Profitability aspects of biofuel manufacturers in the Republic of South Africa, 2006 Submitted

Profitability aspects of biofuel manufacturers in the Republic of South Africa, 2006 Submitted
Profitability
aspects of biofuel manufacturers
in the Republic of South Africa, 2006
Submitted in partial fulfilment
Administration
of the requirements for the degree Master of Business
in the Faculty of Economic and Management Sciences, University
Pretoria, Pretoria, Republic of South Africa
© University of Pretoria
of
I, Evert Janse van Rensburg, herewith declare that the language in this research report has
been edited by Mrs. Idette Noome.
Signed:
'6b6j
Declaration
Acknowledgements
List of figures
List of tables
Definition of terms and abbreviations
CHAPTER 1 -
PROBLEM STATEMENT, RESEARCH OBJECTIVES AND
METHODOLOGY
1.1
PROBLEM STATEMENT
1
1
1.1.1
Introduction
1
1.1.2
The oil industry
1
1.1.3
Limited information on aspects of biofuel profitability
3
1.2
FIELD OF STUDY
4
1.2.1
Outline of the field of study
4
1.2.2
Elements of the field of study
4
1.2.2.1
Strategies
4
1.2.2.2
Value chain management
5
1.2.2.3
Competitive forces in the biofuel industry
7
1.2.2.4
Macro-environment forces
8
1.2.2.5
Forces that affect the profitability of biofuel manufacturers
8
1.3
DEFINITIONS USED IN THIS REPORT
8
1.3.1
Biofuel
8
1.3.2
Biofuel manufacturer
9
1.3.3
Profitability
9
1.4
OBJECTIVES OF THE STUDY
10
1.5
ASSUMPTIONS AND DELIMITATIONS
11
1.6
OUTLINE OF THE REPORT
12
1.6.1
Part 1: Introduction to biofuel manufacturing in South Africa
12
1.6.2
Part 2: Biofuel manufacturer value chain activities
12
1.6.3
Part 3: Competition in the biofuel industry
12
1.6.4
Part 4: Macro-environment of biofuel manufacturers
13
1.6.5
Part 5: Related matters that influence the profitability of biofuel manufacturers13
1.6.6
Part 6: Closing remarks
13
CHAPTER 2 -
BIOFUEL, MANUFACTURING PROCESSES AND
CAPITAL INVESTMENT
2.1
INTRODUCTION
15
15
2.1.1
Biofuel
15
2.1.2
The use of biofuels in the past
15
2.1.3
Biofuel energy value
16
2.2
NECESSITY OF MANUFACTURING BIOFUEL IN THE SOUTH AFRICAN
CONTEXT
18
2.2.1
Fuel imports
18
2.2.2
Environmental considerations
19
2.2.3
Agricultural development
19
2.2.4
Closing remarks on the necessity of local biofuel manufacturing
21
2.3
BIOFUEL MANUFACTURING PROCESSES
2.3.1
Bio-ethanol
21
21
2.3.1.1
Acid hydrolysis and the fermentation of wood or straw
22
2.3.1.2
Malting and the fermentation of wheat
22
2.3.1.3
Fermentation of maize
23
2.3.1.4
Fermentation of sugar cane or sugar beet
23
2.3.2
Biodiesel
24
2.3.2.1
Esterification of vegetable oil
24
2.3.2.2
Gasification and the Fisher-Tropsch processing of wood and straw
25
2.3.3
2.4
Closing remarks on manufacturing processes
ESTIMATED CAPITAL INVESTMENTS
26
26
2.4.1
Introductory remarks
26
2.4.2
Turn key biodiesel plant: Shaval BioDiesei
27
2.4.3
Ethanol Africa (pty) Ltd - bio-ethanol manufacturer
27
2.4.4
Total capital investment of a small biodiesel manufacturer
29
2.5
CLOSING REMARKS
CHAPTER 3 -
FEEDSTOCK FOR BIOFUEL MANUFACTURING
32
34
3.1
INTRODUCTION
34
3.2
CONSISTENT SUPPLY OF FEEDSTOCK
34
3.3
LOCATION OF BIOFUEL MANUFACTURING PLANTS
35
3.4
CROP PRODUCTION, BIOFUEL CONVERSION YIELDS AND COSTS
3.4.1
Maize as a feedstock for biofuel
35
36
3.4.1.1
Maize production
36
3.4.1.2
Biofuel yields from maize
37
3.4.1.3
Cost of maize
37
3.4.1.4
Cost of biofuel from maize
39
3.4.2
Sunflowers as a feedstock for biofuel
39
3.4.2.1
