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An Unlikely Impact

Growth of biodiesel has big implications for the oleochemical industry

February 21, 2005 | A version of this story appeared in Volume 83, Issue 8

The U.S. military is a major consumer of biodiesel.
The U.S. military is a major consumer of biodiesel.

The Soap & Detergent Association sponsors an annual $3,000 prize for research into new applications for glycerin. Thanks to a new U.S. law that threatens to create an oversupply of this oleochemical, companies that make it are praying for a really good winner this year.

The American Jobs Creation Act of 2004, signed into law by President George W. Bush on Jan. 1, would not seem to be of much concern to the oleochemical industry. But part of the massive bill is a new tax incentive for using the alternative fuel known as biodiesel.

Biodiesel is a diesel fuel produced by combining vegetable oils or animal fats with methanol in a transesterification reaction that yields a fatty acid methyl ester, known as biodiesel, and glycerin. About three-quarters of a pound of glycerin is produced for every gallon of biodiesel made.

Last year, according to the National Biodiesel Board (NBB), the industry's trade association, the U.S. produced about 30 million gal of biodiesel, primarily for customers like universities and the U.S. military that operate large diesel vehicle fleets. A blend of 80% diesel and 20% biodiesel can be used in conventional diesel engines without modification, proponents say.

The incentive included in the jobs bill is a two-year federal excise tax credit that will trim 20 cents off the price of a gallon of the blend, bringing it close in cost to straight diesel. NBB and its lobbying partner, the American Soybean Association, cite a Department of Agriculture prediction that the incentive will help boost biodiesel demand to at least 125 million gal in the next few years.

The Soap & Detergent Association has been lobbying Congress, so far unsuccessfully, for an amendment that would help offset the bill's impact on oleochemical companies, which make glycerin as a by-product of soap and fatty acid manufacture. Because biodiesel made from tallow qualifies for the tax break, SDA is also concerned that tallow will be diverted from buyers in the U.S. oleochemical industry, rendering them uncompetitive against foreign oleochemical firms that use tropical oils.

The tallow issue aside, the prospect of a flood of biodiesel-based glycerin is sobering to oleochemical companies. They have seen the European biodiesel industry flourish in recent years with the help of similar incentives: European biodiesel production in 2003 rose 35%, to 420 million gal, an output that was accompanied by about 300 million lb of glycerin.

Oleochemical executives like Howard M. Findley, sales manager for Peter Cremer North America, have watched helplessly as the price of glycerin has dropped by almost half over the past few years to less than 50 cents per lb today. Given that the global glycerin market is about 2 billion lb per year, "a billion dollars has been sucked out of the business, almost all because of biodiesel," Findley says.

Now, with the U.S. tax break and talk of palm-oil-based biodiesel plants in Southeast Asia, chemical producers are concerned that even more price erosion is on the horizon. "There's glycerin dripping into the system from every direction," says Norman Ellard, director of global sales at Procter & Gamble Chemicals, one of the world's leading glycerin producers.

But even as firms like Peter Cremer and P&G get their profits pinched by biodiesel, they are also participating in the business. That's because U.S. biodiesel producers fall mainly into two classes: large soybean processors such as Ag Processing Inc. and West Central Soy that have forward-integrated into biodiesel, and chemical firms with transesterification capacity to spare.

Findley's company, the U.S. arm of Cremer Gruppe, a German food ingredients and oleochemical firm, began marketing biodiesel in 2002 through a toll manufacturing agreement with Corsicana Technologies, a small chemical maker that operates a former P&G facility in Corsicana, Texas.

P&G itself began supplying Peter Cremer the following year using excess capacity in its oleochemical network. As Ellard points out, P&G is the world's largest producer of methyl esters, owing to their role as intermediates in the firm's fatty alcohol production process. "We resisted biodiesel for a long time," he says, "but we have the assets, and the business was happening anyway, so we got involved."

Last month, Dow Chemical stepped into the biodiesel arena through a toll manufacturing agreement with World Energy, a Chelsea, Mass., firm that calls itself the U.S.'s premier producer and distributor of biodiesel. Under the deal, Dow is producing up to 24 million gal of biodiesel per year for World Energy at a Dow Haltermann Custom Processing plant in Houston.

World Energy manages four other tolling arrangements that complement its pact with Dow. The company also makes its own biodiesel at an 18 million-gal facility in Lakeland, Fla., that it acquired last year.

Gene Gebolys, World Energy's founder and president, acknowledges the tension between the oleochemical and biodiesel industries, but he says the momentum is behind biodiesel. "If it turns into a battle between biodiesel and glycerin, the part of me in the glycerin business doesn't like the chances against the part of me in the biodiesel business." At the same time, Gebolys says biodiesel firms need to become more enlightened about their relationship to glycerin and the oleochemicals world.

Steve Howell is technical director of NBB and also president of the consulting firm MARC-IV, which conducts feasibility studies for prospective biodiesel producers. Today, Howell says, the biodiesel industry gets about 70% of its revenue from biodiesel and 30% from glycerin. However, he is telling his clients not to count on this ratio in the future. "If you are smart, you are already assuming that glycerin won't be worth very much," he says.

Although the biodiesel and chemical industries have an uneasy relationship over glycerin, they agree on the need for new uses. To this end, at a recent biodiesel convention, NBB's board of directors voted to cosponsor the glycerin contest with the Soap & Detergent Association and to raise the prize money to $5,000.

TRYING TO LOOK on the bright side, Steve McKeown, global director of Crompton's oleochemical business, is counting on new markets to open up as the price of glycerin falls. Glycerin, McKeown notes, is already priced below propylene glycol, a competing polyol that contains one fewer hydroxyl group, and glycerin is starting to be substituted for other polyols in applications where they compete on price.

Above and beyond additional sales in traditional glycerin markets, Howell sees potential for new large-volume uses like aircraft deicing, now dominated by propylene glycol, and automotive antifreeze/coolant, now the province of ethylene glycol.

Scientists at P&G are conducting their own research into new outlets for glycerin. However, any new uses will be cold comfort to Ellard, because they are predicated on glycerin being cheaper than the likes of propylene glycol, long considered a poor relation. "It's an unusual situation, but it may be the way of the future," he says.



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