Biodiesel production becoming a zero-sum game

Summary: As diesel engines continue to lose ground against gasoline, the global biodiesel industry feels the pinch. Saddled with slow growth, a lack of technological advancement, little fresh investment and significant overcapacity, the industry increasingly turns on itself to fight for survival.

About the AuthorCarlos St. James is a leading advisor to energy investors and developers in emerging markets. He co-founded and presided over the Argentine Renewable Energies Chamber from 2005-2011; has been a board member of the Latin American & Caribbean Council on Renewable Energy since 2010; and publishes the Latin American Energy Review in his free time to help generate debate on the industry’s issues.

He will speak at the LAC-CORE Clean Energy Finance Summit, June 13-15, 2017 in Miami, where industry leaders gather to discuss the sector’s issues.


Just a decade ago investment in biofuels was the rage. It represents the first wave of significant clean energy investment of the 21st century, which was followed by a second wave (wind power) — which was followed by the overlapping third wave we are currently riding (solar). The next wave will likely be distributed energy coupled with storage; the best investor/surfers will be able to see that wave coming in the distance and prepare themselves to ride it.

Meanwhile, investment in biofuels has all but disappeared. As this first graph shows (click on all graphs and charts to enlarge), global investment in biofuels such as ethanol and biodiesel peaked in 2006-07. By 2015 total investment had fallen to below 2004 levels. The wave has washed ashore.

Graph 1: Global investment in biofuels production. Source: Global Trends in Renewable Energy Investment 2016; UNEP + Bloomberg NEF

So what happened? It wasn’t that the fossil fuel industry killed biofuels (although they tried); it is — in part — that technological advancement has not been sufficiently successful in making 2nd and 3rd generation biofuels commercially viable, which were supposed to replace the first generation (which uses food crops as feedstock). This shift to non-food feedstock was to eliminate those unable to climb the technological walls – namely, emerging market producers like Argentina and Indonesia, which have become large biodiesel exporters. In the mean time, the entire industry – almost without exception globally – has significant excess installed capacity that causes weary and stressed-out investors to always be on the lookout for new markets. And it doesn’t help matters that there is a growing preference for gasoline engines over diesel.

Graph 2: World biodiesel production, 2011-16. Source: Author’s compilation from a variety of government and industry association sources listed on Chart 6 below

As Graph 2 shows, biodiesel production growth has slowed significantly in what has become a mature sector: between 2011-2016, for example, production has grown 31% (an average 6% p.a.). But given the excess capacity, competition is increasingly cutthroat: one producer’s gain comes at the expense of another. Given that there is little new installed capacity to speak of, costs are well established; industrywide, biodiesel plants are on average nine years old. Since cheaper feedstock is not emerging, the only variables left to play with are government subsidies, protectionist plays, or mandates of one kind or another.

Nowhere is this more evident than in international biodiesel trade. A few years ago the European Union imposed punitive tariffs on U.S. biodiesel claiming unfair trade practices. It was a correct assessment: traders had found a blending loophole and exploited the hell out of it to the EU’s detriment. This past week the U.S. biodiesel industry filed an antidumping and countervailing duty petition with the U.S. International Trade Commission against Argentina and Indonesia. Having worked on previous biodiesel dumping cases, I question the case’s merits. But in a world with oversupply, can anyone really blame an industry for trying to protect itself? The sector’s infighting exposes an industry that cannot find a viable path to growth and seems to be going the way of coal: the wave is spent; its time is past.

First clues as to what might be happening

Graph 3: Three leading Latin American biodiesel producers. Source: Agência Nacional do Petróleo, Gás Natural e Biocombustíveis do Brasil; Camara Argentina de Biocombustibles; Federacion Nacional de Biocombustibles de Colombia

Brazil, Argentina and Colombia are among the eleven largest biodiesel producers in the world. It makes sense because they are swimming in feedstock: soy oil in the case of Brazil and Argentina; palm oil in Colombia. But Graph 3 reveals something important: note the comparative smoothness in production levels in Brazil and Colombia, and contrast to the erratic numbers of Argentina.

Brazil and Colombia have closed themselves off to international biodiesel trade: they neither import nor export in significant quantities. Production facilities service their domestic markets, driven by government-led policy mandates to consume X amount of biodiesel per year. Argentina, however, exports far more than is consumed internally (e.g., 60% of 2016 production was exported) and this is where things get complicated.

This is the first clue in understanding the possible winners and losers in what increasingly seems to look like a zero-sum game. If you look at biodiesel production trends by country, those that minimize international trade (such as France, Belgium, Brazil and Colombia, among others) have the steadiest production levels, while those that do engage in trade – countries like Argentina, the U.S., Spain (as importer), and Indonesia (the poster child for erratic production levels) — have more see-saw production levels.

