BIOFUELS SCENARIO IN ASIA

Marlon Joseph S. Apaňada

Editor, www.bioethanol.com.ph

The following article aims to provide a general overview of the emerging biofuels
industry in Asia, particularly in feedstock-rich Southeast Asia. Specifically, the
article shall discuss on the promising agricultural crops that can be used as
ethanol and biodiesel feedstock, situate Asia’s emerging participation in the
global biofuels industry vis-à-vis the pioneers in North and South America and
Europe, and pinpoint the multi-faceted challenges that shall affect the
sustainability of Asia’s biofuels industry.

FEEDSTOCK PROSPECTS
In the Philippines, three major crops with existing production volume are being
eyed for ethanol: sugarcane, corn, and cassava. These crops contain sugar and
starch that can be processed into alcohol. Biodiesel, on the other hand, shall rely
at coconut as the feedstock source for the production of coco methyl ester (CME)
or “coco-diesel”, a type of biodiesel. These agricultural crops are major food
sources and also have industrial uses. With the production of ethanol and
biodiesel posing new demand for these crops, the issue of ensuring the supply of
these crops both for food, industrial and fuel purposes is a significant
consideration.

As for other countries, India uses cane juice and molasses, both from sugarcane,
for ethanol production. In Thailand, cassava is already an established feedstock
source along with molasses and cane juice. China shall be relying on corn, a
starch-yielding crop, for ethanol.

For the two leading biodiesel producers in Asia, Indonesia and Malaysia, palm oil
is the substrate of choice for the production of biodiesel as there is existing
supply of the crop.

The reliability of feedstock availability is one factor in assessing the viability of a

crop as ethanol or biodiesel feedstock. This is very important since the market
for biofuels for Asia shall be created in great measure through such government
policies as national mandates – 5-10% national mandate of ethanol blending to
gasoline in India, Philippines, and Thailand; 1-5% national mandate of CME
blending to diesel in the Philippines, and 10-20% mandate of biodiesel blending
to diesel in India.

To assess the reliability of crops for its use in biofuels, the institutional
preparedness of the industry involved in the feedstock’s production should also
be considered. This refers to the organization and cohesiveness of the industry in
order to address such issues as crop pricing, ensuring year-round crop supply,
and implementing contingency measures in cases of force majeure. Institutional
preparedness also points to achievements in the aspects of research and
development to produce higher yielding varieties of crops, promote sustainable
cropping systems to avoid land exhaustion, and improve farm productivity,
among others.

New crops, however, are being studied as alternative or complementary crops to

the traditional feedstock cited above. For ethanol, sweet sorghum is showing a
lot of promise as it is, like sugarcane, sugar-based and simpler to process, has
2-3 cropping periods a year, and can be grown in fallow sugarcane land. It also
yields fiber that can be burned as fuel, which is similar to that of bagasse
produced from sugarcane. For biodiesel, Jatropha has emerged to be a major
alternative to coconut. There are groups in the Philippines that are interested to
establish dedicated jatropha farms for the production of biodisel.

BIOFUELS PIONEERS
ETHANOL

Brazil remains the world leader in fuel ethanol production and consumption. In
Brazil, ethanol now accounts for as much as 20% of its transport fuel market and
is 55% cheaper at the pump than regular gasoline. More than 60% of the cars in
Brazil are flex-fuel vehicles (FFVs) that can run as readily on ethanol as on
regular gasoline. For 2005, the output of fuel ethanol reached 15.1 billion liters,
up from 13.60 billion liters in 2004. The total demand for fuel ethanol in Brazil is
boosted by the rapid growth in sales of FFVs.

In Asia, ethanol production and use are led by India and Thailand. India’s sugar
glut and burgeoning supplies of molasses in 2002 hastened the establishment of
an ethanol program. In Mid-March of 2002, the government decided to allow the
sale of E-5 across the country and mandated that nine states and four federally
ruled areas will have to sell gasoline blended with 5% ethanol by law starting on
January 1, 2003. The mandate has translated to a captive market of at least 0.5
billion liters of fuel ethanol.

Thailand, on the other hand, formally started selling ethanol on July 2002. In
mid-2005, there are three plants in operation. These molasses-based plants
have a combined capacity of 82.5 million liters per year. As of May 2005, 24
plants are under construction: 14 cane juice-based, 4 molasses-based and 6
cassava-based. When these plants will be fully operational in 2006, Thailand will
have total capacity of 1.230 million liters per annum. Surplus ethanol from these
plants is planned to be exported to Japan if the Japanese fuel ethanol market will
be available. Although no data has been confirmed as of late, the total sales of
E-10 in 2005 should easily top 2004‘s volume of 59.6 million liters.
BIODIESEL

Germany is the world’s biggest producer of biodiesel. Biodiesel has been

produced for the German market since 1999. Its raw material is rapeseed, which
can also be used for human consumption or industrial purposes. In 2001 about
460,000 hectares of rapeseed were cultivated in Germany for non-food
purposes. These yielded some 470,000 tons of oil, of which about 300,000 tons
were used for biodiesel production - equivalent to about 1% of Germany's diesel
fuel consumption. Biodiesel is now available at about 1,500 filling stations
throughout the country. The production and utilization of biodiesel is facilitated
firstly through the agricultural policy of subsidizing the cultivation of non-food
crops. Secondly, biodiesel is exempt from the mineral oil tax.j

In Asia, Malaysia is the largest producer of biodiesel. In 2005, Malaysia produced

around 15 million tons of crude palm oil, a significant portion of which went to
the production of biodiesel. Malaysia primarily sells biodiesel to export markets,
especially Europe. It is, however, also preparing regulations for a mandatory
internal switch to biofuel blends by 2008. Malaysia’s state of Sabah, the
country’s largest palm oil producer, is the site for two separate initiatives
building what would be the largest palm-oil biodiesel plants yet. In December
2005, a joint venture between Malaysian and South Korean firms, and a London-
based company announced plans to build separate 300,000 tons-per-year plants.

