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China Biofuel Industry Provides Opportunities in Agribusiness

Exploring China's alternative energy market

As China's solar and wind power sectors grab headlines, leading agribusiness companies are grabbing a foothold in China's biofuel sector. As oil prices threaten to rise in years to come, China's drive to create a biofuel industry that does not include use of foodstocks is gaining fans among foreign investors. This week RightSite explores how agribusiness investors can find opportunities for clean energy profits in China's biofuel industry.


Global Bio-Fuel Industry On the Rise


The combined capacity of the world's bio-fuel industry (including both ethanol and biodiesel segments) reached 80 million tonnes by 2008 and is expected to increase to 120 million tonnes by 2015. At the moment, the US, Brazil, Europe and Canada contribute nearly 90% of the global bio-fuel production, however, as petroleum prices soar and environmental concerns grow, many experts believe that emerging countries such as China and India will invest more actively in the biofuel industry, further hastening the development of biofuel technologies. Already, according to a new market report published by Fuji Keizai USA, the global biodiesel market is estimated to reach 37 billion gallons by 2016, growing at an average annual rate of 42%.


China Encourages Non-food Fuels


While the development of biofuels has been widely encouraged in the US and other countries such as Brazil, China has been cautious about encouraging ethanol production in particular, because of the possible negative impact on food supplies and food prices. While the US is currently the largest ethanol fuel producer in the world, followed by Brazil, the US relies primarily on corn for ethanol production, and Brazil on sugar cane. In China, with its low ratio of arable land to population, this path to ethanol development risks raising fuel prices and stoking inflation.


However, despite these obstacles, the Chinese government still sees potential benefits from biofuel energy development, provided that this development is based on production from non-food stocks. Given the country's requirements for alternative energy sources to feed its rapid economic growth, and the global need to reduce the negative impact of industrial activities on climate, in 2007 the government put in place a national goal of having biofuel, which now only accounts for 2% of fuel consumption, account for 15% of fuel used by 2020. In addition, the authrorities have also pledged as part of the Copenhagen agreements to cut carbon emissions by 40-45% compared to 2005 levels. This commitment translates into an investment of at least 1% of GDP (RMB 240bn) into China's clean energy sector in the next five years.


However, unlike the U.S and European markets where corn-based ethanol dominates the biofuel discussion, China's push on biofuel will be focused on production made from non-food feedstocks such as waste oil, vegetable oil and jatropha. As a country that has a population of more than 1.3 billion, stable food supply is the primary concern of the Chinese government.


This emphasis on balancing the development of biofuels against preserving the nation's foodstocks could be seen as early as 2006 when the government restricted the use of grain products like corn and sweet potatoes for biofuel production. In 2007, the Ministry of Finance issued policies that promoted the use of non-food sources for biofuel through subsidies for projects producing ethanol from cellulose, sweet sorghum, and cassava or for making biodiesel from oil crops and forest products.


China's Government Provides Bio-fuel Subsidies


The development of the biofuel industry, to a large extent, depends on the ratio of raw material prices to the biofuel price and the strengths of government subsidies available. Investors in China are also lured by the growth potential of the market. Already, in terms of market size, China is the third largest bio-fuel market in the world, after only the U.S and Brazil.


Compared to more mature biofuel markets in the US and Europe, China is still in the process of setting up a clear framework to support investors financially. However, the central government has given significant freedom to local governments to offer subsidies to biofuel companies. According to a research report released by Global Subsidies Initiative in 2008, China provided a total of RMB 780 million (US$115 million, or roughly US$ 0.40 a litre) in biofuel subsidies in 2006. Total support for ethanol and biodiesel is expected to reach approximately RMB 8 billion (US$ 1.2 billion) by 2020.


These subsidies comprised support for ethanol in the form of direct output-linked subsidies paid to the five licensed producers, as well as tax exemptions and low-interest loans for capital investment. Further support is provided through mandates on consumption of ethanol-blended fuel in ten provinces.



Government Subsidy Estimates for Biofuel Industry in China

(millions of RMB and of US$)


Notes: Subsidies comprise direct payments tax exemptions and low-interest loans.


Source:National Development and Reform Commission(NDRC), 2008; International Institute for Sustainable Development(IISD)

Investors Tap into The Third Largest Biofuel Market in the World


As a result of the potential growth in China's biofuel market and the available government subsidies for biofuel production, over the past four years, many international investors have established biofuel projects. At present, there are five licensed ethanol fuel producers and more than 12 operational biodiesel plants with at least another 28 under construction. Major foreign investors in China's biofuel industry include Biolux Bioenergy, Bright BioFuels (BBF), Sunshine Technology Group, and Asia Energy.


Biolux, a leading bioenergy group from Austria started a biofuel project in 2006 through its wholly-owned subsidiary in the city of Nantong in Jiangsu province. Biolux's project covers a total area of more than 200,000 sqm in Nantong Economic & Technological Development Area (NETDA). With a total investment of more than RMB 1.17 billion, the facility will be one of the biggest of its kind in the world and the first large-scale plant for the production of biodiesel in China.


According to a source close to the deal, “Biolux's project is expected to be finished later this year. When fully operational, the plant will process approximately 700,000 tonnes of rapeseed every year and will produce approximately 270,000 tonnes of FAME (biodiesel), 400,000 tonnes of rape meal and more than 25,000 tonnes of pharmaceutical grade glycerin per year,”