scb aviation biofuels: cleantech amsterdam may 2011 kevin
TRANSCRIPT
SCB Aviation Biofuels: Cleantech Amsterdam May 2011
Kevin McGeeney CEO
SCB Overview
• Its all about money: Perspective on who made money in road biofuels and how that provides lessons for bio-jet markets.
• Market style: Explain the differences between the road biofuel and the bio-jet market structure.
• Viability: What will make a bio-jet market viable?
• Progress to date: A synopsis of the flows seen in the bio-jet market.
It’s all about the Money
“The single most important decision in evaluating a business is pricing power,” Warren Buffett 2011
1,215
17
158
0
200
400
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1,000
1,200
1,400
Gasoil Biodiesel Vegetable Oil
Annual Global Volumes in Million MT
Source DataGasoil IEA 2009;Biodiesel F.O Licht 2010; Veg oil USDA 2011
1,102
67
3,147
0
500
1,000
1,500
2,000
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3,000
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Gasoline Fuel Ethanol Grains, sugar & sucrose
Annual Global Volume in Million MT
Source DataGasoline IEA 2009;Fuel ethanol F.O Licht 2010;Grains/sugar/sucrose USDA/FAO 2011
If one competes for agricultural land, one is a price taker on biofuel inputs/feedstocks.
Biofuels prices are set by the fossil fuel equivalent plus government actions.
It’s all about the Money
“The single most important decision in evaluating a business is pricing power,” Warren Buffett 2011
-200
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0
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15/05/07 15/05/08 15/05/09 15/05/10
Spot EU RME Gross Margins $ per MTMay 2007 to May 2011
Source: SCB
-0.6
-0.4
-0.2
0
0.2
0.4
0.6
05/09/07 05/09/08 05/09/09 05/09/10
Spot US Ethanol Gross Margin $ per US GalSept 2007 to May 2011
Source Data:CBOT/CME for input ;SCB for methodology
Capital costs not taken into account, merely gross margins on the spot market.
Are biofuels a profitable business and if so for who?
Trading
Agricultural
supply
Distribution
Production
Trading
Agricultural
supply
Distribution
Production
Are biofuels a profitable business and if so for who?
First generation biofuel production is an industrial process with low IP and little differentiation.
The profitability of an industrial process depends on supply demand balance.
Without IP there can be no long term expectation of profitable biofuel production.
In some biofuel markets government have a tight control over pricing , demand and supply and consequently profitability, e.g. France, Portugal and Brazil in biodiesel.
Trading
Agricultural
supply
Distribution
Production
Are biofuels a profitable business and if so for who?
Biofuels provide greater security of demand, significant at lower prices. In all cases, agricultural suppliers have generally sucked back any value in the chain.
Alternative fuel feedstock suppliers; UCO, tallow (white or yellow grease), even Jatropha have managed to capture the bulk of any value in the chain.
Trading
Agricultural
supply
Distribution
Production
Are biofuels a profitable business and if so for who?
Unclear consumers regard biofuels as a premium product. Poor handling of the food-fuel and land-use-change debates by the biofuel producers organisations the main reason. Producer organisations too busy securing government handouts.
Trading
Agricultural
supply
Distribution
Production
Are biofuels a profitable business and if so for who?
The prime driver of trading volumes and profitability in biofuels is government action.
Ever increasing layers of regulation provide trading opportunities to exploit unintended & intended consequences. This often undermines the biofuelsindustry.
A good understanding of government action is vital to optimise trading in biofuels.
Market opportunity exists for fund managers to mix the trading of biofuels as a commodity with trading the equities of the sector.
Biofuels trading opportunities
Portfolio Management
Trading decisions
Investigation of both equities and commodities
Thourough analysis of government regulations
Equities Commodities
Market style: How will (first generation) road biofuelsmarkets differ from a possible bio-jet market?
Key attribute for profitability of production
Road Biofuels Bio-Jet fuel
Price taker for inputs yes yes
Price taker for outputs yes yes
Influence of Govt Action Strong Weak
Competitor differences Little difference for which customers will pay
Little difference for which customers will pay
Internal cost control Asymmetric profile,unlikely to benefit, can hurt
Asymmetric profile,unlikely to benefit, can hurt
Market style: How will first generation bio-jet markets differ from road biofuels markets?
• Key influencer for production is Government Action: Road biofuels are mandated by government in the three main markets; US, Brazil and Europe. No such mandates exists in bio-jet markets and they are unlikely. Brining aviation into the carbon credit world, will set a bid max-price on bio-jet fuel: Fossil Jet fuel + CO2 emission cost. Too low currently to develop a market.
Market style: How will first generation bio-jet markets differ from road biofuels markets?
• Government involvement: Current road biofuels markets are not connected to the price of emissions.
UK RTFO Data 2008-20102.9bn liters of biofuel used in the UKGHG saving 51% ex ILUC3.6m MT of CO2 savedActual cost to UK, ex farming benefits $694'600'388Biodiesel Premium to Gasoil per MT energy adjusted $307.50Ethanol Premium to Gasoline per MT energy adjusted $204.00Average Price of Dec 10 EU Carbon 2008-2010 17.61 EUROffset theoretical cost: $89'876'509
Viability: How will a bio-jet market become viable?
• First generation bio-jet fuels are unlikely to be viable. Agricultural prices are too high relative to fossil fuel and the support offered from government can not fill the gap. It is extremely unlikely a majority consumers will indicate a preference for higher priced air travel because of bio-jet fuel.
• If agricultural prices fall relative to fossil fuel to the extent that discretionary blending of first generation biofuel occurs the bio-jet fuel markets will have an advantage over road biofuels markets; the value of the CO2 emission. However, it is probable that such a move down would be slow and is unlikely.
• Second generation bio-jet fuels likely viable. If one can produce biofuel from a permanently cheap input of which you can control the supply, you will look to scale to supply all liquid fuel markets, transport and power. The likes of jatrophaand camelina are unlikely to apply as they compete for agricultural land.
Progress: What progress has been made on the development of a bio-jet market?
• Negligible: Market prices simply not aligned for bio-jet fuel at the moment.
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700Spread Bean oil - Gasoil in USD per MT
Source: Data CBOT/CME;Methodology SCB
