MADRID/HAMBURG Cheaper, local ingredients make bioethanol more profitable, and sustainable, than far more widely produced biodiesel in Europe, even though it adds to a surplus of conventional gasoline while diesel remains more in demand.
"From this perspective biodiesel is complementary to the oil refinery industry in Europe whereas each tonne of bioethanol would increase the surplus of gasoline," said Klaus Henschel, chief executive of Swiss-German biodiesel maker Biopetrol.
However, biodiesel has to be made from vegetable oils, which have to be mostly imported and are far more expensive than locally grown cereals, the main raw material for bioethanol, which can be blended with petrol.
EU grain trade lobby Coceral estimates the 27-country bloc will produce 284 million tonnes of cereal this year, or 10 times a total oilseed harvest of 28.3 million.
Several large European biofuel manufacturers see bioethanol as a better long-term business.
Spanish multinational renewable energy firm Abengoa has built just one biodiesel plant in Europe, compared with four bioethanol plants and one more under construction.
"Biodiesel is not a strategic business for us," said Javier Salgado, chief executive of Abengoa's biofuels division, which had global revenues of 1 billion euros ($1.22 billion) in 2009.
"You have to import massive amounts of soya oil, palm oil. We think there is a significant Achilles heel in the (biodiesel) industry," he added.
British biofuel maker Ensus has also chosen to focus on bioethanol, of which it makes 400-450 litres a year from 1.1 million tonnes of wheat.
"I think you're going to see preferential use of bioethanol in Europe because of cost and sustainability," Ensus Chief Executive Alwyn Hughes said.
"The sustainability risks are greater in biodiesel and as the sustainability rules start to bite in Europe that's increasingly going to become an important factor."
NARROW PROFIT MARGINS
Christoph Berg, head of German commodity analysts F.O. Licht, said that bioethanol producers in Europe benefitted from relatively low feedstock prices for sugar and grains while prices for rapeseed oil, a key biodiesel feedstock, had risen sharply.
"The profit margins in the biodiesel sector are currently low, for some at loss-making levels," he said.
"For bioethanol the scene is better overall and producers are finding it easier to achieve profitable operations than the biodiesel industry, but bioethanol profit margins are also not as high as hoped."
In Spanish ports, a tonne of wheat costs 150 euros and can be used to make 387 litres of ethanol, so grain costing 388 euros will make one cubic meter. That compares to a benchmark bioethanol price of 470 euros/m3.
Reuters data show that a tonne of biodiesel costs 803 euros to refine in Germany -- using palm oil at 715 euros/tonne -- but will sell at 721 euros.
Producers in some countries hoped for a near-term boost to demand on moves to raise bioethanol blending targets in fossil petrol to 10 percent content in so-called E10 fuels.
France and Poland have already introduced E10, and Germany is likely to follow suit in late 2010 or 2011, although the government has yet to set a date.
"E10 will probably become a standard in coming years and its introduction in a large consuming country like Germany would certainly be an advantage to other countries which wish to follow," Berg said.
Geraldine Gilmartin, an analyst at Kingsman SA, said bioethanol demand in Britain could grow for similar reasons.
"The UK is one market where we forecast stronger growth rates for bioethanol than biodiesel this year," she said.
(Additional reporting by Catherine Hornby in Amsterdam and Sarah McFarlane in London, editing by William Hardy)