Argentina: A Win-Win Situation

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Building on its position as a global leader in oilseed production, in just under four years Argentina has made an astonishing catch-up with some of the more mature biodiesel producers such as Germany. It now ranks as the fifth largest producer and largest global exporter. Neighboring Brazil has become a global leader in ethanol production, and Argentina is poised to take on the same role in biodiesel. And the prospects for the sector have never been brighter-not only is global demand rising on the back of biofuel mandates, but also Argentina introduced its own mandatory B5 mix in March, creating a large domestic market for biodiesel and putting the country on a par with the most advanced economies in terms of its energy policy. For those considering investing in the Argentine biodiesel sector, it is effectively a one-way bet.

Argentina's main soybean-growing region is concentrated within a radius of 200 kilometers of the port of Rosario in Santa Fe province. With plentiful soybean supplies, Rosario constitutes the largest oilseed processing cluster in the world. The sector as a whole has a crushing capacity of more than 150,000 metric tons per day, with some excess capacity. Benefiting from economies of scale and ultramodern technologies, plants are highly efficient. An added advantage is the excellent logistics, in particular the modern port facilities at the mouth of the Paraná River adjacent to the crushing complexes.

Facilities based in the province have an installed capacity to produce 2.5 million tons (approximately 750.5 million gallons) of biodiesel annually, with more than a dozen firms involved in production. Unquestionably, Argentina has the competitive advantage to emerge as an undisputed global leader in biodiesel production.


Investment Surge, Strong Institutions Emerge

Concerns over emissions and security of supply led Argentina to pass federal law 26093 in 2006 to promote the use and production of biofuels. Since passage of the law, which gave the biodiesel sector a strong legal foundation, the industry has seen an enormous inflow of investment. And support has not stopped at the federal level. Provincial governments such as that of Santa Fe have also been proactive in their support, putting in place promotional regimes for biofuels research and development along with the production and use of renewable energy-related products.

Strong industry groups such as the Argentine Renewable Energies Chamber (CADER), presided over by Carlos St. James, have emerged, giving the industry the opportunity to influence policymaking.

Large oil crushers were the first to take advantage of the opportunities in the sector. Based on their large crushing facilities, in addition to their strategic location next to ports, international trade networks and ready access to feedstock, it was a relatively straightforward transition. A good example of this is Renova SA, a joint venture between the long-established Argentine oilseed processing company Vicentin and Swiss commodities group, Glencore. This segment of the market has an installed capacity of more than about 850,000 tons annually, and is virtually working at full capacity.

Taking advantage of the enormous opportunities in the market and the already competitive edge held by Argentina in biodiesel production, many new independent players have emerged in the past couple of years with installed production capacity now equating to more than 570,000 tons per year. In general, these new companies have strong financial backers, excellent production facilities and are well-positioned near key ports. While for the most part they do not have crushing facilities of their own, many of them have entered into long-term contracts with large oilseed crushers, taking advantage of the excess capacity in the sector.

One of these successful new companies among the many new independent players in Argentina's biodiesel sector is Rosario Bioenergy, which was awarded a quota to supply the domestic market. Financed by Argentine, Irish, Swiss, French and Italian capital, it recently started production at its state-of-the-art facility in Roldán on the outskirts of Rosario. Driven by a vision of environmental sustainability, its founders, led by Federico Pucciariello, president and principle shareholder, have created the first production facility in Argentina that does not use fossil fuel in the production of biodiesel. As a further manifestation of its green credentials, the company is spearheading a pilot program for the conversion of used vegetable oil from restaurants and hotels in Rosario to biodiesel.


EU Requirements Will be Significant

Hitherto, the Argentine sector has been highly export-orientated, with an estimated 1.2 million tons exported in 2009, most of which went to the EU. Since July, the European biodiesel industry has been vigorously lobbying for a halt to Argentine biodiesel imports, claiming they are suffering from unfair competition. A particular target for the campaigners has been Argentina's use of Differential Export Taxes. Unprocessed soybeans are taxed at 35 percent of their free-on-board (FOB) price compared to a rate of 17.5 percent for soy-based biodiesel. DETs have long been a feature of Argentine fiscal policy and an important tool in incentivizing the creation of a value-added processing industry, generating much needed employment. And such taxes are fully compliant with World Trade Organization rules.

If the EU is to meet its binding target that 10 percent of fuel consumption in its transport sector should come from renewable sources by 2020, it is estimated that, at least, this will require production levels of 30 to 35 million tons of biodiesel per year. But EU production is falling far short of this target. Encouraged by support from the European Commission and member states, a big increase in capacity has taken place over the past few years-but half of this capacity is idled because of insufficient demand, shortages in rapeseed oil for feedstock or inefficiencies, making it difficult to compete with more efficient producers such as those in Argentina.

Even if this campaign from the European Biodiesel Board and its members is successful, and restrictions on Argentine exports to the EU are put in place, it is hard to see how such a policy would be sustainable in the medium-term. It is fanciful, however, to think that the EU can meet its targets without resorting to imports, and Argentina is in a very good position to help make up this deficit.


China: A Growing Need for Biodiesel

Europe is not the only prospective market for Argentine biodiesel. Excellent prospects also abound in China, where more than 24 percent of vehicles run on diesel. With soaring vehicle ownership and escalating oil import requirements, China is also looking at alternative fuel supplies. By 2020, the government has set a target of 12 million tons of biofuel production, amounting to 2 percent of the country's total oil consumption. But with problems surrounding the lack of feedstock and the conflict of trying to feed itself, China will undoubtedly need to import biodiesel. Indeed, according to the CADER, Chinese companies have already started to look at the Argentine market as a potential source of imports.


Argentina's Own Domestic Demand

While the main market for Argentine biodiesel has up to now been almost exclusively export-oriented, its internal market has just come into being and will expand over the next few years. Argentina holds a huge potential domestic demand for biodiesel. Thanks to favorable tax policies introduced at the beginning of the 1990s, diesel fuel is the most widely consumed fossil fuel in Argentina with around 67 percent of cars, trucks and farm machinery powered by diesel.

In February, the Argentine federal government awarded production quotas of 860,000 tons-representing 35.7 percent of the country's installed capacity-to 19 companies for supplying the domestic market, enabling implementation of the mandatory B5 requirement. Four companies were awarded 45 percent of the internal quota of biodiesel (UnitecBio, Viluco, Explora and Diaser), with the remaining 55 percent awarded to the rest, including large independents such as Rosario Bioenergy, Biomadero and AOM.

Besides setting the technical requirement for biodiesel, the government has also set the price by which the companies can sell biodiesel to the internal market. Currently set at 2.90 Argentine pesos ($0.75) per liter, it is deemed profitable and will give businesses the ability to plan with certainty.

Over the next four years, the mandatory biodiesel requirement will increase incrementally to 20 percent by 2014, creating an enormous domestic market and making it an excellent opportunity for investors.


Feedstock Diversification

While there is still scope for significant expansion in the soybean sector, inevitably at some point sustainable soy production will reach its limit, resulting in feedstock supply constraints. It is very encouraging, however, to see that Argentina is beginning to plan for that eventuality. The government agency, Instituto Nacional de Tecnología Agropecuaria, has carried out jatropha trials in areas not suited for soy production in the provinces of Salta, Misiones and Formosa. Research is also taking place at Universidad Nacional de la Patagonia San Juan Bosco, in Trelew, Cubut, in collaboration with Italian researchers looking at the potential of using microalgae for biodiesel production.

John Kennedy is an independent economic consultant based in London. Reach him at +44 77898 61880 or [email protected].