Biodiesel Trade Wars

Complaints from the European Biodiesel Board are the subject of a serious trade investigation underway across the pond. The Europeans claim U.S.-subsidized B99 imports are causing injury to its domestic biodiesel industry. If the allegations are found to be true, the timing-if nothing else-may be a godsend.
By Ron Kotrba | September 16, 2008
Were it not for the cheap dollar, strong euro, solid biodiesel demand from Europe and highly penetrable European markets, U.S. biodiesel producers likely would be producing far less than they are, which, even so, is only a fraction of what they are capable of. Installed capacity is always greater than actual production, but in the United States the disparity today between installed capacity and actual production is largely due to the high cost of soybean oil and other feedstocks. But the other side of the equation-the end-market demand-also needs to be in place and, so far, biodiesel is not moving in the United States as it is in Europe. The U.S. federal blender's tax credit gives a penny per 1 percent of biodiesel blended, so naturally blenders blend as little petroleum as possible into B100 to maximize the credit's value. Without the incentive, "B99" as we know it would not even exist.

Globalization, multinational corporatism and a world full of middle men can make trade issues into indiscernible shades of grey. Some U.S. biodiesel producers also crush rapeseed or soybeans and make biodiesel in Europe. Then there are multinational producers operating in the United States who are getting feedstock from Canada, processing it into biodiesel and then shipping it to Europe as U.S.-subsidized B99. And then there are producers who make B100 outside the U.S. borders, ship it to an American port and splash it with a drop of diesel, then it's off to Europe-the splash-and-dashers. However the U.S.-subsidized fuel gets to Europe, it may be subject to even greater subsidization once it
arrives there.

On June 13, the European Union launched an investigation into B99 imports from the United States. Complaints lodged by the European Biodiesel Board against U.S. producers on April 25 initiated the investigation. According to the European Commission, biodiesel imports into Europe increased from 2.1 million gallons in 2005 to 300.2 million gallons in 2007. The EC also states imports of biodiesel into Europe come mainly from the United States, with other imports accounting for a minor share of the market. The U.S. biodiesel industry only produced 500 million gallons in 2007.

The Complaint
The EBB's announcement of complaint earlier in April, characterized the situation as such: "The unfair competition from U.S. B99 is price-setting and has progressively disrupted the margins of European biodiesel producers, putting most of them out of business. Consequently, the important E.U. biodiesel production capacity has remained largely unutilized in 2007 and production has increased at a much lower rate than in the previous years." Attempts by Biodiesel Magazine to get comments directly from the EBB went unanswered.

Two months later, the EBB at least attributed a portion of its industry's woes on something other than unfair trade. On June 25, the EBB released data on the "injury" visited upon its domestic biodiesel industry thanks to what the organization characterized as "market conditions and competition from U.S. B99 imports." As of July 2008, 214 plants representing 4.8 billion gallons of production capacity exist in Europe, but 900.6 million gallons of that sits idle "due to the lack of a viable market for biodiesel in Member States,"
the EBB states.

Last year in a meeting of the European Council it was agreed that Europe would substitute 10 percent of its fuel use with biofuels by 2020. Part of the EBB's complaint states that unfair trade is interfering with achieving that goal. European biodiesel production increased from 1.47 billion gallons in 2006 to only 1.71 billion gallons in 2007-a diminished growth-rate when compared with the 54 percent leap in production that occurred from 2005 to 2006, and the 65 percent increase in output from 2004 to 2005. The EBB mentions
nothing of the comparable slowdown in growth of the U.S. biodiesel industry within the same time frame.

Production has decreased in six of the 26 E.U. member states since 2006 "and has stagnated in many other countries , [which] highlights the negative change in market conditions in 2007, showing the difficulty for E.U. producers to compete with unfair B99 imports from the U.S."

It's not just the federal blender's credit the EBB takes issue with. In its complaint to the commission, the organization mentions the federal excise and income tax credits, federal grant programs to finance increased production capacity, and a number of various state subsidies, all of which it claims create a nonlevel playing field making European-produced biodiesel unable to compete with U.S. imports.

The Investigation
From its preliminary examination the E.U. found sufficient prima facie evidence to initiate the anti-dumping/anti-subsidy investigation. "Anti-subsidy investigations are 'business as usual' in terms of bilateral trade regulations," according to an official with the EC. Over the past 20 years, the United States has carried out approximately 30 anti-subsidy investigations against E.U. products, including steel, pasta, uranium and flowers.

Shortly after the investigation was initiated, the EC sent initial anti-dumping/countervailing anti-subsidy questionnaires to a number of U.S. biodiesel interests. A smaller sample was selected from those companies that demonstrated a willingness to participate. Summertime reports from the Oil Price Information Service listed seven U.S. biodiesel producers, including Archer Daniels Midland Co. and Cargill Inc. as being implicated in the investigation. When asked about these reports an EC official said that names of companies under investigation aren't divulged during such investigations. In attempting to get comments from ADM and Cargill on the matter, Cargill ignored requests altogether while ADM said that this is not something ADM would typically offer comment on.

