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The biofuels industry in crisis: Part three

Hydrocarbon Engineering,


According to Bain & Company, Brazil produces more sugarcane than any other country, and because sugarcane is the key feedstock for low cost production of ethanol, Brazil quickly became the second largest producer and consumer market for ethanol. In 2003, Voltswagen and GM both introduced flex-fuel vehicles in Brazil – followed quickly by other carmakers – transforming the consumer market.

Ethanol use was encouraged through financial support by the Brazilian Economic and Social Development Bank (BNDES) and lower taxes on gasoline. With this support, ethanol consumption grew from 34% of automobile fuel consumption in 2005 to 50% by 2009.

But then ethanol became more expensive than gasoline. This happened for several reasons:

  • Shortages of skilled biofuel engineering talent.
  • Rising costs for manual labour.
  • Raising production costs.
  • Government monitoring of labour and environmental regulations increasing in intensity, leading to increasing cost of compliance.

These and other factors reduced producer margins, which are now so low that they barely cover production costs and cannot support capital expenditure investments.

In addition, Brazil’s federal and state governments became concerned about rising inflation and reduced taxes in gasoline to hold down its price, even as ethanol costs grew. Between 2008 and 2013, ethanol lost its competitive advantage against gasoline.

Emerging markets

In the Bains & Company report ‘Biofuels: From boom to bust?, it is reported that several small economies have begun to promote biofuels over the past decade. Argentina and Indonesia now contribute approximately 20% of global biodiesel production, and Columbia and Thailand have grown from zero to approximately 6% of global biodiesel production combined. Other countries with large, fertile lands, such as those in Sub-Saharan Africa, are also developing programs to produce biodiesel.

In order to reduce market distortions while encouraging local production, the Columbian government has implemented a combination of policies, including blend requirements (8 – 10%), tax credits for production and consumption, and special economic zones for biodiesel production, all of which have been well received by investors and the private sector.

However, Bain & Company holds that the most interesting aspect of Columbian biodiesel adoption strategy is the way its sets price. The Columbian government has established a price stabilization fund that secures financial sustainability of local producers by guaranteeing that they could sell biodiesel for a profit. The price is set to be the higher of two costs: the cost of locally producing crude palm oil (CPO) or its substitutes, or importing them from the international market at the benchmark international price (CPO Rotterdam). Thus, biodiesel has a higher price than local diesel.

The report highlights that while biodiesel in Columbia is relatively expensive, the system guarantees stable local production and is set up so consumers pay most of the costs, rather than government subsidies. In order to minimize significant increases in diesel prices at the pump, biodiesel blending into diesel was capped at 8%, resulting in a 5 cents/ltr increase in the price of diesel. Consumers appear to have adjusted to this increase, the report’s authors suggest, but if the government raises the blending requirement then costs to consumers would rise to unsustainable levels.

In Thailand, consumption of ethanol and biodiesel has also rapidly increased. The government’s 10 year (2012 – 2021) Alternative Energy Development Plan aims to increase consumption of biofuels to 3.3 billion ltrs/y by 2021, while easing ethanol laws and regulations and improving farmers’ productivity.

According to Bain & Company the early signs are positive for the biofuels industry in both countries. It may be worth considering what can be learnt from their example.

Adapted from a report by Emma McAleavey.

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