Biofuel firms in race for market share

By Judith Balea,

Posted at Sep 29 2008 08:59 AM | Updated as of Sep 06 2009 02:08 AM

More and more companies are joining the rush into biofuels due to an anticipated huge local demand from next year onwards. But the battle for a reasonable share of this lucrative market won't be easy.
"You have to scramble to get a piece of the pie. It's really tough," Raffy Diaz, managing director of the Asian Institute of Petroleum Studies Inc. (AIPSI), told
The Philippines is pushing the use of alternative fuels like biodiesel from coconut, palm and jatropha; and ethanol from cassava, sugarcane and corn, to reduce its dependence on imported oil.
According to Diaz, the country has about eight biodiesel producers accredited by the Department of Energy and several others planning investments in bioethanol development.
Many other firms are racing to get in the game as oil companies have to double to two percent the mix of biodiesel with regular diesel, and implement the 5-percent blend of ethanol with gasoline in 2009. By 2010, the Biofuel Law will require a blend of 10-percent ethanol. 
With the mandate, Diaz noted, demand for biodiesel would grow to at least 130 million liters per year from the current 65 million liters while that for ethanol, from 200 million liters to 400 million liters.

Excess Production

Competition is more evident in biodiesel than in ethanol because commercial production of the latter is still on the drawing board.
"Our biodiesel capacity is good even for a 3-percent blend. We have excess production. But with ethanol, they still have a problem. There is still a lot of groundwork to be done on the upstream side."
The country is producing 1.4-1.6 billion liters of coconut oil per year, of which, 20 percent is already insulated for domestic use such as for cooking while 80 percent is shipped overseas. Take a chunk of the exported oil and convert this into biodiesel, then "you have more than enough for the required blend," Diaz remarked.
When it comes to ethanol, however, it's a different story. Despite higher demand, there are no sufficient investments to speed up its production and play catch-up with biodiesel because building an ethanol plant is costly and large scale plantations of its feedstock have been partly blamed for dwindling food production.  An ethanol plant for wide commercial production can cost up to P3 billion in development while a biodiesel plant only requires an investment of as much as P1 billion, industry estimates show.

Currently, there are 13 distilleries in the country manufacturing "hydrous" ethanol, which is used for liquor.
Diaz said only two companies--Leyte Agri Corp. in Leyte province and San Carlos Bioenergy in Negros Occidental--are producing ethanol for fuel blend. But since they already signed supply contracts with Petron Corp., the rest of the oil firms would have to import their ethanol requirement.
Ethanol Investors
A number of firms have laid down plans to venture into ethanol production, although only a few made their intentions public. Among them are Gotianun-led Filinvest Development Corp. (FDC), Roxas Holdings Inc. and most recently, Basic Energy Corp.
Last June, FDC, which was originally engaged in real estate and banking, said it was mulling to spend between P700 million and P800 million for an ethanol plant in Davao that would use the by-products of its sugar refineries operated by subsidiary, Pacific Sugar Holdings Corp.
"We are eyeing a production capacity of 100,000 liters per day. We want the plant to be operational by 2010," said company president and chief operating officer Josephine Yap.
Sugar conglomerate Roxas Holdings, on the other hand, tapped Indian firm KBK Chem-Engineering Pvt. Ltd. to design and construct a P1-billion bioethanol plant near its sugar mill in Negros Occidental. The plant will also have a capacity of 100,000 liters per day and will be completed by the end of 2009. The company earlier secured a P2-billion loan from two local lenders to bankroll the expansion of its sugar business and construction of the planned ethanol plant.
Basic Energy is perhaps the most aggressive of the three, having forged several accords with both local and foreign firms to pursue the development of biofuel projects.
Just within the month of September, it signed agreements with German firm MAN Ferrostaal Industrieanlagen GmbH and Canada's Nexum Energy Corp. It also sealed a deal with Ecomarketfarms Inc. for the expansion of their cassava farmland project in Zamboanga.
Aiming to become one of the country's major biofuel producers, Basic Energy said it would put up two fully-integrated bioethanol processing plants at a total cost of P6 billion, and with an aggregate capacity of up to 400,000 liters per day. 
The threat of more players
Meanwhile, with two or more new biodiesel players coming in next year, Chemrez Technologies Inc. (ChemrezTech) can only hope to sustain its market share of 33-75 percent, its chief operating officer, Jun Lao, told
The company, which produces 72 million liters of coco-biodiesel or Coconut Methyl Ester (CME) yearly, will increase its capacity, in line with the expected growth in demand and "if we maintain our market share."
"But what we want and what happens are two different things," Lao pointed out. "Most companies that did spend on making biodiesel, they come in very aggressive when bidding time's very competitively fought," he added.
Aside from competition from other producers, Lao said they are also under pressure from oil refiners who are very clever at purchasing and have strong clout to negotiate prices.
These oil companies bid out supply contracts using a hybrid method that includes a reverse auction, where producers punch into an electronic board their asking prices, and a sealed envelope auction, where only the buyer can see each participant's offer.
"So if you want to bag the contract, you have to put in a lower selling price. At the end of the day, it's the oil companies which get the better end of the deal because they are sure to get the lowest price," Lao said.
"If you lose one of them, then you lose a big portion of the market because there are only few oil players."
Lao said biodiesel sells at about P60-P70 per liter.  At face value, it seems more expensive than the regular diesel product, which is priced below P60 per liter. However, because it is more efficient, the consumer "is actually getting more than what he pays for," according to Diaz.

He said biodiesel has all the values of additives for diesel fuel that are crucial for enhancement of engine performance, maximization of fuel economy and reduction of emissions.  "CME (biodiesel) is more than just a fuel substitute. It has additives which can typically cost you extra of up to P1,000 per liter. In the long run, you're putting a very inexpensive but effective additive onto your diesel. You can consider it an additive-substitute," he said.

For 2009, ChemrezTech targets to generate P2 billion in additional revenues, with biodiesel sales contributing more than a third of the total. Lao said they will source the remaining amount from the company's other products including resins, oleochemicals and powder coatings.
Meeting Industry Standards
As more players enter the biofuels industry, the possibility of substandard products becoming prevalent is greater.
Both Diaz and Lao noted that there were cases in the past where the biodiesel products sold by some producers were not compliant with the Philippine National Standards.
Diaz explained, "coco-biodiesel is made up of two components, one is fatty acid, one is glycerine. Some failed to take away glycerine, which could clog up the engine of a vehicle and affect its performance."
Thus, he concluded, "the manufacturer and the oil companies should always check the quality of the product" while Lao agreed, saying "the government should also ensure to get samples from producers to check the quality of whatever is delivered to the buyers."
It is only by doing these that industry stakeholders can protect the integrity of the program, they said.
Diaz is particularly sentimental about the country's Biofuels program since he pioneered studies about the use of coconut oil for biodiesel, in response to a troubled coconut industry back in the 1990s.
"There was a slump in export demand for coconut oil, then later, coco lumber, so we had to look for a means to solve this problem. That's why we came up with high-volume, high-value secondary product for coconut, which is biodiesel," he said.
"We spent our own money on laboratory tests. We presented it to the President, before that to the Philippine Coconut Authority, which picked it up and organized a nationwide task force for the purpose of producing coco-biodiesel."
"There has been a lot of debate on the program and we really fought for it. We don't want the program to be sabotaged by off-spec products."