Bad news from London-listed China Biodiesel International offers a salutary lesson for investors in faddish sectors like biofuels.

China, more than any country could do with some greener alternatives to fuel its rapidly growing economy. But biodiesel's attractions have waned because of a rise in the price of the feedstock — used cooking oil — that CBI uses to make its fuel.

The average price per ton that CBI pays for its feedstock has risen in the past six months by 18% from 2,800 to 3,300 yuan. But the selling price for diesel has remained stable. You don't need an MBA to guess the next bit. Sure enough, gross margins have fallen and the company today issued a profit warning. It does not expect the price of feedstock to drop back in the near future.

On a brighter note, the construction of its second plant in Longyan is almost complete, and the new plant at Xiamen is scheduled to start production later this year. The company said it has built relationships with feedstock providers both inside and outside China to secure supply when the new plants start production.

The new capacity will allow CBI to export more and so achieve higher prices on the international market.

China's policy objectives are to produce 12m tons biofuels, including ethanol and biodiesel, annually by 2020, pushing it up to 15% of the nation's transportation fuel use. Current production is around 1m tons.

EngagingChina wrote about China Biodiesel and its IPO on London's AIM market last year in this story.

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