Biofuels Offer Worldwide Potential – Frost & Sullivan
Diminishing oil reserves and soaring crude oil prices are driving global interest in the potential for renewable sources of fuel. Initiatives to establish viable technologies and markets for “green fuels” are currently growing the interest in biofuels — ethanol and biodiesel.
Ethanol is a renewable fuel produced typically from wheat, maize or sugarcane. It is currently seen as the best alternative to gasoline, as the amount of energy available in ethanol is more than the energy used to produce it. There is therefore a positive net energy value associated with ethanol. In addition, ethanol helps reduce greenhouse gas (GHG) emissions by almost 29 percent.
Biodiesel’s appeal is that nearly all diesel vehicle engines are compatible with blends of up to 20 percent biodiesel, and blends higher than that and even pure biodiesel (B100) can be used in engines built since 1994 with little or no modification. The fuel is most commonly made from vegetable oil, jatropha or alternatives such as algae.
As the amount of biodiesel blended into diesel fuel increases, emissions of unburned hydrocarbons, carbon monoxide, sulfates, polycyclic aromatic hydrocarbons, nitrated polycyclic aromatic hydrocarbons, and particulate matter decrease substantially. However, B100 is not suitable for use in cold engines (engines first have to be heated by conventional fuels in cold weather), and special management is needed to transport and store B100.
The biofuels industry in North America is already booming, due to government support and environmental concerns. Recent research by global growth consultancy Frost & Sullivan, estimates that the industry will continue to grow at a rate of between 20 and 22 per cent per annum for the next few years. Frost & Sullivan also finds that there is significant potential for biofuels in Europe, Latin America, India, the Asia Pacific region and sub-Saharan Africa.
Europe’s desire to be less dependent on oil imports has revived interest in alternative fuels. This need to be self sufficient has also induced encouraging legislation from individual EU member state governments for the biodiesel market.
This interest is also backed by demands for cleaner fuels. The EU’s commitment to achieve a reduction in CO2 emissions by 8.0 percent between 2008 and 2012 has resulted in the setting a target of 5.75 percent biofuels of all transportation fuel by December 2010. This will make the EU the largest market for biofuels in the world.
“The biodiesel market has enjoyed excellent European Commission support by way of the Kyoto agreement and Directives 2003/30/EC and 2003/96/EC, which specifically seek to promote biofuels and establish indicative targets for their use in the transport industry,” notes Frost & Sullivan Industry Analyst Robert Outram.
These regulations are expected to encourage biofuel use and make them cost competitive with mineral fuels. Encouraged by the EU legislation, individual member states have implemented their own incentives such as tax relief, renewable transport fuel obligations and blending mandates.
Such helpful mandates are however expected to contribute to escalating feedstock prices. Since the production of vegetable oil in Western Europe has touched full capacity and has remained constant over the past decade (at between 11 and 12 million tonnes), the intensely competitive biodiesel market is hard pressed to procure feedstock at competitive prices. Even with the new EU member states contributing an additional 1 million tonnes, approximately 9.5 million tonnes of biodiesel will be required to meet EU Directives that aim to make biodiesel account for 5.75 percent of all transport fuels.
“Assuming a 1:1 conversion of vegetable oil to biodiesel by volume, over 80 percent of all the vegetable oil currently produced in Europe would be required for the biodiesel market,” observes Outram.
The overwhelming demand for finite commodities such as feedstock will inevitably hike biofuel prices to a level where producer margins will start thinning. As feedstock costs account for 70 percent of the total plant operating expenditure, biodiesel producers will rely heavily on an effective feedstock procurement strategy and reduced logistics costs.
Latin America’s biodiesel market is much smaller, but is witnessing rapid growth as a potential supplier to the European market. New biodiesel capacities are being installed, domestic consumption is steadily emerging and the export market further enhances future attractiveness.
Most countries in the region are crop suppliers and hence the opportunity of producing biodiesel has the added value of increasing employment. Furthermore, given the limitations for production growth in Europe, Latin American biodiesel enjoys an unprecedented opportunity to build market share in the European continent.
