How Significant Is Scale?
Agriculture processing giants Bunge, Cargill Inc., and Archer Daniels Midland Co. entered the biodiesel game with mega-sized projects that could change the identity of methyl-ester manufacturing. As these plants come on line, the industry will continue to evaluate the efficiencies and deficiencies involved when agricultural processing is combined with biodiesel production on a large scale.
"We've certainly seen a trend toward these larger plants-30 MMgy or larger," says Mark Soutter, project analyst for BBI International. However, that doesn't mean that smaller plants are on the way out. "Some of the small plants are using niche feedstocks," Soutter says. "They've got a waste stream coming out of a processing plant somewhere, a small rendering facility and some other captive feedstock supply. In the long run they might do all right. Those who are producing 2 MMgy and railing in feedstock from halfway across the country, are going to be the high-cost producers."
Although the U.S. biodiesel industry has grown, it still has a ways to go to catch up with Europe. Lurgi is very active in Europe and has seen growth there accelerate much faster than in the United States. "That is probably driven by a number of factors, one being the transportation fuel basis of diesel versus gasoline, but we see that moving toward the states," says Vaughan Farrie, marketing director for Lurgi.
In the United States, Lurgi's completion of the Cargill project is a signal that suggests the most significant action stateside has come from companies in the agricultural oils business that are expanding their operations to include biodiesel plants. Bunge, ADM and Cargill's projects alone could nearly double the industry's capacity.
So what do the heavyweights entering the ring mean for the lighter contenders? Having control of the oils from which biodiesel is made could be a major competitive advantage in regard to project development. Also, if the meal market floods and crush margins are driven into negative territory, the agricultural oils companies will react predictably. "They are going to have to do something else to make a profit, and that means doing something value-added with their oil, which is biodiesel," Soutter says. On the other hand, there are advantages to being a smaller producer outside of the farm belt. "We've seen the same phenomenon with the ethanol industry," Soutter says. "No matter where your plant is, you will have to ship either your feedstock or your product. Sometimes it makes more sense to be close to the product markets."
One of the downsides for large soybean crushers is contending with the extra soymeal. Nearly 80 percent of the product generated by a crush facility is soymeal. "So you're taking beans that would ordinarily be exported and crushed overseas, and you're crushing them domestically for the oil, but then you've got all of this meal," Soutter says. "So we've seen downward pressure on the meal market, which has been negatively affecting the crush margin."
Companies like REG aren't worried about creating a meal surplus just yet, however, even with the numerous projects taking shape in Iowa. "There is some concern, but there is a very solid meal market and a growing livestock industry worldwide, so it is an issue but it is not imminent," REG President Jeff Stroburg says. "More and more, countries are increasing the amount of protein that they're consuming, and ultimately the most desirous form of protein is meat."
Stroburg's theory will be put to the test as REG has 12 projects in its cache. "We will be collocating biodiesel plants at Bunge crush facilities," Stroburg says. The first of these plants is in Cairo, Ill., a town on the southern tip of the state with access to the Mississippi River. Locations along the Mississippi, Missouri and Ohio rivers have created a stronghold in the area for several agricultural processing firms. "There are a lot of things that would attract a biodiesel plant there, including transportation efficiencies," Stroburg says, adding that he believes more biodiesel will be transported via marine outlets in the near future. River transport looks even more attractive when railcar shortages keep product and feedstock from moving in a timely manner. "All of this infrastructure is already positioned on the river to tap into the flow of the big processors," Soutter says.
The Big Picture
At press time, a total of 88 biodiesel plants were operating with a total capacity of more than 700 MMgy.
A skeptical observer might look at this tremendous growth and wonder whether soybean production will be able to sustain the added biodiesel production. In fact, even by diverting the roughly 30 percent of soybeans that are distributed into export markets, the United States could only produce about 1.5 billion to 2 billion gallons of biodiesel from soy oil. "The problem, however, is that to actually keep them from going to export-because it is a global market-you'd have to raise your price so high that your crush margin would keep getting smaller because the meal price is just going to keep going down," Soutter says. "The only way to divert them from export channels is to pay more than the world market is dictating."
Obtaining appropriately priced feedstocks is a major issue in developing new projects. "If one looks at the economics of these facilities, the cost of feedstock is typically in the neighborhood of 70 percent to 80 percent of the cost of the product, so it appears obvious to us … that's the driver," Farrie says. "If you're one of the big grain guys, who deals with those [feedstocks], you're in a stronger position. If you have the ability to crush, that is better than if you don't have the ability to crush."
Even with a supporting crush operation, diversifying a feedstock portfolio may be how some project managers keep their jobs. "Feedstock neutrality is a must," Jake Stewart, formerly of Biodiesel Industries, said in July. "If you build a high-volume facility around one feedstock with little flexibility-that, to me, is a risky place to be. If there is a hedging mechanism, like an ADM or a Cargill has, you can mitigate some of that risk." Feedstock neutrality, or being closer to feedstocks and closer to the end market, allows nimbleness through the natural turbulence of the industry.
"Most of our plants are using multiple feedstocks, so soy continuing to be our primary source-that may or may not be the case," Stroburg says. Lurgi's plants have been designed to accommodate various virgin oils, as well. "We have designed plants using tallow and avian fats, but in general we have been looking at a variety of virgin oils," Farrie says. "Rapeseed is predominant in Europe, as is soy, canola and palm oils in the U.S. So if you are talking about large facilities on a commercial basis, you're going to be looking at those types of feedstocks."
Although being able to use multiple feedstocks provides flexibility, there are some challenges. "There are some design peculiarities," Farrie says. "If you are talking about all virgin oils, it is quite manageable. If you are talking about any kind of recyclable things-recoverable oils and fats-then it's the unknown factor."
Project development providers, big and small, are faced with the task of finding solutions for coproduct marketing and management. As Biodiesel Magazine reported in its September issue, the U.S. crude glycerin market has reached a saturation level, that has prompted some companies to upgrade the product. "From our point of view as a designer, the physical plant would be the same, and it would be a difference of operating conditions as to whether you make pharmaceutical grade [glycerin] or something less," Farrie says. "The view I've heard from some clients is that they suspect it will be a difficult market, and their feeling is that they have to have the best glycerin in the marketplace just so they can sell it."
Lurgi is also investigating an option where glycerin is fed into a gasifier to produce a syngas. "Then, from the syngas, you can produce a variety of either pipeline-quality gas or transportation fuels," Farrie says. "We know we have the technology, but it is not currently applicable to the economy. It's a huge investment, and it has to be a very large plant."
That may well be another reason to build larger plants, but it remains to be seen until the larger plants start to come on line in 2007.
Nicholas Zeman is a Biodiesel Magazine staff writer. Reach him at firstname.lastname@example.org or (701) 746-8385.