Frost: N. American Biofuels Market Faces Challenges

June 26, 2008 // Published as a news service by IHS

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Biofuels enjoy many inherent advantages such as regulatory, infrastructural, environmental, geopolitical and agricultural support, according to Frost & Sullivan.

However, their negative association with escalating food prices remains a major concern.

To overcome this challenge, the North American market has adopted strategies such as improving yield, tie-ups with the developing world and focus on alternative feedstock.

Given the high feedstock prices for first-generation biofuels, analysts said next-generation biofuels have garnered increased attention and will likely be commercialized after 2012.

Recent analysis from Frost & Sullivan of the North American biofuels market found earned revenues of $9.98 billion in 2007, with estimates to reach $18.52 billion in 2012.

"Regulatory support, coupled with the need to address the geopolitical risk posed by relying on the turbulent Middle East and Venezuela, is driving the growth of the North American biofuels market," said Frost & Sullivan research analyst Shrikanth S.

"Furthermore, there is a strong venture capital investment climate in the next-generation biofuels, which are expected to be more efficient, using algae, waste, straw, wood and other forest-based inputs that can be found in abundance in the U.S."

The expanded Renewable Fuel Standard, Volumetric Blender Tax Credit, Small Agri-Biodiesel Producer Tax Credit and Alternative Fuel Refueling Infrastructure Tax Credit provide the necessary regulatory support for the North American biofuels industry, analysts said.

The dependence on foreign oil continues to increase, analysts said, and costs approximately $1 billion per day. Oil from Venezuela and the Persian Gulf accounted for 26.3% of the total imports in 2007. By 2012, biofuels are expected to account for 15.20 billion gallons of the total fuel source in the U.S., up from the estimated 9 billion gallons in 2008.

Analysts said the debate on food versus fuel remains a major challenge for the biofuel industry. Many respected organizations and media outlets believe that the focus on biofuels increases food prices, especially that of corn and soybean. The volatility of feedstock prices and their unpredictable profit margins has diminished the attractiveness for the market participants and the institutional investors for the first-generation biofuels.

"In the period between September 2006 and February 2008, corn prices rose by 83.6% and the soybean oil prices increased by 135%," said Shrikanth. "It has been noted that economically disadvantaged people spend approximately 50% to 70% of their income on food, compared to 1% to 10% on energy."

In the short term, analysts said only a significant improvement in the average yield of feedstock, such as corn and soybean oils, will mitigate this problem. While alternative feedstock such as jatropha is expected to help in the medium term, the next-generation biofuels will play a vital role in addressing the challenge by 2012-2013.

Source: Frost & Sullivan.