Biodiesel industry players hit by a crude shock

NIDHI NATH SRINIVAS

NEW DELHI: Falling crude oil has taken the bottom off the green fuel
market. Now that diesel has become more Rs 6 per litre cheaper than
biodiesel, there is next to no chance of consumers switching to any
green fuel. For investors in biodiesel factories, this huge gap in
retail prices can only mean one thing: an even longer stretch than
expected before they can start raking it in.

The old break-even calculations of biodiesel companies are being re-
written after crude oil dropped to $50/barrel-levels. In
Maharashtra, for example, pumps are currently selling diesel for Rs
35.70/l. This may even be brought down further if international oil
prices remain bearish. In comparison, biodiesel is available for Rs
41/l ex-factory plus taxes. “With such a stark difference, we have
no option but to shut down production for now,” said a managing
director of a biodiesel company in Maharashtra.

For biodiesel manufacturers, there are two options right now: one,
keep capacity idle till crude oil prices spiral again; or two,
reduce the cost of producing biodiesel so that it can compete better
with diesel.

The biggest cost for biodiesel manufacturers is raw material. At
present, farmers are selling jatropha and pongamia for Rs 12,000 per
tonne because of low total volumes. With a processing cost of Rs
1000 per tonne, manufacturers then get 70% deoiled cake and 30% oil
from each tonne of raw material. The deoiled cake fetches around Rs
1400 per tonne in the market.

With this conversion ration, oil costs the company Rs 38.66 a kg.
They spend another Rs 5 converting it into biodiesel. In other
words, the biodiesel is priced at Rs 43 a litre at factory gate.
State taxes are extra.

The only way companies can compete in the new scenario is by
ensuring that either the cost of jatropha is reduced to less than Rs
10,000 per tonne or the conversion cost of Rs 5 is chopped
substantially. While the more efficient units can easily achieve the
latter, jatropha can only become cheaper if more farmers grow it.
However, given the three-year lag period before the saplings bear
fruit, small farmers on marginal lands simply don’t have the deep
pockets necessary to survive this period.

Keeping these problems in view, a section of the biodiesel industry
has been lobbying hard for permission to use palm oil imported at
concessional duty as feedstock. However, that may not be the right
way forward. Diverting an expensive food into fuel may impact 1.1
billion cooking oil consumers in India.

More importantly, because cooking oils are so expensive, there is a
genuine likelihood of palm oil imported for fuel to be diverted to
the food market. Already the government has been troubled by
instances of edible oil being imported in the guise of non-edible
oil. Actual inflow of palm oil would completely distort the market
in favour of a few unscrupulous players.
http://economictimes.indiatimes.com/Markets/Commodities/Biodiesel_ind
ustry_players_hit_by_a_crude_shock/articleshow/1388118.cms