biofuels.jpgChina's biofuel industry is alive and well, despite the global slowdown and tumbling oil price. That's the conclusion of a recent Frost & Sullivan report which predicts the Chinese biofuel market — the third largest behind the US and Brasil — will grow by 9% this year.

The consultancy estimates that China produced more than 360 kilotons of biodiesel and 1,620 kilotons of bioethanol in 2008. Interestingly, Frost & Sullivan highlights supply-side issues rather than softening demand as the greatest concern for China's biofuel industry, at least in the next year or so.

Frank Xie, a Frost & Sullivan researcher, says:

For 2009 and 2010, the shortage of feedstock remains the top challenge for the Chinese bio-fuel industry. However, most of these shortages can be resolved as more entrepreneurs join the market in the forecasted period. “

As EngagingChina has written in the past, China's biofuel sector was held back initially by government fears that if promoted too vigorously, it would compete for land with food producers.

To address this concern, Xie says that bioethanol producers are now moving from corn and wheat to non-food celluloses and potatoes. For bio-diesel, the unstable supply of waste cooking oil may threaten the continuity of biodiesel production, he warns as only some leading bio-diesel producers have effectively managed the supply chain to ensure the stable supply of feedstock..

According to Xie, government support is vital for the healthy development of the Chinese biofuel industry. Subsidies, tax exemptions, or allowances help increase the competitiveness of producers as well as ensure their continuous development.

In December 2008 regulations released by the Chinese government announced that biodiesel companies which utilise waste animal and vegetable oils as feedstock can apply for refund of value-added tax.

Such measures could benefit the many small biofuel suppliers in China who now find themselves struggling against currently unfavourable winds. One such, London-listed China Biodiesel International recently confirmed that both its Longyan and Xiamen subsidiaries have qualified for the refund, which should lead to it paying lower tax and achieving potentially higher margins.

The firm, the only China biodiesel play listed in London, recently reported that sales volume in H2 2008 dropped almost 12% to just over 11,850 tons compared to H1 2008. Revenues were further hit by falling average prices — down 5.4% over the same period.

CBI's chairman Huodong Ye nevertheless prefers to look ahead, saying:

We are confident that the financial performance of the Company will improve during the year as a more mature product mix is released into the market, our brand is further acknowledged and the recent preferential tax policies are implemented.”

More EngagingChina stories on biofuels here.

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