BEIJING (Interfax-China) -- The development of China's fuel ethanol market, which the Chinese government predicts will double between 2006 and 2010, still faces significant uncertainties due to a shortage of feedstock for fuel production, a lack of mature product standards and unclear pricing policies, according to industry insiders attending an industry forum late last week.
Background on China's Ethanol Sector
China began promoting the production of ethanol fuel using corn in 2001, when the country was experiencing abundant grain output. As part of the push, four domestic companies were designated as exclusive producers of the fuel, namely Jilin Fuel Ethanol Co. Ltd., Heilongjiang China Resources Corp., Henan Tianguan Group and Anhui BBCA Biochemical.
However, because corn producers can earn much greater profit by selling corn to ethanol plants instead of using it for animal feed, more corn has been diverted into the industrial deep-processing sector than expected, leaving significant shortfalls in the availability of corn as an animal feed and as a raw material for food products. As a result, China's hog and pork prices, as well as other food-related prices, soared this year. Pork prices jumped by 10.5% from April to May alone.
The Chinese government, which is concerned about rising inflation as well as food prices, reacted by suspending approving new corn-based fuel ethanol projects as well as any plans to expand the production capacity of existing plants. On several occasions the government made it clear that it would only encourage non-grain-based fuel ethanol projects for the time being.
Ethanol Producers Under Pressure From High Corn Costs
Even before such a warning from the government, ethanol producers had already began to look elsewhere for feedstock, as soaring corn prices and shrinking government subsidies for such projects had significantly diminished their profits, Yang Weihua, the research and development director of Anhui BBCA Biochemical, told Interfax.
Corn prices have jumped from RMB 4,070 ($544.85) to RMB 4,080 ($546.18) per tonne to RMB 5,067 ($678.31) per tonne so far this year. Government subsidies, which initially were more than RMB 1,800 ($240.96) per tonne of fuel ethanol produced, have fallen to RMB 1,373 ($183.8) per tonne this year as such projects are no longer favoured by the government, Yang said.
At the same time, as retail prices for fuel ethanol have to be kept closely in line with domestic gasoline prices, retail prices have been capped at low levels and do not reflect the surge in production costs. Fuel ethanol is comprised of 10% ethanol and 90% gasoline.
The raw materials that the government currently favours for the production of fuel ethanol include sweet potato and cassava, Liu Qun with the National Development and Reform Commission (NDRC) said. The government is also encouraging the cultivation of sweet sorghum as feedstock for the fuel.
With a planned non-grain plantation areas of 16.5 million mu (1.1 million hectares), Liu said that the country will see annual additions in cassava, sweet potato and sweet sorghum output of 1 million tonnes, 2 million tonnes and 400,000 tonnes respectively.
The China National Cereals, Oils and Foodstuffs Import & Export Corp. Ltd. (COFCO), a leading grains, oils and foodstuffs group in China, will complete the construction of a leading cassava-based fuel ethanol project in the Guangxi Autonomous Region by the end of this year. The plant is to produce 200,000 tonnes of ethanol annually.
Grain to Remain Leading Feedstock for at Least Three More Years
While the government has encouraged the use of non-grain feedstock for ethanol plants, industry insiders remain doubtful.
"China has just started on its mass plantation plans for cassava and sweet potato for industrial use, and it takes time for such crops to grow and mature," said an official with a foreign equipment manufacturer whose products include those used in bio-fuel production. I believe that within three years time, grains such as corn and wheat will still be the leading feedstock for ethanol fuel."
For example, Henan Tianguan Enterprise Group Co. Ltd., one of the country's four major ethanol producers, currently uses a mix of 60% wheat, 20% corn, 10% cassava and 10% sweet potato to produce the fuel.
As a state-appointed ethanol producer, Anhui BBCA's Yang said that the company is required to guarantee sufficient ethanol supplies to two neighbouring provinces, both of which are currently undergoing experimental projects to popularize the use of fuel ethanol, despite the surge in costs.
The company is currently researching technologies related to cellulosic ethanol, which is processed from plant fibres. Though the core technologies have already been successfully developed, Yang does not expect to see the company complete its pilot production facility for another three years. Canada is the global leader in cellulosic ethanol technologies, and has the world's largest production facility, with a capacity of 10,000 tonnes.
Another problem is that China still lacks a market-based pricing mechanism for fuel ethanol that reflects the fuel's costs and market demand.
"Fuel ethanol is still in the preliminary stage of development in China, and does not have a mature product standard and pricing scheme," said the official with the equipment manufacturing company. "Even if such standards and schemes are in place, the industry still needs time to test and adjust, so I do not see a booming fuel ethanol market in China in the near future."
The development of bio-fuel is still a topic of much dispute in the international community. A report published by Sri Lanka-based World Water Management Institute earlier this month said that bio-fuel production will increase demand for land at the expense of the environment, and will also require large quantities of water, already a major constraint to agriculture in many parts of the world, including China.
Other reports have said that ethanol production may severely impact upon the food industry, since, at excessive levels, it can use the food industry to feed energy needs. This could have an especially severe effect in countries with a developed car culture, such as the United States.
In the meantime, the International Monetary Fund said recently that higher bio-fuel demand will push up food prices, especially for the world's poor, and increase food import costs, thus curbing economic growth.
Bio-Diesel Industry Faces Same Challenges
China's bio-diesel feedstock supplies will be unstable and inadequate for another three to four years, and will serve to bottleneck the industry's development, industry insiders said at a recent forum held in Beijing.
The country is currently sourcing most of its raw materials for bio-diesel from waste cooking oil, and production volumes are still very small, according to an official with a Hong Kong-based biofuel company that operates bio-diesel plants in China. The official, who wished to remain anonymous, noted that the country currently lacks an efficient system for collecting such waste cooking oil.
The use of vegetable oil as a feedstock, something that is widely practiced in the rest of the world, is also not viable in China because the country does not have the necessary resources and already has to import almost half of the vegetable oil needed to feed its population, the official added.
According to government plans, physic nut trees (Jatropha curcas) are to serve as the major source of raw material for the country's bio-diesel industry, and a buildup of physic nut-based bio-diesel plants in the provinces of Sichuan, Guizhou, Yunnan and Hainan is already underway. In the meantime, projects that can produce biofuel from Chinese pistache and waste animal oil are also being developed in Hebei Province, according to Liu Qun, director of the National Development and Reform Commission's industrial department.
However, the country only started planting physic nut trees a year ago and lacks experience in dealing with issues such as insect pests. As a result, it is hard to make predictions about production volume in the foreseeable future, the official said.
While fuel ethanol producers are subsidized by the government, bio-diesel producers still don't enjoy any kind of preferential policies as the industry is still its infancy stage, according to Liu Yonglu, deputy director of the Ministry of Finance's tax department.
The National Grain and Oil Information Center forecast in July that China's bio-diesel demand will exceed domestic production by 2010. By this time, the country's annual demand for bio-diesel is expected to reach 1 million tons, 20 percent greater than the expected domestic bio-diesel production volume at the time.
China produced about 300,000 tons of bio-diesel last year.
The country so far has only issued one non-mandatory bio-diesel standard, B100, which refers to diesel products that are entirely comprised of bio-diesel. The standards B5 and B10, which are more economically viable in the retail market, are yet to be issued.
(c) Interfax-China 2007. For more intelligence on Chinese metals and mining, contact David Harman in Hong Kong at email@example.com or (852) 2537-2262.