The fuel made from vegetable oils has averaged 780 euros ($982) a tonne this year and will drop 18% to 640 euros a tonne when governments mandate set proportions for blending the fuel with conventional diesel. European biodiesel production may increase almost fourfold to 12 million tonne by 2010 on an estimated $3.8 billion of capital investment, Goldman Sachs said.
Production capacity is expected to increase considerably in the coming years due to low barriers to entry, London-based analysts Mariano Alarco, Jason Channell and Stephen Benson said in an October 23 report. The likely winners will be large, low-cost, multifeedstock vegetable oil processors in advantaged logistical locations.
Consumer and government interest in biofuels is driven by a desire to replace fossil fuels because of soaring oil prices, and to limit greenhouse gases blamed for global warming. Government support programmes are the main driver of industry growth, the Goldman analysts added.
Biodiesel is not competitive without subsidies, the analysts said. Without any government support, the price of oil would have to reach $110 a barrel for biodiesel to be attractive, they said.
Biofuels can compete when the oil price is as low as $50 a barrel, according to Michael Coleman, who helps run Merchant Commodity Fund in Singapore. Crude oil rose $1.67 to $61.02 a barrel at 12:38pm on Saturday in New York. Oil has declined 22% from a record high of $78.40 per barrel in July.
Global production of ethanol, made from sugar and starch crops and blended with gasoline, is expected to grow 13% by 2010 and continue to dominate the biofuel market, according to Goldman Sachs. Global biodiesel production is forecast to grow 35%, led by Europe, where half of new cars sold run on diesel, of which there is a shortage.