ASIA’S BIOFUEL HOTSPOTS

Traditionally, the market for biofuels has been largely policy-driven. If we look at
the example of biofuel leaders Brazil and Germany, the market has been
sustained through government interventions through mandates and subsidies by
way of tax credits, among others. In 1975, Brazil’s National Alcohol Program,
Proalcool, was established against a background of high crude oil prices, high
domestic sugar stocks, and rapidly decreasing world sugar prices. The Proalcool
program provided for a mandated blending of alcohol with gasoline, tax
advantages, and subsidized pump prices. Although the alcohol market has been
liberalized in 1990, mandatory blending, at 20-25% is still present. In Germany,
biodiesel is exempt from the mineral oil tax, giving it a slight pump price
advantage over regular diesel. This economic advantage does not reflect the
production costs, which are significantly higher for biodiesel than for regular
diesel. Hence the market viability of ethanol and biodiesel depends heavily on
governmental support policies.

However, with the escalating oil prices, analysts have recognized that biofuels, at
least for the user, have finally become attractive price-wise. According to The
Economist, in the United States, subtracting the biofuel subsidy will still yield a
competitive, if not cheaper, pump-price cost for biofuels. This has become
especially pronounced in Brazil, where ethanol costs about 30-50% cheaper than
gasoline per liter. Since FFVs can run on ethanol, gasoline, or any combination of
the two fules, FFV sales continue to outpace that of conventional engines. This
just goes to show that market-driven developments, in particular the
introduction of FFVs and the upsurge of oil prices, have created a climate that is
less reliant on government-initiated policies.

Asia shall be looking at the model of Brazil, wherein the government shall
mandate a specific blend of biodiesel and ethanol to the country’s diesel and
gasoline pool, respectively. The mandate shall create a ready market for
biofuels. India, Thailand, Japan, China, and the Philippines are going that route
for ethanol; Malaysia and Indonesia are preparing policies for compulsory
biodiesel blending. The mandate shall be justified by any, a combination, or all of
the following reasons:

- Addressing high domestic oil prices;

- Achieving “energy security” for the long term;
- Mitigating air pollution and abating greenhouse gas emission as per Kyoto
Protocol directive;
- Creating market for surplus crops and other farm products

With the success of Brazil’s model, Asian countries already have a template to
follow.

CHALLENGES AHEAD
The main challenges for the emerging biofuels sector are policy, supply, and
cost.

Policy sustainability

Policy sustainability will be a major issue among Asian countries with fledgling
ethanol and biodiesel programs. This is also true to countries in Europe and to
the United States. Legislation underpinning policies on mandates, subsidies, and
incentives, are already met with hesitation by oil companies, car manufacturers,
and consumer interest groups who argue that mandates leave the public with no
choice on which fuel to use. Oil companies, for one, question the readiness of
infrastructure in place to implement nationwide blending. Car manufacturers, on
the other hand, raise worries on car warranty should biofuels adversely affect car
engines.

More challenging will be the determination of governments to maintain pro-

biofuels policies over a long-term period. Droughts and lack of land affecting
supply, stabilization of oil prices affecting economics, and a host of other
possible scenarios may cause governments to pull out support. This is indeed a
challenge, especially that the market for biofuels among many countries is
expected to be largely policy driven.
Supply reliability

Reliability of supply is another challenge for the biofuels sector. The impact of
biofuels on food and land use is one of the biggest questions raised by concerned
groups. Environmental groups, for example, have consistently raised concerns
about sustainable palm oil development, especially in rainforest areas such as
Sabah. Experts have also warned that large-scale monoculture cropping systems
such as “fuel farms” may lead to soil exhaustion. The “food versus fuel” question
has been a longstanding argument against biofuels.

Economics

Feedstock (raw material) prices and oil prices will be key determinants in the
sustained attractiveness of biofuels as alternative fuels. While sugarcane-based
ethanol, as in the Brazil model, have proven very competitive as against
gasoline, the escalating sugar prices have experts worried that ethanol shall also
end up expensive as feedstock cost accounts for 60-80% of the total production
cost of ethanol. Thailand and India have experienced firsthand the impact of high
feedstock, in this case molasses, prices. India, for one, was at one time forced to
withdraw its 5% ethanol mandate in several states.

The biofuels sector will also continue to monitor the movements of oil prices, as
it shall struggle to stay competitive against fossil fuel-based transport fuels. In
the Philippines, CME is facing stiff opposition from oil companies due to its higher
cost than diesel on a per liter basis.

The issue on economics also points to the challenge of making production cost
cheaper through new technologies and feedstocks. “Cellulosic ethanol”, a type of
ethanol that shall come from waste residues, wood chips, switch grass, etc., is
receiving extensive research interest. Cellulosic ethanol is perceived to be
cheaper than ethanol currently made from sugarcane, corn, and cassava. It also
avoids food and land use issues as it will be sourced from waste products or
crops with practically zero value.

For questions, comments, and reactions email author at info@bioethanol.com.ph