Sunflower production
39
3.4.2.2
Biofuel yields from sunflowers
40
3.4.2.3
Cost of sunflowers
40
3.4.2.4
Cost of biofuel from sunflowers
42
Soybeans as a feedstock for biofuel
42
3.4.3
3.4.3.1
Soybean production
42
3.4.3.2
Biofuel yields from soybeans
43
3.4.3.3
Cost of soybeans
44
3.4.3.4
Cost of biofuel from soybeans
46
Wheat as a feedstock for biofuel
46
3.4.4
3.4.4.1
Wheat production
46
3.4.4.2
Biofuel yields from wheat
47
3.4.4.3
Cost of wheat
47
3.4.4.4
Cost of biofuel from wheat
49
3.4.5
Jatropha curcas as a feedstock for biofuel
49
3.4.5.1
Jatropha curcas production
49
3.4.5.2
Biofuel yields from jatropha curcas
49
3.4.5.3
Cost of jatropha curcas
50
3.5
3.6
COMPARISON BETWEEN MAIZE, SUNFLOWERS, SOYBEANS, WHEAT
AND JA TROPHA CURCAS AS A FEEDSTOCK
50
CLOSING REMARKS
52
CHAPTER 4 -
BIOFUEL SALES
53
4.1
INTRODUCTION
53
4.2
FUEL PRICE AND CONSUMPTION
53
4.2.1
Oil price
53
4.2.1.1
Barrels, the measuring unit of oil
53
4.2.1.2
Trends in crude oil prices
54
4.2.1.3
The impact of world events on oil prices
56
4.2.2
Oil demand
60
4.2.3
Oil supply
62
4.2.4
Economic forecasts on petroleum fuel
63
4.2.5
Fuel prices in the Republic of South Africa
65
4.3
BIOFUEL PRICES
66
4.4
BIOFUEL DEMAND
67
4.5
CLOSING REMARKS
68
CHAPTER 5 -
REVENUES FROM BY-PRODUCTS AND EXPENSES FOR
BIOFUEL MANUFACTURERS
69
5.1 INTRODUCTION
69
5.2 SALE OF BY-PRODUCTS
69
5.2.1
69
Animal feed as a by-product of biofuel manufacturing
5.2.1.1
Animal feed as a by-product of maize
69
5.2.1.2
Animal feed as a by-product of sunflowers
70
5.2.1.3
Animal feed as a by-product of soybeans
70
5.2.1.4
Animal feed as a by-product of wheat
70
5.2.2
Glycerine as a by-product of biodiesel manufacturing
71
5.2.2.1
Glycerine as a by-product of sunflower and soybean processing
71
5.2.2.2
Glycerine as a by-product of jatropha curcas processing
72
Organic fertiliser as a by-product of biofuel manufacturing
72
5.2.3
5.2.3.1
Organic fertiliser as a by-product of jatropha cur cas processing
72
5.3 EXPENSES RELATED TO THE MANUFACTURE OF BIOFUEL
73
5.3.1
Methanol used in biodiesel manufacturing
73
5.3.2
Caustic soda used in biodiesel manufacturing
73
5.3.3
Biodiesel additives used in biodiesel manufacturing
73
5.3.4
Financing cost in manufacturing biodiesel
73
5.4 SUMMARY OF SALES AND EXPENSES IN BIOFUEL MANUFACTURING
5.5
75
COMPARISON BElWEEN THE NET COST OF BIODIESEL AND
THAT OF PETROLEUM DIESEL
5.6 CLOSING REMARKS
CHAPTER 6 -
COMPETITIVE
77
78
FORCES AND STRATEGIES
81
6.1
INTRODUCTION
81
6.2
COMPETITIVE FORCES
81
6.2.1
Other existing biofuel manufacturers
83
6.2.2
Potential new biofuel manufacturers
83
6.2.3
Alternative energy products
85
6.2.3.1
Opening remarks
85
6.2.3.2
Petroleum fuel: oil
86
6.2.3.3
Petroleum fuel: coal and natural gas
90
6.2.3.4
Wind power
91
6.2.3.5
Solar power
91
6.2.3.6
Hydro power
91
6.2.3.7
Nuclear power
92
6.2.4
Feedstock producer bargaining power
92
6.2.5
Customer bargaining power
93
6.2.6
Closing remarks on competitive forces
94
6.3
COMPETITIVE STRATEGIES FOR BIOFUEL MANUFACTURERS
95
6.3.1
Introductory remarks
95
6.3.2
Key success factors
96
6.3.2.1
Biofuel attributes
96
6.3.2.2
Resource management
98
6.3.2.3
Marketing
98
6.3.2.4
Capabilities
98
SWOT analysis
99
6.3.3
6.3.3.1
Strengths
99
6.3.3.2
Weaknesses
99
6.3.3.3
Opportunities
101
6.3.3.4
Threats
101
6.3.4
Generic competitive strategic approaches
101
6.3.4.1
Low selling price strategy
102
6.3.4.2
Broad differentiation strategy
102
