EU bioethanol outlook brightens, biodiesel dims

A man put a petrol pump back after filling up his car in Berlin April 4, 2008.

LONDON/HAMBURG (Reuters) - The outlook for the European Union's bioethanol industry looks brighter in 2010 after a bleak couple of years but biodiesel remains dogged by overcapacity and producers face a grim struggle to stay afloat.

The European Union has been expanding the use of the two major biofuels as it seeks to cut emissions of the greenhouse gases which contribute to climate change.

But a political backlash, driven partly by accusations the growth of biofuels had helped to drive up food prices, has led some member states to scale-back support.

Industry sources said, however, the political mood has started to become more favorable again, demand is expected to grow in 2010 and two massive bioethanol refineries are due to come on line in the first half of the year.

"I think we've had the worst," said Rob Vierhout, secretary general of the European Bioethanol Fuel Association.

"I think we are seeing now a change in the tide and it will slowly come back to the old idea that we need biofuels to achieve our targets for 2020," he added.

Bioethanol, which is produced mainly from sugar and grain crops, is a substitute for petroleum. Vegetable oil, tallow and recycled cooking oil are used as produce diesel substitute biodiesel.

In north-east England, Ensus is bringing on line Europe's largest biorefinery which will use 1.1 million tonnes of wheat to produce 400-450 million liters of bioethanol.

The refinery is only expected to retain that mantel until the second quarter of this year when Spain's Abengoa is expected to bring on line an even bigger refinery in Rotterdam in the Netherlands with a capacity of about 480 million liters.

The Rotterdam refinery will run on grain.

Bioethanol derived from grain has received a significant competitive boost during the last year against shipments from top exporter Brazil whose supplies are made from sugar cane.

Wheat prices have fallen about 23 percent since the end of 2008 with record global crops leading to a supply glut. In stark contrast, global sugar deficits have seen raw sugar prices climb by 134 percent over the same period.

While in Brazil and the United States the biofuels boom was led by bioethanol, in the EU it was biodiesel which led the way before overcapacity, reduced government support and the credit crisis stalled the industry's expansion.

DRAMATICALLY POOR OUTLOOK

Germany's biodiesel industry, Europe's largest, expects to operate at only around 50 percent of capacity in 2010, said Elmar Baumann, chief executive of German biofuels industry association VBO.

"The industry is facing a dramatically poor outlook, we will be facing more consolidation in the coming year with more plants being taken out of the market," Baumann said.

About half of the 49 German biodiesel plants were not working at all and many of the operational plants were producing well under capacity, he said.

"The question is also that in terms of capacity we still have major overcapacity in Europe," said Philippe Tillous-Borde, chief executive of Sofiproteol, the parent company of Diester Industrie, Europe's largest biodiesel maker.

He put biodiesel capacity in Europe at 20 million tonnes versus only 10-11.5 million tonnes in actual demand.

Demand in the European Union is, however, beginning to creep up, boosted by increased targets for blending biofuels into conventional motor fuel.

European Union member states must raise the ratio of renewable energy sources in transport fuel to 10 percent by 2020 as part of the trading bloc's climate change goals and many countries have set interim targets.

"Member states are slowly increasing their targets. I think the market opportunity this year looks better than last year," ebio's Vierhout said.

The government mandated expansion was slowed in Britain as biofuels suffered a political backlash following claims they may have contributed to a rise in food prices in 2007/08 while some scientists cast doubts about their environmental benefits.

The European Union, however, currently has a glut of grain and biofuels present a new market for surplus crops.

"Many are now admitting that the claims made in the 2008 debate (on biofuels causing food price rises) were hugely exaggerated," said VBO's Baumann.

(Additional reporting by Gus Trompiz in Paris; Editing by Sue Thomas)