Global Biodiesel Capacity Growing Faster Than Demand

Overcapacity of biodiesel manufacturing facilities will increase competition and drive out smaller producers.

The global biodiesel market is one of the most rapidly growing sectors in the chemicals industry, according to the new BioDiesel Report released Thursday by SRI Consulting (SRIC), a business research service for the global chemical industry.

Between 2000 and 2005, world capacity, production and consumption of biodiesel grew an average of 32 percent, and the forecast is for stronger growth annually of 115 percent in capacity and 101 percent for demand to 2008 and beyond, the report noted.

Biodiesel, a renewable fuel made from vegetable or animal fats and oils, is being developed as an alternative to fossil diesel for use in diesel engines and as a heating fuel.

But the report said that the success of biodiesel as a substitute fuel rests on subsidies and tax relief from the government, in order to make biodiesel competitive with fossil diesel.

“The main drivers for growth and survival of the biodiesel industry are government regulations that mandate incorporation of renewable fuels over time," said John Pearson, SRIC's CEO.

Biodiesel offers the environmental advantage of reducing greenhouse gas emissions compared with the use of fossil fuels. This makes it attractive to national governments that are looking to meet their obligations under the Kyoto Protocol. Biodiesel also has a favorable energy balance and can be made sustainably from renewable oilseed resources.
Currently, the study noted, the size of the fossil diesel fuel market is defined by its market potential. There is no major technical limitation on replacing fossil diesel with biodiesel.

The limitation that does exist is in the area of feedstock availability, vegetable fats and oils and animal fats, and this is determined by the availability of farmland for crop growth.

The introduction of new biodiesel production plants is growing rapidly, almost on a daily basis. Globally, with capacity increasing annually at 115 percent, there will be an overcapacity of biodiesel manufacturing facilities in 2007, despite the expectation that biodiesel use will reach its pinnacle between 2006 and 2007, SRIC's report concluded.

The result of the capacity growth exceeding consumption rates will result in increased competition, lower capacity utilization rates, squeezed profit margins, competition for raw materials, and the potential loss of smaller producers and those in less strategically important areas.

The report forecasts that worldwide biodiesel production patterns will shift during 2005 and 2010. Although Western Europe was responsible for more than three-quarters of the global biodiesel production in 2005, its capacity is expected to fall to less than 40 percent by 2010. This is due to expected higher growth in production in other areas, especially Asia which is gearing up to be the second-largest biodiesel producer, right behind Western Europe and followed by North America.

According to the Biodiesel Report's author and vice president at SRIC, Ralf Gubler, the biodiesel market has changed dramatically over the last year.

"The average biodiesel plant in Western Europe produced about 40 thousand metric tons last year. In 2006, the average capacity is expected to be 100 thousand metric tons. Also, other regions are planning to have the same capacity within two years,” Gubler said.

The expected ramp-up in biodiesel production capacity over the next five years is not in balance with expected demand in many regions, Gubler added.

"While growth in Western Europe is currently under control, the U.S. is currently in the process of building massive excess capacity. Asia and South America are building significant biodiesel capacity with the expectation of large export markets. On a World average, biodiesel capacity is expected to grow annually as high as 66 percent through 2010,” explained Gubler.

In 2005, Germany had the highest biodiesel consumption, with 61 percent of the world total, according to the report. The U.S., Italy, France and Brazil also showed significant consumption rates last year. All other countries combined accounted for only 11 percent of world consumption.

Yet, by 2010, it is expected that the U. S. will become the largest single biodiesel market, accounting for approximately 18 percent of world biodiesel consumption. New and large single markets for biodiesel are expected to emerge in China and India. The share of all other countries will increase to 44 percent through the forecasted period.

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