6.3.4.3
Focused market, low selling price strategy
103
6.3.4.4
Focused market, differentiation strategy
103
6.3.4.5
Best selling price strategy
103
6.3.4.6
Closing remarks on strategic approaches
103
6.3.5
Complementary strategies
104
6.3.5.1
Strategic alliances
104
6.3.5.2
Mergers and acquisitions
104
6.3.5.3
Backward or forward integration
104
6.3.5.4
Outsourcing
105
6.3.5.5
Offensive moves
105
6.3.5.6
Defensive moves
105
6.3.6
Functional area support strategies
106
6.3.7
Timing strategic moves
106
6.4
CLOSING REMARKS
PART IV -
107
ELEMENTS OF THE MACRO-ENVIRONMENT
OF BIOFUEL
MANUFACTURERS
CHAPTER 7 -
GOVERNMENTAL
108
FORCES THAT INFLUENCE BIOFUEL
MANUFACTURERS
109
7.1
THE MACRO-ENVIRONMENT IN PERSPECTIVE
109
7.2
INTRODUCTORY REMARKS ON GOVERNMENTAL FORCES
109
7.3
THE PETROLEUM PRODUCTS ACT
110
7.3.1
Manufacturing biofuels
110
7.3.2
Price regulation, fuel tax and levies
111
7.3.3
Intended compulsory use of biofuels
113
7.3.4
Standards for fuel (grading and specifications)
113
7.3.4.1
Standards for petrol
113
7.3.4.2
Standards for diesel
114
7.3.5
Labelling specifications
114
7.3.6
Inspection and testing
115
7.3.7
Records
115
7.4
TAXATION OF BIOFUEL AND BIOFUEL MANUFACTURERS
115
7.4.1
Income tax
115
7.4.2
Value added tax (VAT)
116
7.5
CLOSING REMARKS
117
PART V - RELATED MATTERS THAT INFLUENCE THE PROFITABILITY
BIOFUEL MANUFACTURERS
CHAPTER 8 -
FINANCIAL RISK MANAGEMENT
MANUFACTURERS
OF
118
BY BIOFUEL
119
8.1
INTRODUCTION
119
8.2
RISK MANAGEMENT
119
8.3
HEDGING AS A RISK MANAGEMENT TOOL
120
8.3.1
Futures contracts
120
8.3.2
8.4
Forward contracts
SHORT-TERM INSURANCE AS A RISK MANAGEMENT TOOL
121
121
8.4.1
Accidents and theft
121
8.4.2
Loss of income-generating assets
122
8.5
8.6
SUSPENDING OPERATIONS IN UNFAVOURABLE ECONOMIC
CONDITIONS
122
CLOSING REMARKS
122
CHAPTER 9 -
SUMMARY AND RECOMMENDATIONS
125
9.1
INTRODUCTION
125
9.2
SUMMARY OF RESEARCH REPORT
125
9.3
SUMMARY OF RESEARCH FINDINGS
125
9.3.1
Introduction to biofuel in South Africa
126
9.3.2
Biofuel manufacturer value chain activities
127
9.3.3
Competition in the biofuel industry
128
9.3.4
Government as a macro-environment force affecting biofuel manufacturers 129
9.3.5
Related matters that influence biofuel manufacturer profitability
9.4
RECOMMENDATIONS
9.4.1
Business plan for potential new biofuel manufacturers
130
131
131
9.4.1.1
Description of the proposed biofuel manufacturing business
131
9.4.1.2
The biofuel manufacturer's target market
132
9.4.1.3
The biofuel manufacturer's financial plan
132
9.4.2
9.5
Business audit for existing biofuel manufacturers
LIMITATIONS AND AREAS FOR FURTHER RESEARCH
133
133
9.5.1
Biofuel market survey
133
9.5.2
Cost of jatropha curcas as a feedstock in biodiesel manufacturing
134
9.5.3
Total capital investment in a biofuel plant
134
9.6
CLOSING REMARKS
134
Page
Figure 1.1
-
Environmental influences on biofuel manufacturers
5
Figure 1.2
-
Main activities and costs in a biofuel manufacturer's value chain
6
Figure 1.3
-
Main entities in the biofuel industry value chain
7
Figure 2.1
-
Production of bio-ethanol from wood and straw
22
Figure 2.2
-
Production of bio-ethanol from wheat
22
Figure 2.3
-
Production of bio-ethanol from maize
23
Figure 2.4
-
Production of bio-ethanol from sugar cane and sugar beet
24
Figure 2.5
-
Production of biodiesel from vegetable oil
25
Figure 2.6
-
Production of biodiesel from wood and straw
25
Figure 2.7
-
Shaval BioDiesel's batch system process
