Future of biofuel looks grim in China

Beijing, CHINA — A recent unlikely court victory against China Petrochemical Corp., known as Sinopec, and new policies issued by the National Energy Administration may signal that China is finally serious about its biofuel industry, which is widely seen as a way to reduce the country's chronic pollution and reliance on imported oil.

Yingding Bio-energy is a privately-owned company in Yunnan Province that produces biofuel. It sued China's biggest refiner for monopolistic behavior -- the first time a powerful state-owned energy giant has been challenged in this way -- and won. The court decided in December that Sinopec, by refusing for years to re-sell Yingding's biofuel at its gas stations, essentially maintained a monopoly over fuel supply.

Sinopec defended itself by saying that the biofuel producer failed to prove that its products met national standards and that it would be irresponsible for it to sell the biofuel. It has launched an appeal.

The court's decision to back the biofuel maker was quickly followed by an "urgent" notice on the development of the biodiesel industry from the National Energy Administration in mid-January. It called for state oil companies to include biodiesel in their diesel mix as "a solution to improve air quality and a potential substitute of petroleum."

Despite these official actions, there are plenty of hurdles before biodiesel will become popular in China. Currently, as much as half of the biodiesel produced in China is used in industrial sectors such as leather softening and plastic manufacturing. The rest is mostly sold to small, private gas stations that blend it with petroleum-based diesel. For independent gas stations, the cost of buying biodiesel is cheaper than buying petroleum. PetroChina and Sinopec, which control 55% of all petrol stations in China, need to be on board to promote the use of biodiesel. But they have no incentive to do so.

Liu Mengkai, a biodiesel analyst at Sublime China Information Group, a consulting institute that specializes in commodities, said selling biodiesel raises costs for oil companies because they have to buy it from third-party suppliers and make adjustments to their infrastructure. He added that there has been a slight oversupply of Sinopec's petroleum diesel since 2012, another reason why the refiner would be reluctant to squash demand for its key product further.

Sinopec Yunnan, at a mediation meeting with Yingding, had said changes to its pipelines and buying new tanks for selling biodiesel would cost up to "30 to 40 million yuan ($4.79 to 6.38 million)," a bill that the company refused to foot, according to a report by the Southern Weekend magazine.

There are good reasons for the central government's strong embrace of biodiesel. The fuel reduces carbon dioxide and emissions of other pollutants by as much as 70% compared with fossil fuel. It is also a clean way to utilize the used cooking oil created by the country's millions of restaurants. Nonetheless, there is no move to improve the generally poor quality of the products -- a constant complaint among those who have used it.

"Many biodiesel makers are small and produce less than 10,000 tons per year, and the quality varies a lot," said Zhang Yonghao, an analyst at Chem365.net, a petrochemical portal.

According to the Changjiang Times newspaper, a Kunming bus company halted use of Yingding's biofuel after four months because it caused serious carbon deposition and engine malfunctions.

Biodiesel plants mushroomed in China in the early 2000s. There were more than 2,000 plants nationwide at its peak in 2007. Only around 53 are left, according to a report recently filed with the USDA Foreign Agricultural Service's Global Agricultural Information Network.

Today, only 28% of the 4 billion liters national capacity is utilized. Annual production is just 1 million tons, far behind an official target set in 2007 to produce 2 million tons of biofuel a year by 2020.

Sun Shanlin, head of the China Biodiesel Industry Association, said the support of the oil giants would make it into a much bigger industry with larger, high-quality suppliers. "China consumes 170 million tons of diesel every year." Sun said. "If [the adding of biodiesel] is enforced, oil giants will have to blend biodiesel into their products and more than 8 million tons of biodiesel would be consumed annually. That would make the market 7 million tons bigger than it is now."

Apart from poor quality and demand, biodiesel makers face other serious hurdles. There is also a shortage of "gutter oil", one of the main materials in biodiesel production. Unfortunately for China's public, there are plenty of oil "recyclers" who process these waste oils and resell them to unsuspecting buyers for cooking. Biodiesel makers have to compete with these criminals to secure supplies of the waste fat.

Oil recyclers can sell oil as new for 10,000 yuan per ton, while biodiesel sells for just 5,800 yuan, said Zhao Huichuan, CEO of Jingu Recycling Resources in Hebei. "The result is [the food industry] quite often offers a much higher price for the oil, and we sometimes end up empty-handed," Zhao said.

The National Energy Administration will require local governments to set up waste oil recycling systems in order to establish a stable supply of gutter oil, focusing initially on the areas around Beijing, Shanghai and Guangzhou. It also proposes planting more oil bearing trees such as jatropha and Chinese pistache as alternative feedstocks, and requires banks to support the financing of such forestry projects.

The agency also set the price of biodiesel on a par with the petro-diesel price used by the military and the state's fuel reserve, in order to prevent pricing discrimination from the oil giants. But Zhang said the market price of biodiesel has plunged from above 10,000 yuan per ton to as low as 4,000 yuan, bringing the industry to a halt. "The price of gutter is going up while the price of petroleum has dropped lately, forcing biodiesel prices to go down and making it near impossible for producers to make a profit." Zhang said.

In fact, all three state oil giants, including China National Offshore Oil Corp, known as CNOOC, tried to explore making and selling biodiesel in 2007. None proved successful. CNOOC's Hainan plant, built in 2009 with 270,000 tons of production capacity, only made less than 100,000 tons of biodiesel in 2012 and 2013. It was sold off last June at a huge loss.

"Even when the oil giants agree to sell the biodiesel, the producers will still face big challenges," said Sun.