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Changing market conditions, or something else?

Biox cans plans to build a 30 MMgy biodiesel facility in New York Harbor
By Ron Kotrba | December 26, 2012

On Dec. 24, Biox Corp. announced it was terminating the land lease agreement with International-Matex Tank Terminals to build a 30 MMgy biodiesel production facility in New York Harbor. The company is spending $700,000 in termination charges to do so. The news followed an announcement in the fall that Biox was suspending production at its Hamilton, Ontario, plant.

The rationale behind terminating the land lease agreement, according to CEO Kevin Norton, was the “significant change in biodiesel market dynamics” since the June 2012 announcement was made to build in New York Harbor. One of the significant changes in biodiesel market dynamics Norton is referring to is the appreciable decline in RIN values this year. But in June, when the company announced it would build in New York Harbor, biodiesel RIN values were already on the decline. Even though RIN values have dropped significantly since June, one might have deduced that the decline that started in spring would continue throughout the year, as 2011’s 1.1 billion gallons of reported U.S. production surpassed the 800 million gallon federal mandate for that year, indicating that obligated parties would be carrying into the 2012 year up to the allowable 20 percent limit. Earlier this month biodiesel RINs were trading at around 56 cents.

Norton says he believes the biodiesel market will return to a rational balance between supply and demand, and that the issues experienced this year are short-term. If this is the case, why would the company terminate long-term plans—particularly at a loss of $700,000—to grow its presence in the North American biodiesel market? It doesn’t seem to make sense, particularly after U.S. EPA finalized its 2013 RVO at 1.28 billion gallons, up 28 percent from last year. Had the RVO for 2013 remained at 1 billion gallons, the decision would have been rather logical. But greater demand via a significantly higher mandate next year indicates a rebound in RIN values will return.

There has to be something more to the story above admitted short-term market fluctuations to affect such a long-term project as construction of a 30 MMgy plant on the East Coast.

Could last month’s announcement that the country’s largest biodiesel producer, Renewable Energy Group, gained biodiesel positions in four terminals in the New York City metropolitan area, essentially giving the firm major outlets for its fuel to the most densely populated region in the U.S., have influenced Biox’s decision to terminate building in New York Harbor? If not, what other plausible reasons might have affected Biox's growth plans? 

 

 

3 Responses

  1. Roman Wolff

    2012-12-26

    1

    Ron, all points well taken. I will give you a small company perspective as to why another small company (Biox) can come to their announced decision given the facts you have outlined. For a small company, a 30 MMGPY biodiesel plant is in fact a long term investment, including the cost of inventory, it can run as high as $45MM. This long term investment may pay out in 3 to 5 years (good return!). However, given the fluctuations and uncertainty in the value of the RINs, a prospective investor can not see any further than 6 months into the future (if that much), and while long term prospects are good, a small company can not weather 6 months of losses ($5MM - $7MM for that size plant) waiting for the upswing. REG, like larger oil companies have the financing available to deal with the ups and downs, since the trend long term is likely to be up and their fixed costs are more distribued. As a result they gain market share in uncertain times. Not very pleasant, but logical.

  2. Mike Corner

    2012-12-26

    2

    Have you seen Biox filings? This co is all about spending tax payers money including the subsidy in Canada. Their general admin is insane for the biodiesel company their size! So I guess their long road show is ending, since there is just so much you can play the industry.

  3. Tres

    2013-01-08

    3

    God help me, I put aside a whole afteonron to figure this out.

  4.  

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