Brazil is currently one of the leading producers and consumer of bioethanol in the world, due mainly to strong governmental support for the industry and a significant domestic market demand. The market currently has a production capacity of 18 billion litres and has been growing at a rate of about 14 percent per annum over the last 3 years. The major feedstock for producing ethanol in Brazil is sugarcane.
In India, a strong economy, rising incomes, and a vibrant market have given a huge boost to the transport sector. This has made a case for biofuels in India, strengthened by the huge dependence on oil imports.
Oil import expenditure in India has increased by more than six times in the last 25 years due to escalation in global demand and prices, and biofuels will be critical in achieving greater energy security.
“The Government is currently implementing an ethanol-blending program and considering initiatives in the form of mandates for biodiesel,” says Frost & Sullivan Research Analyst Hari Krishnan. “Due to these strategies, the rising population and the growing energy demand, biofuels can be assured of a significant market in India.”
However, the lack of large-scale availability of feedstock restrains the market. Biodiesel will take a while to establish itself as an effective biofuel, since jatropha plantations in the country are still in the initial stages of development.
Initially, the biodiesel sector in Asia Pacific focused on export opportunities, especially to the European Union. Now, domestic demand is emerging as an important driver for the industry and many governments in the region are setting formal targets for biofuels usage, imposing mandates on oil companies to blend biofuels, providing taxation benefits to biofuels, or introducing other measures to stimulate the industry. These measures are creating an increasingly viable domestic market within the region.
Analysis from Frost & Sullivan finds that consumption that was virtually negligible across the region in 2004 is likely to reach 1.2 million tonnes by the end of 2007 and 8 million tones by 2013. China, Australia, Indonesia and the Philippines will be the largest markets.
The rapid increase in the costs of feedstocks, and particularly of palm oil, have provided a major challenge to the commercial viability of the industry though, as this has not been accompanied by an increase in biodiesel selling prices.
“Some of the more optimistic forecasts may not be met, as Asia Pacific biodiesel producers need to address the likelihood of continued pressure on feedstock costs,” suggests, Frost & Sullivan ANZ Managing Director Dougan. “Nonetheless, the long-term fundamentals remain unchanged and the industry will continue to grow.”
Biofuels production in Africa is currently limited, although ethanol is successfully being produced in several countries that are all currently finalising their biofuel strategies. A number of companies have already started investing in the biofuels market in Africa and early participants are expected to gain considerable benefit from early market entry.
Despite several potential hurdles, the probable return on investment will be substantial. While government strategy will have a significant impact on the industry, it will by no means be the only factor that will determine the future of the sector. Frost & Sullivan estimates that the sub-Saharan African biofuels markets could be worth USD1.54 billion in 2010 and USD1.82 billion in 2013.
“The African biofuels market is set for spectacular growth in a market where agricultural land and labour is in abundance and where government support will foster a protective market,” explains Frost & Sullivan Research Analyst Cornelis van der Waal. “Many acres of jatropha have already been planted, intensive skills programmes are being set up and various international companies are investing in this ‘non-existent’ industry. Early market participants will not only have a significant advantage over future competitors but will also be able to shape the industry in their favour.”
The South African biofuels markets in particular are currently only theoretical, but they offer several promising opportunities due to the government’s commitment to establishing the industry. Biofuels can also play an important role in stimulating economic activity in agricultural communities and boosting employment.
As South Africa is a net importer of petroleum products, any additional local production should be encouraged. There will be significant opportunities for new and established companies to get involved in the lucrative petroleum sector that is currently dominated by a small number of large competitors.
If you are interested in the virtual brochures that provide manufacturers, end users and other industry participants with overviews of the European, Latin American, Indian, Asian Pacfic, Sub-Saharan African or South African biofuels markets, then send an e-mail to Patrick Cairns, Corporate Communications, at patrick.cairns@frost.com, with your full name, company name, title, telephone number, fax number and e-mail address. Upon receipt of the above information, an overview will be sent to you by e-mail.
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