Why is this so?
Before examining the question of why biofuels refuse to float to the surface of their troubled waters, consider the evidence gathered since Slugcatcher last took his cudgel to one of his least favourite energy sectors.
Back in mid-March, your scribe pointed that the stock market performances of most biofuels stocks had been awful over the first few months of the year.
Back then, the miserable prices of stocks such as Natural Fuel, Australian Biodiesel Group and Australian Renewable Fuels, could be partly explained by the relatively low oil price.
The oil price had dropped to $US57 a barrel, and since all biofuels such as ethanol and biodiesel are traded in an environment in which they are compared with oil, it was perhaps to be expected that the biofuels would be in the doldrums.
But if you take a fresh look at the sector, most of it hasn’t got much better and some players have actually gotten worse despite a handsome rise in the oil price to around $70/bbl.
Natural Fuel is an excellent example. This is a company making its products out of palm oil. It has achieved something of a milestone with its current share price at 27c – close to a sixth of its $1.50 float price from late last year.
The problem for Natural Fuel is not that it lacks a good idea, Slugcatcher actually quite likes its plans for a series of biofuel refineries at ports around the world, it’s the price of its chosen feedstock for conversion to biodiesel – palm oil.
What’s happened to players in the palm oil-to-biofuel space is that as more potential refiners have entered the business, the price of feedstock has risen sharply. In fact, the rise has been so sharp that Jupiter Energy abandoned its palm oil-to-biodiesel plans.
Other biofuel producers are in a similar boat – of the non-rising variety, despite the upward tide in the oil price.
Since March. Australian Renewable Fuels has slid from 36c to 19c, and Australian Biodiesel Group, hit hard by its heavy reliance on doing business in Australia where the tax regime is unfriendly to biofuel producers, has seen its share price slip from around 11c in mid-March to around 9.2c high feedstock prices bite deeply into revenue.
In fact, at the ABG annual meeting in late May, the tyranny of feedstock prices was detailed in a table shown to shareholders. It revealed that between 2005 and the end of 2006, the price of tallow (animal fat) had risen from $464 a tonne to $600/t, canola was up from $750/t to $1200/t, soy was up from $850/t to $1200/t and palm oil was from $736/t to $900/t.
Given the rise-and-rise of biofuels as a trendy place for investor dollars, it’s a fair bet that those prices will continue to rise as competition for feedstock intensifies.
Biofuels, as Slugcatcher has pointed out in the past, have several fundamental weak points, and that’s before we even look at the problem that the entire concept of making liquid fuels from crops might not actually be that good for the environment.
There is plenty of evidence that crops of sugar used in Brazilian ethanol and palm oil used in South-East Asian biodiesel are being expanded by replacing rainforest with plantations, and the expansion of US corn production for ethanol has forced up food prices across North America, including meat and dairy prices as farmers pay more for their stock feed.
It seems to this casual observer of the liquid fuels market that the forces gathering against biofuels are formidable indeed.