28
Figure 3.1
-
Impact of location on a biofuel manufacturer's profitability
35
Figure 3.2
-
Maize price and production, January 2003 to June 2006
38
Figure 3.3
-
Maize import parity and exchange rate, January 2003 to June 200638
Figure 3.4
-
Sunflower price and production, January 2003 to June 2006
Figure 3.5
-
Sunflower import parity and exchange rate, January 2003 to
41
June 2006
Figure 3.6
-
Soybean price and production, January 2003 to June 2006
Figure 3.7
-
Soybean import parity and exchange rate, January 2003 to
June 2006
Figure 3.8
-
Wheat price and production, January 2003 to June 2006
Figure 3.9
-
Wheat import parity and exchange rate, January 2003 to
June 2006
48
Figure 4.1
-
Crude oil prices from 1869 to 2004 in 2004 US dollars
54
Figure 4.2
-
North Sea Brent crude oil spot prices, 1976 to July 2006
55
Figure 4.3
-
Major world events and oil prices, 1861 - 2005
56
Figure 4.4
-
World events and oil prices, 1947 -1973
57
Figure 4.5
-
World events and oil prices, 1973 -1981
58
Figure 4.6
-
World events and oil prices, 1981 -1998
59
Figure 4.7
-
World events and oil prices, 1997 - 2003
59
Figure 4.8
-
World events and oil prices, 2001 - 2005
60
Figure 4.9
-
South African petrol pump price history, March 1990 to March 200565
Figure 4.10 -
Ethanol market prices in Chicago, USA, January 2005 - July 2006 66
Figure 6.1
-
Five forces of competition in the biofuel industry
82
Figure 6.2
-
The biofuel manufacturer's
97
Figure 6.3
-
The five generic competitive strategies
menu of strategic options
102
Page
Table 2.1 -
Comparison of the energy content of selected types of fuel
17
Table 2.2 -
Provincial arable land, employment and gross farming income, 2002 19
Table 2.3 -
Total capital investment of a small biodiesel manufacturer, 2006
30
Table 3.1 -
Maize production in South Africa, 2004 to 2006
37
Table 3.2 -
Sunflower production in South Africa, 2004 to 2006
40
Table 3.3 -
Soybean production in South Africa, 2004 to 2006
43
Table 3.4 -
Wheat production in South Africa, 2004 to 2006
46
Table 3.5 -
Comparison between maize, sunflowers, soybeans, wheat and
jatropha curcas as feedstock
51
Table 4.1 -
Global oil demand at certain oil prices, 1965 to 2005
61
Table 4.2 -
Proven oil reserves by region, 1985 to 2005
62
Table 4.3 -
Proven oil reserves by OPEC membership, 1985 to 2005
63
Table 4.4 -
Economic growth of certain countries on a GDP basis, 1990 to 2006 64
Table 5.1 -
Calculation of estimated finance cost in year one for various
biodiesel plant capacities using sunflowers as a feedstock
Table 5.2 -
Summary of sales and direct costs per litre of biofuel manufactured
from various feedstock types
Table 7.1 -
76
The elements of the Gauteng pump price of 93 octane petrol,
6 September 2006.
Table 7.2 -
74
111
The elements of the pump price of low-sulphur diesel,
6 September 2006.
112
Definition
Term or abbreviation
Additive
Traces of a substance added to a fuel in order to improve the fuel's
attributes, such as its performance and storage capabilities.
B10, B100
Diesel containing the stated percentage of biodiesel.
Bbl
Barrel, the standard measure unit of oil, which is 158.98 Iitres or 42
United States of America gallons.
Biodiesel
Biofuel used as diesel in its pure form or as a blend in petroleum
diesel,
manufactured
normally
jatropha curcas. It conforms
from
to SANS
1935.
or
soybeans
sunflowers,
As
in
a blend
petroleum, diesel must conform to SANS 342.
