| Awaiting Mandate, US Biodiesel Makers Stall Jun 24, 2009 By Angel Gonzalez A DOW JONES NEWSWIRES COLUMN HOUSTON (Dow Jones)--When Imperium Renewables Inc. opened what was then the largest U.S. biodiesel plant on the coast of Washington state two years ago, its executives thought it would be the cornerstone of a far-flung empire. The shiny Grays Harbor, Wash., facility is still there - but hasn't produced a drop of the stuff since February. The privately held Seattle company now makes its money by storing biodiesel produced by other facilities. John Plaza, Imperium's chief executive, said that a combination of volatile commodity prices, a financial crisis, heated anti-biofuel rhetoric and U.S. and state governments' tardiness in enforcing renewable fuel mandates have arrested the biodiesel industry's momentum. "It is not profitable to produce," Plaza told Dow Jones Newswires in an interview this week. "The demand here in the United States has not been created as anticipated." Biodiesel, a fuel derived from vegetable or animal fat, can be used in engines designed to run petroleum diesel. Biodiesel production in the U.S. has expanded significantly in the past four years, but has been far surpassed by corn-based ethanol, which is blended into most U.S. gasoline to satisfy federal mandates. Imperium Renewables is not the sole major biodiesel maker to stop producing. GreenHunter Energy Inc.'s (GRH) Houston plant, which surpassed Imperium's as the largest in the U.S. after its 2008 opening, has also been idle since February. On Tuesday, GreenHunter said it's mulling a sale of the plant to pay down debt. About one-third of the nation's biodiesel plants are idle, say officials with the National Biodiesel Board, an industry group. The difficulties faced by these companies underscore how the first wave of biodiesel producers has so far failed to navigate the volatile commodities business - a failure that was compounded by sluggish demand and an extraordinary credit crisis. The challenge for makers of the renewable fuel "is to track not one but two separate commodities" that move independently, said Pavel Molchanov, an analyst with Raymond James. If biodiesel producers are to turn a profit, the price of their product must compare favorably with that of diesel, whose price is also volatile. But their production costs depend on markets for soybean oil or animal fat, which can run in the opposite direction of energy markets. During the recent economic meltdown, crude oil has fallen from its record above $147 a barrel last summer, while prices for agricultural commodities have remained elevated, wiping out any possibility of profit. Biodiesel makers are also waiting for the U.S. government to enforce a biodiesel mandate similar to the one in place for ethanol, one that would guarantee demand for their product. Although legislation for a 500 million-gallon-a-year mandate has been in place since 2007, the Environmental Protection Agency is currently devising the rules to implement it. "Once a solid federal policy framework is established, it will provide a level of certainty to producers," said Michael Frohlich, Washington director of communications for the National Biodiesel Board. Big Biodiesel Stalls Spurred by sky-high oil prices and encouraged by state and federal legislation mandating use of biofuels, Imperium Renewables borrowed heavily to build a massive $80 million plant, which it opened in August 2007 amid great fanfare and the backing of Washington state politicians. The company rode on the wave of optimism that drove U.S. biodiesel production from 25 million gallons in 2004 to 690 million gallons in 2008. But despite galloping prices at the petroleum diesel pump, the alternative fuel suddenly became a hard sell in the U.S. The cost of such food crops as soybeans - which serves as the feedstock for most U.S. biodiesel production - also hit new highs, making biodiesel less competitive. Moreover, doubts emerged among consumers as to whether plant-based biofuels came with a hidden environmental price tag. Although the debate centered on corn ethanol, biodiesel got caught in the quagmire. Producers are still working to "help people recognize that biodiesel is not ethanol" and has more environmental benefits, Plaza said. In December 2007, when oil prices were well on their way to record highs, then-CEO Martin Tobias quit, leaving Plaza in charge at Imperium. Shortly after, the company canceled a $345 million initial public offering. In June 2008, one of the company's main clients - King County Metro Transit - decided not to renew its contract due to pricing and environmental concerns. For a while, a significant part of Imperium's production was going to Europe, where there was high demand for U.S. biodiesel made cheaper by federal subsidies that gave blenders a tax credit for each gallon of biodiesel they meshed in with petroleum diesel. But that market dried up when the European Union imposed a temporary tariff on U.S. biodiesel earlier this year. The global economic meltdown that drove crude prices down was the last straw. The financial crisis severely tightened the availability of credit and investor cash that would have enabled big biodiesel makers to sail through the rough patch. With many plants being idle and running below capacity, at the current rate of production without an effective mandate, U.S. biodiesel producers are forecast to slash output by almost half this year to 350 million gallons. But Imperium is counting on the upcoming implementation of renewable fuel standards by the EPA and at the regional level, in such places as Oregon and the Canadian province of British Columbia, to begin producing again. "We need an immediate implementation of a renewable fuels mandate to really move the industry forward," Plaza said. (Angel Gonzalez is Houston bureau chief for Dow Jones Newswires. He can be reached at 713-547-9214, or angel.gonzalez@dowjones.com). TALK BACK: We invite readers to send us comments on this or other financial news topics. Please email us at TalkbackAmericas@dowjones.com. Readers should include their full names, work or home addresses and telephone numbers for verification purposes. We reserve the right to edit and publish your comments along with your name; we reserve the right not to publish reader comments. To subscribe or visit go to: http://www.firstenercastfinancial.com |