ABG said it manufactured 17.5 million litres of biodiesel in 2006. But reduced demand due to fuel tax changes, more complex supply arrangements and higher raw material costs mean the company is likely to produce less than 10 million litres of biodiesel during the 2007 year.

“Under current market conditions and government policy settings, the cost of producing biodiesel exceeds the price it can be sold for, the company said.

“ABG will no longer do this. The company will hold its Narangba plant on standby, retaining sufficient skilled operators employed to facilitate a rapid return to production, when demand and costs allow profitable manufacture.”

The company also plans to sell its Moree oil-seed crushing mill for $2.64 million. Contracts for the sale were signed on Wednesday. The Moree mill was mothballed in December 2006 and is a non-core asset of the company.

“This will ensure the company remains solvent while it works with governments and customers to put its biodiesel production on a sound footing,” ABG said.

The company will also reduce overhead costs, including staff and office facilities, to a minimum consistent with remaining a publicly listed company, and will complete “the orderly sale” of other non-core assets.

ABG said it believed there was a good chance that the current unsustainable situation would be rectified by governments adopting policies that are commonplace overseas, and the company has taken actions that give it the best chance to survive and be ready to respond when changes to the market emerge.

But all of this restructuring is intended as a temporary solution and further action will have to be taken if circumstances do not change over the coming months, the company said.

“If the production of biodiesel remains uneconomic for an extended period, the company will review its position and consider returning any surplus funds to shareholders,” ABG said.

To reduce corporate overheads, chief executive Martin Earp will shortly end his secondment to ABG Limited and return to Transfield Holdings. Executive director Bevan Dooley will be appointed as chief executive. In light of a reduced workload for the board and in the interests of reducing corporate overheads, non-executive director Russell Higgins has resigned. The board has also taken measures to reduce its costs, including a reduction in directors’ fees.

ABG’s Sydney corporate office will be wound down, with remaining activities managed from the Narangba facility.

“The implementation of a quality system and minor maintenance jobs at Narangba will continue, so that the plant is able to produce at short notice and ramp up quickly, if the outlook for biodiesel improves significantly,” ABG said.

ABG will also continue to provide technical support to Tadanac, developer of the Tri-Cities biodiesel project in the United States.

“The outlook for biodiesel production in the USA remains much better than in Australia,” ABG said.

The company said the fledgling biofuels industry would not be able to survive in Australia without new regulatory settings.

“Ineffective and unstable policy settings continue to undermine the biodiesel industry,” ABG said.

“The 350 million litre biofuel target policy mechanism has failed to establish market access via the crucial oil majors, as had been anticipated by the company. Without access to the customers of the majors, ABG has been unable to generate the volumes required for the company to be profitable.

“Significant changes to fuel excise arrangements on July 1, 2006 and ongoing uncertainty related to government fuel standards has further hampered the viability of the biodiesel market.”

Like other Australian biofuels producers, ABG has also experienced significant rises in raw materials costs, especially over the second half of this year.

“The company’s Rights Issue Prospectus of March 23, 2007 detailed an assumption of a tallow price of $580 per tonne,” the company said.

“However, tallow has recently traded at over $950 per tonne, with indicative tallow offers for November of $975 per tonne, making production costs unsustainable.”

ABG said a government requirement that petroleum fuels have a small amount of biofuel added to them was urgently needed to secure the future of the local industry.

“In the case of ABG’s home state of Queensland, a requirement that on average, mineral diesel contains 2 percent biodiesel, would mean manufacturing could be scheduled with a high degree of certainty, skilled staff retained and production efficiencies achieved,” the company said.

“Such a requirement would utilise approximately 50 percent of the tallow produced in Queensland.”

ABG said a fuel mandate was preferable to subsidies as it would eliminate wild swings in demand and profitability.

“In the absence of the stability that predictable demand will create, bank and investor sentiment will remain negative and a return to growth is impossible,” ABG said.

“Many other developed countries have specific requirements for the use of biodiesel and ABG believes it is inevitable that similar policies will eventually be adopted in Australia. Under present policy settings, however, it is likely that the significant private and government investment in the industry to date will be lost and expertise dissipated.”