Bio-ethanol
Biofuel used as a blend in petrol, normally
manufactured
from
maize or wheat. The scientific notation is CzHsOH. It conforms to
SANS 1598.
Biofuel
Fuel manufactured from biomass.
Biomass
Renewable organic resources.
CTL
Coal to liquid technology for the production of fuel from coal.
E10, E85
Petrol containing the indicated percentage of bio-ethanol.
Feedstock
Raw materials
that are used in the process
of manufacturing
biofuel.
Fuel
Substance with combustion properties that can be used in internal
combustion engines.
GTL
Gas to liquid technology for the production of fuel from natural gas.
Oil
Blend of organic
compounds.
It consists
primarily of hydrogen,
carbon and oxygen.
OPEC
Organisation of the Petroleum Exporting Countries.
Petroleum
Latin for "rock oil", refers to fossil oil or crude oil.
Petroleum fuel
Fuel manufactured from petroleum.
RON
Research octane number.
SAFEX
South African Futures Exchange.
SANS
South African National Standard issued by Standards South Africa,
a division of the South African Bureau of Standards (SABS).
SWOT analysis
Analysis of the enterprise's
resource and management
strengths
and weaknesses, opportunities and threats.
Value chain
Entities in the industry or activities performed by enterprises
add value to the product.
that
Biofuel is manufactured
from biological, renewable resources and has beneficial attributes
similar to those of petroleum fuel. It is therefore primarily used to propel intemal combustion
engines, inter alia, in trucks, tractors, heavy duty equipment, motor vehicles and electricity
generators.
Biofuel in this report refers to bio-ethanol
manufactured
from grains such as
maize and wheat, and biodiesel manufactured from oil seeds, such as sunflowers, soybeans,
and jatropha curcas.
Manufacture biofuel locally holds at least three advantages for South Africa. Firstly, savings
on expensive
fuel imports and foreign currency
will improve the balance of payments.
Secondly, the additional production of feedstocks utilise the carbon dioxide that is produced
from the burning of fuel. The net effect from the use of biofuels will therefore not contribute
significantly to global warming, as petroleum fuels currently do. Thirdly, agriculture, which is
an important sector of the economy, will benefit from the new markets created for crops used
as feedstocks
in biofuel manufacturing.
Local manufacture
of biofuel is therefore
in the
The commercial production and utilisation of biofuel is a relatively new development
in the
interests of the national economy and society.
South African fuel industry. Increases in the international price of fuel are one of the reasons
why existing and potential new enterprises would consider manufacturing
biofuel. The main
objective of an enterprise is to generate the required profitability on its investment in the long
run. A profitability
analysis
is therefore
an important
requirement
for decision-making.
However, only limited information is available on certain aspects of the profitability of biofuel
manufacturing
aspects
in South Africa. This study endeavours
that have an impact on biofuel manufacturers'
to identify, describe
profitability.
and quantify
These aspects are
grouped in this report under five headings namely an introduction to biofuel in South Africa,
biofuel manufacturing
value chain activities, competition
in the biofuel industry, the macro-
environmental
forces on biofuel manufacturers,
and related matters that influence biofuel
manufacturers'
profitability. The findings of this study are discussed briefly below.
The value of biofuel and the necessity of manufacturing
above.
Various
feedstocks.
biofuel
manufacturing
processes
biofuel locally have been discussed
have
been
developed
Bio-ethanol is generally manufactured from the fermentation
high starch
content
such
as maize
and wheat.
Biodiesel
for
different
of feedstocks with
is manufactured
from
the
esterification of oil seeds such as sunflowers, soybeans and jatropha curcas. The choice of
feedstock therefore greatly influences the total capital investment of a biofuel manufacturer.
A biodiesel plant with a capacity of 1 000 litres per day may require a total capital investment
of ±R1.518 million or R1 518 per capacity litre. A total capital investment of ±R2.846 million
may provide a biodiesel plant producing 4 000 litres per day or R712 per capacity litre. The
economies of scale are clearly shown by these figures.
The value chain activities of a biofuel manufacturer should be managed to obtain the highest
possible sustainable profits. A concise discussion of the feedstock, sales of biofuel and byproducts and other related expenses follows.
The choice of feedstock not only influences the total capital investment, but also influences
the cost of feedstock, the location of the biofuel plant, which marketable products and byproducts will be obtained and in what quantities.
