Idled biodiesel producer holds hope for quick market turnaround

By Ron Kotrba | September 27, 2019

In August, biodiesel producer W2Fuel LLC began preparing to idle its two production facilities—a 15 MMgy plant in Adrian, Michigan, and a 10 MMgy facility in Crawfordsville, Iowa—due to poor market conditions.

The unfavorable conditions biodiesel producers are enduring result from action and inaction by the U.S. federal government, whose own policies such as the Renewable Fuel Standard and biodiesel tax credit spurred widespread investment in the industry not so long ago. These policies signaled investors to invest, and they did. Now, those same stakeholders feel like they have been left in the lurch.

The blenders tax credit was first implemented in 2005 and helped grow domestic biodiesel manufacturing from a niche fuel to a multibillion gallon per year industry. But the sector is now facing its longest period without the tax credit—nearly two years—since its inception. To make matters worse, the U.S. EPA, the agency in charge of administering the RFS, recently granted dozens of small refinery exemptions to the program, wiping out significant demand and sending RIN credit prices in a tailspin.

A handful of biodiesel plants around the country announced closures recently due to the poor market conditions, including facilities in Nebraska, Texas, Mississippi, Georgia—and with W2Fuel being the latest producer to make such a move and talk about it publicly—Michigan and Iowa.

“I’d hate to think our government is intentionally trying to destroy biodiesel, but it appears that way,” Roy Strom, president and CEO of W2Fuel, told Biodiesel Magazine. “I would like to think this is an oversight, but I would also like them to look at biodiesel not as ethanol—because we get confused with ethanol, and our message gets lost. The way that RINs work, these small refinery exemptions disproportionately hurt biodiesel producers. We take the brunt of the fallout from corn and ethanol, and we get overlooked. We become collateral damage.”

Strom said the latest round of 31 SREs by the Trump administration’s EPA announced Aug. 9 “took a good 15 to 25 cents of value out of the RINs.” Every gallon of biodiesel manufactured generates 1.5 RINs, which are credits generated under the RFS program that hold a fluctuating value depending on market conditions. They are bought, sold and traded, and can be used by petroleum companies to satisfy their obligations under the RFS. When demand is reduced through SREs, RIN values go down, which further compresses margins for biodiesel producers.

When the situation of intentional demand reduction by EPA and resultant depressed RIN values is coupled with a prolonged expiration of the federal tax credit, “you’re operating at sizable loss,” Strom said. “It’s a matter of how much you want to lose on a given day.”

A common misperception surrounding the tax credit is that it’s a windfall for biodiesel producers, but in reality, Strom pointed out, it serves as a benefit to all stakeholders throughout the value chain. “The soybean farmers do better, the refiners are happy because it keeps RIN prices lower, the end marketers are happy because they get bigger discounts, and it makes the fuel cheaper to use on the road, which helps reduce greenhouse gases,” he said. “I may only see a little bit of it because it’s spread throughout the value chain, but at least it would give me certainty and a small margin instead of being in the red.”

While some producers price their product based on speculation that the tax credit will be reinstated, Strom said he is not one of them. “We are manufacturers, not Wall Street,” he said. “We’re not built for speculation.”

W2Fuel employs 50 people between its two plants in Michigan and Iowa. “We’ve laid off 32 of the 50 so far,” he said. “In August we began the shutdown process, letting our employees, customers and vendors know. We still have folks working to finish flushing out the tanks and getting the final loads out. We are preparing everything to be mothballed for at least several months. We are protecting our reputation by doing this the right way, so if market conditions change, we can restart operations quickly. Our hope is the market will come back to equilibrium, making it viable for us to operate again. We don’t plan to sell—we’ve already made significant investments in our assets.”

He said some of his employees have taken other jobs already but told Strom to call them if W2Fuel restarts operations. “I’ve tried to retain key people,” he said. “And we hope to get as many old employees back as we can, but most likely we’ll have to hire new ones too. The longer it takes for market clarity, the less likely it is that I will have a trained crew upon restarting. That could be the difference between a 30-day ramp-up and a three-month one.”  

When asked what he will do—what his alternative plan is—Strom said, “I have no Plan B. I am focused on Plan A. That’s why I’m making sure these plants are shut down and idled correctly. Meanwhile, I am working on what I can do to help move this ball forward. I’m hoping the government comes around and does what’s right. Eventually the market will find equilibrium.”

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