Biofuel boom goes kaboom

The boom in the Australian biofuels sector of less than two years ago was short-lived. The aftermath of the bust is now coming into focus with over $200 million of new capital lost in share price value and seven brand-new biodiesel plants sitting idle as they wait for the market to improve.

Six Australian biodiesel businesses raised about $402 million of equity through IPOs, placements, and convertible notes, almost all of it between 2005 and 2007. Shareholders in only one of these companies, Mission Biofuels, are ahead. Shareholders in the other five companies invested about $297 million, including $158 million in four IPOs. The shares in these companies are now well below 10% of their IPO price.

The lost capital helped build eight biodiesel plants of which seven are fully or mostly idle, with some yet to produce any biodiesel. Six of the plants are in Narangba (Queensland), Adelaide, Perth, Darwin, Singapore, and Malaysia. The seventh plant, in Nebraska, US, has just been completed but is being sold for roughly its construction cost and before it has produced any biodiesel. The eighth plant, belonging to Mission Biofuels, is in Malaysia and it is hoped will start profitable biodiesel production imminently. The extent of the carnage can be seen by looking at Australia’s leading biofuels stocks and where they are now.

nAustralian biofuel IPOs
Firm	IPO Date	IPO ($)	Jan 31, 2008 ($)	Gain Loss (%)
Australian Renewable Fuels	May 2005	1.00	0.045	– 95.5
Australian Biodiesel Group	December 2005	1.00	0.021	– 97.9
Mission Biofuels	May 2006	1.00	1.295	29.5
Sterling Biofuels International	September 2006	1.00	0.079	– 92.1
Axiom Energy	Sep 06 IPO withdrawn
Natural Fuel	December 2006	1.50	0.11	– 92.7
Agri Energy (formerly Australian Ethanol Ltd)	N/A	0.45*	0.035	– 92.2
* Share price on December 16, 2004, when name changed to Australian Ethanol. Source: Eco Investor

The chart shows there was a boom in biodiesel IPOs between 2005 and 2006, but the financial boom quickly turned into a catastrophic kaboom. Five of the six companies, including four of the five IPOs, are showing capital losses of more than 90%, with Australian Biodiesel Group the worst hit with only 2¢ left in the IPO dollar. Only one of the companies is ahead, with Mission Biofuels showing a 29.5% gain on its IPO price. How could the emerging biodiesel industry go so badly wrong? Is there is a future for biodiesel in Australia and, if so, when it will happen and which stocks will deliver?

In terms of the big picture, Brazil has long proven that biofuels – ethanol in particular – can be a major transport fuel. Internationally the sector has many positives: key ones are the potential reduction in greenhouse gas emissions, increased fuel security through less reliance on oil, and new agricultural industries for developing economies. But it seems everyone is having trouble emulating Brazil.

Internationally, the main problems have been in implementation by governments and rising feedstock prices rather than the product itself or the strategic, economic and environmental need for biofuels. In the US the choice of corn as a feedstock was a poor one and, combined with subsidies, has raised the prices of many foods. In South-East Asia the key issues are rising feedstock prices and the clearing of tropical forests to produce plantation palm oil, which negates the environmental benefits of biofuels through habitat destruction and the creation of a major new environmental problem. In Europe and elsewhere the feedstocks for biofuels compete for valuable farmland and become a competitor to food production.

Some of these problems are being addressed. In South-East Asia, for example, biodiesel producers are moving upstream into feedstock production to secure supply and capture a greater share of the profits, and some are moving away from plantation palm oil to Jatropha Curcas, a tree that grows in poor soil and is non-edible. But the development of sustainable biofuels through alternative feedstock crops and new technology will take time. The Australian industry shares some but not all of the overseas problems. Less than two years ago Australia was awash with hope for a new biofuels industry that would help to lower greenhouse gas emissions, reduce dependence on imported oil, and give local farmers new cash crops.

But it all went wrong very quickly. Does the rot date from the Howard’s Government’s July 2006 changes to the Fuel Tax Bill 2006, as many of the biofuel companies say? At the time, this Bill was widely criticised by state governments, the biofuels industry and the Greens Party, among others, for taxing biofuels and removing incentives to encourage the industry. The timing, with the end of the boom following soon after, is very suspicious, but are the problems more complex than that?

In explaining their losses, the biodiesel companies have certainly blamed the Fuel Tax Bill changes, but other key issues that emerge are rising feedstock prices, the lack of interest and cooperation from the major oil companies, ambitious but underfunded overseas expansion plans, construction and engineering issues with new plants, failure to deliver on business plans, and a growing army of scorched and disillusioned investors. Fixing the mixed federal policy signals to the sector should be a major priority for the new Rudd Government. It has yet to make any moves, but there is some hope it may be more friendly to the industry than the Howard Government.

Governments can also assist with the problem of rising feedstock prices, which could be and should be tackled through new uses for declining agricultural products; for example, Queensland sugar cane as promoted by the Queensland Government; and through the cultivation of new agricultural products in new agricultural areas, for example sugar cane in the Ord River Dam region as promoted by the West Australian Government. Both are viable options for ethanol and these principles could be applied to biodiesel. Elsewhere in Australia it should not be difficult to encourage the use of new crops for biodiesel that are neither food nor fibre, and diversify income for farmers.

The Government can also assist with cooperation from oil companies in the take-up of biodiesel, as the Howard Government did with ethanol. But the rest is really up to the industry itself, keeping their expansion ambitions under control and within their financial capacity, and delivering on their business plans. Even if they can do those, winning back investor confidence will take some time. Unless the Rudd Government can act quickly, or feedstock prices suddenly come down, a turnaround in the industry is not imminent.

Unfortunately for biodiesel investors, they backed the one horse in the renewable and alternative fuels race that went backwards. The others – including wind, coal seam gas, solar, geothermal, and wave power are charging forward.

If feedstock prices come down or diesel prices rise so that some or all of the idle plants can begin biodiesel production and generate revenue, it is possible that the share prices may start to move in the right direction. But until some certainty returns to the market, buying on the hope of a rebound would be for brave or speculative investors only.

Victor Bivell is editor and publisher of Eco Investor magazine