The future of bioenergy is uncertain

Thread Content

Repost: Bioenergy has brought good luck to the listed company, but it does not seem to have led to significant financial gains, at least for now. As the leader in the domestic biomass fuel sector, Fengyuan Biochemical (000930), which has a production capacity of 440,000 tons of fuel ethanol, would not have achieved profitability from its bioenergy assets without subsidies. Even due to the lack of **approval, Beihai Guofa’s bioenergy project has become a heavy burden. As the largest producer of fuel ethanol in the country, Fengyuan Biochemical ensures a stable supply of fuel alcohol to the entire province of Anhui, 7 cities in Shandong Province, 5 cities in Jiangsu Province, and 2 cities in Hebei Province. It was precisely because of the company’s dominant position in the domestic fuel ethanol market that, at the end of 2006, COFCO Group invested 1 billion yuan to acquire Fengyuan Biochemicals. The goal was to expand its presence in the fuel ethanol sector and become a leader in the bioenergy industry. This acquisition enabled COFCO Group to obtain three out of the four production licenses for fuel ethanol in China, giving it control over 70% of the country’s fuel ethanol production capacity. Initially, fuel ethanol production in our country was used to process aged grains such as corn and wheat, with corn being the primary source. However, as the production scale of fuel ethanol expanded and other forms of grain processing advanced rapidly, the stock of aged grain was exhausted, leading to an increasing demand for new grain. China’s grain supply has shifted away from its previously more relaxed state, becoming increasingly strained, to the point where it affects food security. In this context, in September 2007, the National Development and Reform Commission issued the \"Guiding Opinions on Promoting the Healthy Development of the Corn Processing Industry,\" ordering that during the 11th Five-Year Plan period, no regions were allowed to build biofuel ethanol projects under the pretext of corn processing, nor to expand corn processing capacity recklessly. At the same time, a comprehensive review of projects that are under construction or planned to be constructed will be carried out; projects that have been registered but not yet built will have their work halted. The use of non-grain crops as raw materials for the production of fuel ethanol is encouraged. The introduction of this policy has placed the company under dual pressure regarding raw materials and costs. At present, the fuel ethanol produced by Fengyuan Biochemical still uses corn as its main raw material, and it relies on **financial subsidies to remain profitable each year. The company’s annual report for 2008 showed that its revenue from fuel ethanol and its by-products amounted to 2.348 billion yuan, accounting for 48.90% of its total business revenue, with a gross margin of -16.05%. Since during the reporting period, the company’s subsidy standard for fuel ethanol remained at 2,251 yuan per ton, as set in 2007; based on a simple calculation using the company’s production capacity of 400,000 tons, the subsidies allocated to this business during the reporting period amounted to as much as 900 million yuan. It is evident that the company’s operations in this area rely heavily on **flexible subsidy policies for designated biofuel ethanol production enterprises**. In 2007, the company was able to turn a profit, largely thanks to the 430 million yuan in financial subsidies for fuel ethanol it received that year. According to analyses, there is also a significant difference in production efficiency between China and the United States in terms of fuel ethanol production. China requires 12 tons of water to produce 1 ton of ethanol, while the figure in the United States is 1.8 tons ； China needs 3.3 tons of corn to produce 1 ton of ethanol, while the conversion rate in the United States is 2.8; moreover, China generates much higher levels of pollutants from ethanol production compared to the United States. Therefore, compared to the United States, China currently has higher production costs for fuel ethanol, lower prices, and high energy consumption; ethanol production must rely on **subsidies in order to break even or be profitable. Moreover, our country’s grain production will struggle to meet the rapid growth in demand for fuel ethanol. Therefore, it is plant fibers represented by straw that bear the responsibility of transforming China’s energy structure. Developing industrial technologies for the large-scale production of bioethanol from lignocellulosic biomass is the fundamental solution to the problems of high costs and limited availability of raw materials for fuel ethanol. To reduce costs, many companies are trying to produce bioenergy using materials such as cassava and jatropha. Beihai Guofa?600538? is a prominent listed company in China that produces fuel ethanol using cassava as raw material. According to a research report by Shen Yin Wan Guo, Beihai Guofa once did not have a clear primary business focus. However, after acquiring 100% of the shares in Guangxi Guofa Biological Energy Co., Ltd., the company set out to shift its main focus toward the biofuel industry; in the future, biofuels will serve as a source of revenue for the company. However, those once beautiful dreams were ruined when the fuel ethanol project was not approved in time, leaving the company in a difficult situation where it could no longer repay its debts. On July 18, 2008, Hainan Yidao (600238) issued a announcement stating that it intended to cooperate with a large state-owned petrochemical enterprise to carry out the \"100,000-ton fuel ethanol project,\" which would utilize cassava as raw material to produce 100,000 tons of fuel ethanol and 20,000 tons of liquid carbon dioxide (food-grade) per year. The total investment for this project was estimated at around 350 million yuan. However, its progress is slow. The 2008 annual report stated, “Make full preparations for the commencement of the fuel ethanol project.” ” Guofeng Suiye is attempting to make breakthroughs in the production of bioenergy from jatropha trees. At the end of 2006, the first phase of the biodiesel project owned by the major shareholder Guofeng Group came online; it was the largest biodiesel project planned in China at that time. As a result, the market speculated that this asset would be injected into a listed company, but to this day, nothing has been resolved.