The EC official says exporters/producers in the United States were requested to make themselves known within 15 days of the investigation's onset. "Having received data from around 60 U.S. producers/exporters, it was decided to limit the investigation to a reasonable number of companies who, in terms of turnover, would be representative of the U.S. biodiesel industry," the official says. The EC consulted with "relevant [U.S.] authorities" and "representatives of [U.S.] biodiesel producers" to help reduce those 60 companies down to a representative sample of seven companies. The investigators will review the relevant data from that sample of seven U.S. producers/exporters. The sampled companies have until September to complete and submit their replies to the questionnaires. At the same time, the U.S. government and the National Biodiesel Board will be submitting their own arguments to the European Commission.

The topic of investigation is unfair trade, and to determine if the allegations are substantive, the EC uses three criteria as required by the World Trade Organization: has subsidization taken place; has the European community of biodiesel producers been materially injured; and are subsidized imports the cause of the material injury? On top of the WTO requirements, the European Union applies a fourth condition called "the public interest test." An EC official tells Biodiesel Magazine, "According to this test, an appraisal of the various interests-namely those of the domestic industry, users, importers and consumers-taken as a whole is made and measures may not be imposed when it is concluded that it is not in the so-called 'community interest' to apply these measures To be clear from the outset, any measures that may be imposed as a result of the E.U. investigation do not intend to stop imports from the United States, but rather to restore a level playing field." The Official Journal of the European Union states, "The allegation of dumping is based on a comparison of normal value established on the basis of domestic prices, with the export prices of the product concerned when sold for export to the Community. On this basis, the dumping margin calculated is significant."

The deadline for the EC to take any provisional measure is March 13, 2009. A final determination must be made no later than four months after that.

EU Biodiesel Industry Estimated Production (2006-'07)
Installed Production Capacity (2007-'08)



Considerations
Several U.S. biodiesel producers, who directly or indirectly export biodiesel to Europe, chose not to comment for this article. In publicly available Securities and Exchange Commission 10-Q filings found on the Internet, Western Iowa Energy LLC in Wall Lake, Iowa, whose fuel is marketed by Ames, Iowa-based Renewable Energy Group, expressed concerns about the ongoing B99 investigation. The document reads, "International sales by REG results in a significant portion of our sales to REG being exported to Europe." When REG was asked to comment on this, company spokesperson Sara Taylor says REG does not export fuel to Europe directly but rather buys fuel from and sells fuel to a lot of different companies, and that REG doesn't always know where the fuel ends up.

There are some important points, however, that the EBB fails to mention as potential reasons its biodiesel industry's growth has slowed in recent times. Rapeseed oil is the predominant feedstock in Europe, and it costs more than soybean oil-the dominant U.S. feedstock-which helps to make U.S. biodiesel more competitively priced. A biodiesel industry source says the German government's decision to revoke the preferential excise tax treatment afforded to biodiesel has had a damaging affect on biodiesel producers in Europe. This source also says, "The sub-par business performance and practices of several high-profile European companies listed in the trade complaints have nothing to do with U.S. competition Ironically, several of the European companies that joined in the trade complaints were and still remain active in the trade of U.S. biodiesel." As mentioned earlier, ADM and Cargill were said to be two of the seven companies sampled. Interestingly, an ADM representative and a Cargill representative each sit as vice presidents of the EBB-the original complainant.

The EBB took its gloves off and said, "Subsidized B99 exports are a trade practice that is not only breaching WTO rules but also threatening the very concept of international trade in biodiesel. This is undermining the potential of biodiesel production as a powerful tool in the fight against climate change."

"The European biodiesel industry is not being harmed by U.S. competition and the trade complaints filed by the European Biodiesel Board are nothing more than a protectionist move to shield its members from U.S. competition," says Manning Feraci, vice president of federal affairs for the NBB. "High feedstock costs, changes to EU member policies-and in some cases-poor business practices are the true issues facing European biodiesel producers. It is unfortunate that the EBB has found it politically expedient to blame the U.S. biodiesel industry instead of focusing its efforts on the true challenges facing its membership."

If it is found that U.S. B99 has caused injury to European producers, the timing couldn't be better. Duties would be imposed on U.S. B99 entering Europe the same year a mandate-driven market is being implemented in the United States, thanks to the renewable fuels standard in the 2007 Energy Independence & Security Act. In 2009, 500 million gallons of biomass-based diesel, which includes biodiesel, is required to be blended into U.S. diesel fuel supplies. If the economic viability loophole isn't exploited, this volume increases to 650 million gallons in 2010, 800 million gallons in 2011 and 1 billion gallons by 2012. But if the blender's tax credit extension in H.R. 6049, which passed the House, isn't pushed through the Senate and signed into law soon, things could go from ugly to worse real fast.

Ron Kotrba is a Biodiesel Magazine senior writer. Reach him at rkotrba@bbiinternational.com or (701) 738-4942.
 
 
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