So if global biodiesel production grows at 6% a year and domestic mandates are well established, does that mean that each country’s growth is about the same? Hardly.

Graph 4: Biodiesel production increases by country, 2011-16. Source: Author’s compilation from a variety of government and industry association sources listed on Chart 6 below

In a simpler world this 31% increase over the last five years would mean that each country’s production would rise at about that level or at least at the level of their national mandate – which has a cap, as you can only blend so much biodiesel with diesel fuel. But as per Graph 4, the variance is great: U.S. production has grown by 61% (helped in part by exports to Canada), while Germany’s production has remained flat. In this sampling of the larger producers, the U.S., Indonesia, and Argentina all have significant exports yet their growth rates are quite different. (Note: the Netherlands is also a significant producer and exporter but I’m not including them here because they’re more of a global blending and transit point for fuels generally.)

Indonesia’s biodiesel sector is a mess; its industry lives and dies by exports. But their feedstock is palm oil. It may make for a cleaner fuel but is the opposite of sustainable (remember the rainforests!). There may be environmental, if not economic, reasons to shun that product internationally.

Differential Exports Taxes explained

Like any number of emerging market economies, Argentina uses differential export taxes (DETs) to promote development of value-added production. What does that mean? For example, the government might charge soy bean exporters a 35% export tax, soy oil producers a 32% export tax, and 20% if it is exported as biodiesel: differential export taxes. This creates an incentive for industrial development to take place by going up the value chain. Here’s what that means in practice.

Graph 5-A: Argentine soy oil producers pay a hefty export tax

Assume that the world market price of soy oil as quoted on the Chicago Board of Trade is $1,000/ton (see graph 5-A). But Argentine exporters have to pay a government-imposed 32% export tax, so when selling soy oil overseas they get only $760/ton for their product. This establishes an artificially low domestic price for soy oil: producers can either export or sell locally, but either way they only receive $760.

Graph 5-B: Biodiesel profit margins are larger than in other countries

This in turn creates an enormous incentive for biodiesel production in Argentina. Keeping the concept simple, if every other biodiesel producer in the world has to pay $1,000 for the soy oil feedstock and then sells the biodiesel at a world market price of (say) $1,100, Graph 5-B shows how Argentine producers benefit from a potentially much larger operating margin (the green part of the graph).

Graph 5-C: Differential export taxes on biodiesel reduces profitability

Even if the Argentine government imposes a 20% export tax on biodiesel (see the red in Graph 5-C), Argentine biodiesel still has a potentially larger profit than any other producer in the world.

How you feel about this probably depends on where you live. Europeans have proven themselves very skilled protectionists; Americans, no fools on business matters, tend to be open to free trade concepts; emerging markets, typically inefficient almost by definition, are always on the lookout for any advantage they can have in a hypercompetitive world. But DETs have been around for a long time are an accepted way for a country to promote industrial development, and – this is not a small thing — have been blessed by the World Trade Organization. Furthermore, this very dispute has a precedent: the EU attempted the same argument against Argentina and Indonesia a few years ago and European courts ruled against European producers. Furthermore, the Macri administration has begun dismantling Argentine export taxes from their first day in office. But it generates an enormous amount of tax revenue, so the process goes slowly.

Of course, the U.S. industry knows all this and will take comfort in protracted and long court times, allowing them to keep Argentine biodiesel out of the country for a while. One pragmatic solution: U.S. duties be set so that with or without DETs, exporters have no additional profit margins in international markets that would give them an advantage over others who don’t use DETs. A harsher solution: ban international trade of biofuels.

Argentina would have been wise to set up the differentials on its soy oil and biodiesel export taxes more accurately to avoid conflicts like this one. But the country’s competitive advantage lies in crisis management, not planning. And it has never bothered to make friends overseas: in the last decade it has thrown not a few rocks at the U.S. government in particular. Add to that the current “America First” sentiment in the U.S., and I wouldn’t bet on Argentina winning this case no matter what the merits.


I never see country rankings of biodiesel production and who’s beating whom in any given year, so having gathered a bunch of info in preparing this analysis I include the Top Five for the last few years in this Chart 6. The U.S. is far and away the biggest producer; Brazil has been second in the last two years, showing a nice rising trend, while Germany is a solid and consistent producer but whose best years may be behind them.

Chart 6: Country ranking in biodiesel production 2011-16. Sources: U.S. Energy Information Administration; European Biodiesel Board; Agência Nacional do Petróleo, Gás Natural e Biocombustíveis do Brasil; Camara Argentina de Biocombustibles; Federacion Nacional de Biocombustibles de Colombia; USDA Foreign Agricultural Service; others

© Latin American Energy Review 2017

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