U.S. biodiesel industry drowning in surplus?

U.S. biodiesel production grew to 677 million gallons of production in 2008, largely helped by exports to the European Union.

But the market that accounted for 80 percent of U.S. sales enacted a ban in March, leaving U.S. biodiesel producers with more clean fuel than the domestic market demands, according to Rajalingam A C, a research analyst with Frost & Sullivan.

"The good news is there are a lot of opportunities in the North American market, and these opportunities can help the market to rebound," Rajalingam said during an analyst briefing on the biodiesel industry.

The problem for U.S. biodiesel producers began in 2008 when the European Biodiesel Board launched an anti-subsidy and anti-dumping investigation into imports of biodiesel from the U.S. (see The splash and dash smackdown and EU launches first salvo in biodiesel trade war).

The sector has also been hit by a 30 percent increase in price for soybeans, the dominant feedstock for U.S. biodiesel, from 2007 to 2008, he said. That has led to underproduction and closure of biodiesel plants, which are already operating at about 27 percent of their production capacity.

The growth of the domestic market has been hampered by uncertainty around renewable mandates, Rajalingam said.

The sector is now waiting on the annual announcement of the Renewable Fuel Standard by the U.S. Environmental Protection Agency.

The EPA called for 11.1 billion gallons of biofuel this year, including 500 million gallons
of biomass-based biodiesel (see Ethanol blend increases while oil reaches new low). The EPA's schedule suggests the 2010 requirement should be 650 million gallons, followed by 800 million in 2011 and 1 billion in 2012.

"If we have the mandate by the end of 2009, we could see recovery by the second quarter of 2010," he said. "We have to have the mandates. Only then we can see a recovery in the U.S. biodiesel industry, otherwise it's very difficult."

The European Union is the largest producer of biodiesel with 1.7 billion gallons in 2008, followed by the U.S. with 677 million, Brazil with 300 million, and Argentina with 250 million.

But the U.S. has a significant untapped domestic market that's currently using traditional diesel, Rajalingam said. He noted that all U.S. manufacturers have approved B-5 blends in engines, in which 5 percent biodiesel is mixed with 95 percent traditional diesel, and seven OEMs have approved the use of B-20 blends.

The U.S. trucking and transport industry uses 35 billion gallons of diesel per year. If all started using a B-2 blend, that would create a demand for 700 million gallons of biodiesel, which is more than the U.S. produced in 2008.

Additionally, there are untapped markets in residential heating, marine terminals, school buses, construction, mining, and the 60 million diesel engines already on U.S. roads.

“The U.S. market alone has such huge demand for diesel. If the companies turn their attention to these markets they can easily relieve themselves from the current situation,” Rajalingam said.

Rajalingam also predicted a shift away from soybeans as a feedstock for U.S. biodiesel, mentioning jatropha, rapeseed, algae, and other next-gen solutions.

He estimated the 2008 biodiesel market at $3.6 billion in 2008. Market leader REG accounted for close to one-third of the market, with Cargill and ADM jointly accounting for about 23 percent.