Tremors in the biodiesel industry could force consolidation, bankruptcies21 February 2008

The biodiesel industry is anticipating a round of consolidation in the next 18 months, according to key industry executives and financiers. After an initial flurry of investment in biodiesel startups, many new companies in the sector are now unable to secure adequate financing.
Plant closings, consolidation and an industry shakeout, coupled with the possibility of buyouts by "vulture funds," may proceed, said James Eiler of Eiler Capital at the recent Biodiesel Finance & Investment Summit in New York. Daniel Oh, CEO of Renewable Energy Group (REG), said smaller plants could benefit from mergers to create economies of scale.
Biodiesel plants producing from 20m to 30m gallons per year will be hit the hardest, as they have neither the economies of scale of very large facilities nor the local contacts of smaller plants, said Chris Sorrells of NGP Energy Partners. He said he believes these plants may gain the most from mergers.
Some of the larger and more established companies like REG, which has approximately 27% market share, may drive consolidation of these midsized plants, Oh said.
Smaller producers like Tri-State Biodiesel acknowledged the challenges facing the industry, and could consider a merger with its joint venture partner Connecticut Biofuels, this news service previously reported.
High commodity prices, a lack of infrastructure, and lack of capital are looming large for the biodiesel industry. The feedstocks soy, palm oil, and animal fat have become increasingly costly, driving down profit margins. Even the Blender's Tax subsidy has not brought biodiesel prices down to parity with diesel, according to Eiler.
Distribution and infrastructure are pressing issues, Oh agreed. Companies like privately held Alternegy and REG have co-located their production plants close to terminals in order to take advantage of existing diesel infrastructure, but Midwestern plants may be hurt by their reliance on freight and trucking to distribute their fuel.
Low demand is also a problem, said Eiler, citing a production capacity 8x in excess of demand. Oh hoped that demand would follow production, saying, "If you make the fuel, it will be bought." Eiler said that offtake agreements, OEM standardization and government mandates could help but may be slow in coming, and companies beginning production in the coming year may be unable to sell their fuel.
Jerry Peters, SVP of Project Finance at TD Banknorth, mentioned that biodiesel production requires a great amount of working capital after the initial investment. Waning investor interest contributed to bankruptcies in the ethanol industry and some fear a similar situation in biodiesel. Ethanol company E3 Biofuels filed for bankruptcy after a technical glitch left the plant unproductive and without cash flow or sufficient financing.
The lack of local infrastructure is also resulting in exports of corn-based ethanol, and may lead to roll-ups in that space as well, said Jeff Kistner, VP of Project Finance at BBI International, at the recent Ethanol Finance Americas conference. He noted that there has been about USD 15bn of investment in the ethanol industry, but capital is no longer flowing in. Investors need to slow down and get their return back, he said.
Meanwhile, international buyers are also keeping their distance. Peters of TD Banknorth said that two to three years ago it was easy to raise money in the UK and in Australia, because both were bullish on biofuels. "I've seen that change significantly," he said. "I don't think that there are any real chances in the future that that lack of financing in the US will be filled by foreign investors because of a low US dollar." Sorrells of NGP agreed, noting that he has not been seeing a lot of foreign money flowing into biodiesel.
The public markets do not appear to be a refuge either. Exit multiples are far lower now than they were a few years ago, said John McKenna of Hamilton Clark & Co. Imperium Renewables, for example, recently cancelled its IPO plans, citing unfavorable market conditions.

by Hana Askren and Heather West

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