parts per million (ppm) sulphur content is priced at about $965 a tonne in Singapore, compared with between $1,300 and $1,500 per tonne for various grades of biodiesel.
With rising commodity prices stoking food inflation across the globe, many also question the viability of biofuels, De Lavigne said.
"With escalating food inflation, the food versus fuel debate rages on, and the question is why would you burn food for fuel in this kind of situation," he added.
Global food prices hit a fresh all-time high in February, after setting a record in January, above 2008 peaks when high food prices sparked riots in several countries, the U.N Food and Agriculture Organisation (FAO) said this week.
FEW SURVIVORS
The high operating costs, coupled with tepid demand, have shuttered several biodiesel plants in the region over the last few years.
Singapore-listed Lereno Bio-Chem slipped deeper into the red in the October-December quarter as it tried to keep its Malaysian biodiesel plant afloat, while Australia's Natural Fuel shut its facility on Singapore's offshore Jurong Island in 2009 after margins were decimated by high palm oil prices.
Malaysia has also mothballed 15 to 20 biodiesel projects across the country since 2007, while Indonesia has shuttered another five to 10, according to Frost & Sullivan data.
But a handful of survivors exist.
Singapore-based Vance Bioenergy operates two biodiesel plants in Johor, Malaysia, with total capacity of 180,000 tonnes per annum, while Australian-listed Mission NewEnergy Ltd operates a 100,000 tonnes-per-year facility in the Kuantan Port of Malaysia. It is building a second plant with a capacity of 250,000 tonnes per annum next to the first, data on the company website showed.
Regional demand, however, remains muted. While some economies like South Korea have set mandates for domestic fuel to contain a small percentage of renewable material, others have been slow to boost domestic consumption.
DEMAND
South Korea fixed its required bio-diesel mix rate system at 2 per cent from 2012, while Malaysia is expected to implement a long-delayed mandate this June.
But countries like Indonesia still heavily subsidise retail fuel prices, making it difficult for biofuels to compete with cheaper fossil fuels.
While Asian demand falters, rising consumption of renewable fuels in Europe and Latin America could pick up the slack.
Last May, Neste Chief Executive Officer Matti Lievonen told Reuters that its target markets for biodiesel include Europe, which has a mandate to use a 10 per cent blend in 2010, and Canada, which will expand a 5 per cent biodiesel use throughout the country this year.
The company is also diversifying its sources of feedstock to reduce operating costs and boost margins. It is exploring the use of other vegetable oils and waste fats, while researching entirely new raw materials such as algae oil, microbial oil, and fuel production from wood biomass.
