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Investing in a policy-mandated market, you might think, should make for a comfortable ride. When customers are forced to buy one’s product, there should be easy money to be made. Yet, as the ructions in the European biofuels market show, that is not necessarily the case.
Just listen to the sound of spluttering corporate engines. Shell on Tuesday announced it was temporarily suspending construction work at its 820,000 tonnes a year biofuels facility in the Netherlands, amid technical challenges and concerns about the current market slump. BP has recently scaled back its own biofuel plans, pausing work on two planned refineries. Meanwhile, Finland’s Neste, the world’s leading producer of sustainable aviation fuel and biodiesel, warned on profits in June. Its stock has fallen by half over the past 12 months.
One problem is that biofuel demand relies on government mandates. Biodiesel and green jet fuel cost two to three times as much as comparable fossil fuel-derived products. Consumption is driven by the commitments European countries have made to “blend” a small but growing percentage of green fuel into the traditional kind. The trouble is governments are prone to flip-flopping — on green targets along with much else.
Look at Sweden’s decision last year to row back on its ambitious sustainable fuel mandates in an effort to combat a cost of living crisis. That, thinks Irene Himona at Bernstein, lopped perhaps 1mn tonnes off a European biofuel market of 26mn tonnes — although part of the gap will be made up by demand growth elsewhere.
Another concern is that European companies are not the only ones to have spotted an opportunity in biofuels. Chinese companies have jumped on the bandwagon. Imports of cheap Chinese products into the European market rose to 1.8mn tonnes in 2023, says the European Biodiesel Board, leading to a collapse in profitability. The EU is investigating allegations of dumping, and is due to update on any potential duties this month.
Over time, the biofuels market should find some momentum. European rules target an increase in the share of renewable fuels in transport to at least 14 per cent by 2030, which implies hefty demand growth. There is room yet for European oil and gas majors to make good on their energy transition promises.
But the current market is in gridlock. That is a cautionary tale for anyone thinking that government mandates mean a smooth lift-off for new technologies.
