The Hindu Business Line : Fall in crude prices may affect bio-fuel industry

Good or bad?
If crude prices continue to sustain well below $60 a barrel, there would a negative impact on global vegetable oil and sugar markets.
While this may prove negative for producers, consumers would feel relieved.

Mumbai , Jan. 12

A steep fall in crude oil prices in the last few days and concerns over extremely limited prospects of a major spike anytime soon have unnerved investors in the biofuels industry.

A significant part of the investment in the biofuels sector is premised on continuing high prices of mineral oils.

Indeed, even as the crude market began to ease from its very bullish undertone a few months ago, fresh investments in the alternative fuels started to slowdown.

Many entrepreneurs and investors have been re-assessing the decision since then.

Bioethanol Plants

Currently, in the US alone, there are over 100 bioethanol plants and 33 are under various stages of completion, based almost entirely on corn. Around the world nearly 65 biodiesel plants are said to be under construction.

Vegetable oils — rapeseed oil, soyabean oil and palm oil — are the preferred raw materials.

The crude price decline has surely shocked many as it was widely anticipated that oil producers would not allow prices to plunge.

On the other hand, demand for energy products has been quite healthy, prompted by rising consumption needs in Asia to fuel economic growth.

According to experts, there has been a broad-based move by funds towards the short side.

The WTI front month settled well below the key $55 a barrel level. With prices touching 19-month low, there is reason to believe that the move down in crude oil prices has now become pronounced enough to leave the short-term movement more dominated than usual by technical outlooks.

Cleaner-fuels

There obviously are risks to the downside even from current levels of the crude market. Some analysts see the market declining to as low as $45 a barrel. Whether it will be realised or not and how long current prices would sustain are of course tough to predict.

This makes for a strong likelihood of a serious reassessment of investment decision in what are called cleaner-fuels. A majority of the new projects across the world have come up presumably on expectation of continuing high mineral oil prices and of course some Governmental support.

If crude prices continue to sustain well below $60 a barrel, there would a strong negative impact on global vegetable oil and sugar markets.

In particular, vegetable oil market may see a major price correction. Over the last year or so, traditional food and feed products corn or maize, sugar (via sugarcane) and vegetable oil have been increasingly perceived as energy products.

Downward Movement

A large diversion of vegetable oil for biodiesel purposes has led to prices escalating by 25-30 per cent in recent months. Corn prices, too, have gone through the roof because of its utilisation for bioethanol production, especially in the US.

After hitting record highs in mid-2006, sugar prices corrected down in the wake of excess of supply over demand this year.

All the three markets — corn, sugar and vegetable oil — could come under strain soon. While this would prove negative for producers, consumers would have reason to feel relieved.

For emerging economies such as India that are fighting food and fuel related inflation, the potential of a further downward movement in the prices of crude should indeed be welcome.

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