20 June 2007 02:42 [Source: ICIS news]
By Jeanne Lim?xml:namespace>
SINGAPORE (ICIS news)--Standalone biodiesel makers in Asia must take concrete steps to deal with soaring crude palm oil (CPO) prices, although industry observers said the jury is still out on how many of these players will eventually make the cut.
“It depends on the price of CPO, [which] will probably take a correction at some point in time. At these prices, standalone players cannot make money,” said Chris de Lavigne, a Singapore-based analyst with consulting firm Frost & Sullivan.
Standalone biodiesel companies refer to those which do not grow their own palm oil feedstock, as opposed to vertically-integrated firms that own plantations.
At a biofuels conference held in
It would be tough for standalone producers to survive CPO prices of more than $600/tonne, said De Lavigne.
Just a year ago, there was great interest in production of biodiesel and licences for more than 90 plants were issued in
Golden Hope, Carotino and Kulim own oil palm plantations, while Vance Bioenergy is a standalone player.
What standalone producers could do to ensure longevity would be to stay strong financially even when CPO prices are high, said Long Tian Ching, managing director of Singapore-headquartered Vance Bioenergy.
“If you want to look at it from a surface level, the vertically-integrated guys definitely have stronger staying power. If they don’t run their biodiesel plant, they can still rely on their CPO business,” he said.
But although plantation owners have longer staying power – their asset being oil palm trees – the value between a vertically integrated firm and a standalone one is not too different, said Long, as neither will run their biodiesel plants when margins are poor.
A well-capitalised standalone company could still ride the ups and downs of the industry by making sure it has enough capital to tide through the times.
“You have to have shareholders who will give you a lot of money and you’ll have to be able to manage your risks. If you take it for granted that CPO prices will always be high, then you can basically shut [your business] down,” said Long.
Frost & Sullivan’s De Lavigne recommended hedging against rising CPO prices as a way for smaller, standalone companies to manage their feedstock cost risks.
However, hedging, which involves taking out a contract with a bank or a financial institution as a form of insurance against rising commodity prices, is a sophisticated tool and many standalone producers may not have the experience to deal with it, he said.
To sustain their viability, non-integrated biodiesel companies may need to consider getting backward-integrated with their feedstock or look at producing other products from methyl ester such as winter-grade biodiesel and tocotrienols, De Lavigne added.
Tocotrienols are powerful antioxidants in food sources such as palm oil, rice bran oil and coconut oil.
Carotino, for example, sells a fully-refined cooking palm oil that touts health benefits into the consumer market.
Another industry participant, however, felt that backward integration would do more harm than good in developing the biodiesel industry.
“If you integrate your CPO plantation with your biodiesel plant, there’ll be no incentive to go into biodiesel because if I can sell my CPO at a higher price, I won’t bother [to sell] the biodiesel,” said Allan Lim, CEO of Alpha Synovate, a Singapore-based low-cost biodiesel processor.
“The net effect [of backward integration] will be to slow down development in the biodiesel industry,” he said, adding that some plantation owners will be motivated to just sell the feedstock.
What’s essential in ensuring that the biodiesel industry thrives is the presence of government mandates, said Lim. This is also important in the long run to make sure that the environment is protected from climate change.
Biodiesel producers could also take heart that current CPO prices will not hold forever, said Lim, who expects prices to drop to a “more reasonable” range.
The advent of competing agriculture feedstocks, particularly jatropha curcas, together with about 30% of land being cleared up in Malaysia and Indonesia to develop more palm oil plantations, will put downward pressure on CPO prices.
“But that will happen only in about three years’ time,” said Lim.
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