New York (Platts)--5May2009

More than a month after the European Union slapped US biodiesel producers
with duties to curb imports, some US producers are shutting down while others
are enjoying a spike in demand as capacity utilization sinks to about 15%,
according to marketwatchers.

Adding to market uncertainty are new federal Renewable Fuel Standard
targets, known as RFS-2, expected to be unveiled Tuesday by the Environmental
Protection Agency. The National Biodiesel Board warned its members last week
that RFS-2 may rule out biodiesel made from from soybean oil, the main
feedstock of most US biodiesel makers.

"EPA personnel through stakeholder meetings have indicated that the
forthcoming rule as currently drafted disqualifies biomass-based diesel
derived from vegetable oil, including domestically-produced soybean and canola
oil, from the biomass-based diesel schedule," said NBB in its weekly email
statement to members on May 1. "Vegetable oil is an essential feedstock needed
to meet the RFS-2 biomass-based diesel targets; they simply cannot be met if
vegetable oils are disqualified from the program."

At this point, US biodiesel capacity has dropped to "about 15%," said
Jack Zedlitz, spokesman for GreenHunter Energy, the largest biodiesel maker on
the Gulf Coast. In an interview, he blamed the low run-rate on a combination
of the EU tariffs, an "extreme" drop in petroleum-based diesel prices since
late last year and "difficult to come by" working capital and bank debt.

The EU duties, which were announced in mid-March, took a particularly
heavy toll on US biodiesel producers, said Zedlitz. "We believe about 85% of
biodiesel produced in the US went to Europe," he said. That included
GreenHunter production, none of which is now headed overseas, said Zedlitz.

While he would not give more details or say whether his company has
curbed output, Zedlitz did note that tank leasing is now the company's "most
significant revenue stream."

New York Harbor-based Innovation Fuels is another producer that relied,
at least in part, on demand from Europe to keep margins in place. Now, that
demand has been "shut down for all US producers, including us," said CEO John
Fox in an interview Monday.

But while some companies have cut output or gone bankrupt, Innovation is
actually seeing a spike in demand, said Fox. That is due to a combination of
tightening supply, as former exporters halt production, and changes in state
and federal renewables mandates, he said.

USGC PRODUCERS SET UP FOR EXPORTS

US biodiesel producer woes can be viewed on a regional basis, said Fox.
The Northeast is "heating oil central...it's very easy for us to serve local
customers," he said, noting there is also demand built in from new renewable
rules either in place or being considered in states such as Pennsylvania,
Massachusetts and New York.

However, many producers along the US Gulf Coast, like GreenHunter, are
set up for exports and now face a sharp demand drop and production cuts, said
Fox.

"We're seeing a lot of companies shut down," he said. "They just don't
have the [domestic] outlets" that Innovation has in the Northeast. Limited US
infrastructure to move biodiesel makes local demand especially important.

The National Biodiesel Board, which keeps track of US biodiesel
production, could not be reached for comment.

Traders say that US biodiesel supply has dried up on the Gulf Coast since
the mid-March EU duty announcement, boosting prices. On March 11, soy-based
B99 (99% biodiesel-petroleum diesel blend) was assessed by Platts at
$1.64-1.65/gal, and it has risen steadily to hit $1.85-1.86/gal on May 4.

Regional producers that cannot get a high enough price for biodiesel have
simply stopped producing, say market sources; the only local demand is from
government agencies legally obligated to use biodiesel.

"It seems that all the old inventory is running out and prices have to
increase in line with replacement cost of new production," said one producer.
Prompt sellers right now are asking over $1.90/gal, the producer said.

Not all Gulf Coast biodiesel producer problems can be attributed to
exports. One of the latest bankruptcies, Texas-based Nova Biosource, was
"really more of a lender issue," said Jefferies & Company analyst Laurence
Alexander in an interview. The problems that led to the company's end-March
bankruptcy included volatile feedstock prices "and the fact that the lenders
had significant exposure to other biofuels companies that also ran into
difficulties," said Alexander. Nova Biosource could not be reached for
comment.

Meanwhile, Innovation is making some money off biodiesel exports, said
Fox, citing demand from Asia, Israel and Latin America.
--Beth Evans, beth_evans@platts.com
--Robert Sharp, robert_sharp@platts.com