Asian biodiesel plants sit idle as costs soar

By Naveen Thukral

KUALA LUMPUR (Reuters) - For many of southeast Asia's struggling biofuel makers, the global debate over using crops for food or as transport fuel is irrelevant -- a surge in palm oil prices has brought the industry to a standstill.

Even oil prices at $100 a barrel aren't helping companies who have invested tens of millions of dollars into plants that convert Indonesian or Malaysian palm oil into near zero-pollution diesel -- at a cost some 30 percent higher than regular diesel.

Over a dozen biodiesel plant projects have been delayed, while many of those already built are operating at a fraction of their capacity, according to a survey conducted ahead of the Reuters Global Agriculture and Biofuels Summit on January 14 and 15.

Economics aren't the only factor: demand from Europe has been hurt by accusations that farmers are clearing large swathes of tropical forests to make way for plantations; governments have dragged their heels on policies that would require large-scale biodiesel use in domestic fuel.

The halcyon days of 2005, when vegetable oil-based green fuels were cheaper than crude petroleum and Europe made big plans to use biofuel, are now a distant memory.

"The prospects of the biodiesel industry are very slim, unless feedstock prices come down and we see mandates and subsidies in place," said Singapore-based biofuels analyst Chris de Lavigne at consultancy Frost and Sullivan.

Malaysia, the world's second-largest palm oil producer, took the lead three years ago, licensing more than 90 companies to set up biodiesel projects with a capacity of nearly 10 million tonnes, or some 200,000 barrels per day (bpd) in oil terms.

Today, the country has just 7 plants running, most of them below capacity, with 2008 output likely to be less than 100,000 tonnes, according to a Reuters survey of biodiesel projects in Malaysia, Indonesia and Singapore.

The survey showed 14 projects with a combined capacity of more than 2 million tonnes have either been shelved or delayed.

At least 1 million tonnes in biodiesel capacities sit idle -- an estimated $250 million in investment, based on estimates that each 100,000 tonnes of capacity costs about $25 million to build.

In Singapore, Australia-based Natural Fuel's 600,000 tonne plant is running at just 10 percent of the capacity as surging raw material prices have turned margins negative, a market source close to the company told Reuters.

"I don't see any point in going ahead with biodiesel. We lose money," said an official of a Malaysian plantation company which has shelved plans to build a biodiesel plant.

PRICES SURGE

Palm oil which soared by more than 50 percent last year, has extended gains to new records in recent weeks thanks to a cocktail of booming demand from the food sector in Asia, lower output in Malaysia due to flooding and surging global crude and vegetable oil markets.

Crude palm oil, the main ingredient for biodiesel, now costs just over $1,000 a tonne, while petroleum-based diesel fuel trades at about $780 a tonne in Singapore.  Continued...