The net contribution to the gross profit of a biofuel manufacturer at September 2006 prices
per feedstock was the following: maize RO.74 per litre, sunflowers R2.79 per litre, soybeans
R6.81 per litre, wheat R-0.77 per litre, and jatropha curcas (excluding the cost of feedstock)
R4.68 per litre. It is clear that certain feedstocks are more profitable than others. However,
the relatively high volatility of the SAFEX price per ton and the import parity prices of the
feedstocks
can change these calculated
net contributions
significantly
from time to time.
Furthermore, the selling prices of the by-products are also relatively volatile, due to supply
and demand.
A biofuel manufacturer
can expect competition from other existing biofuel manufacturers,
potential new biofuel manufacturers,
customers.
altemative energy products, feedstock suppliers, and
It was found that potential new biofuel manufacturers
and petroleum fuel as an
altemative energy product are currently the largest threats to biofuel manufacturers.
These competitive
biofuel
forces have to be countered
manufacturer
complementary
has to make four
strategies, functional
only be developed
with detailed
by employing
sets of decisions
competitive
namely
strategies.
generic
A
strategies,
area strategies and timing strategies. Strategies can
knowledge
of the key success factors and information
obtained from a detailed SWOT analysis.
Aspects of profitability that a biofuel manufacturer
can control or influence to a lesser or
greater extent are its value chain activities and competition. Largely uncontrollable forces in
the macro-environment
can also affect the profitability of biofuel manufacturers, as discussed
below.
It was found that the South African government aims to promote the manufacture and use of
biofuel.
Stringent
requirements
by the Petroleum
Products
Act, Act
120 of 1977, are
applicable to fuel producers and distributors. Some of these regulations are relaxed for small
biofuel manufacturers.
For example, a manufacturer
producing less than 300 000 litres of
biofuel for consumption in farming operations is exempt from fuel taxes. Another example is
the 40 per cent reduction in the fuel tax on biodiesel sold to final consumers. Furthermore,
qualifying biofuel manufacturers
enjoy beneficial wear and tear allowances for income tax
purposes. The sale of biofuel and animal feed by-products is subject to VAT at the zero rate.
This means that input VAT can be claimed on qualifying purchases, thereby improving a
biofuel manufacturer's
cash flow.
From the findings in the abovementioned
are subject
to a relatively
comprehensive
high level of risk. A biofuel
risk management
probability of occurrence,
paragraphs it is clear that biofuel manufacturers
manufacturer
should
have a
plan that details all the possible risks it is exposed to, the
the impact on profitability should a threatening event occur, and
what actions to take to prevent or recover from unexpected
biofuel manufacturer
although
Furthermore,
a
can use financial instruments as a hedging tool to eliminate the risk
pertaining to certain transactions,
insurance,
happenings.
it is relatively
such as the quantity and cost of feedstock.
expensive,
is a valuable
mechanism
Short-term
to protect the
enterprise against possible financial losses due to fixed assets that are stolen or damaged,
or the loss of gross profit when a large portion of the income-generating
Farmers who manufacture
manufacturing
assets are lost.
biofuel as a channel to market their produce may suspend
for a longer or shorter period if their produce can be sold more profitably
through other channels.
There are a large number of potential new biofuel manufacturers in South Africa, as well as a
number of biofuel manufacturers that are in the process of commencing business. There are
many options a new biofuel manufacturer can use to enter the biofuel industry. Based on the
findings of this study, and due to the several variables
strategy is recommended
for biofuel manufacturers.
and forces involved, a two-step
First, a comprehensive
business plan
needs to be designed, developed, implemented and maintained. Second, a comprehensive
business audit on the execution of the business plan should be implemented.
Areas were identified during the course of the research where no information was available,
limited
information
was
available,
or information
was vague
or doubtful.
Enterprises
considering biofuel manufacturing were unwilling to disclose information regarding aspects of
profitability. It is recommended that further research should be undertaken on these aspects.
The most important of these are biofuel market surveys, the cost of jatropha
curcas as a
feedstock for biodiesel manufacturing, and the total capital investment of a biofuel plant.
Selected profitability aspects of biofuel manufacturers
in the Republic of South Africa were
identified, described and quantified (where possible). It is acknowledged
that there are still
other aspects that may require further research. The findings, as discussed in more detail in
this research report, should be valuable to potential new and existing biofuel manufacturers
in South Africa.
CHAPTER 1
PROBLEM STATEMENT, RESEARCH OBJECTIVES AND METHODOLOGY
Energy comes from different sources and it is utilised in various forms. The supply of energy
should be economically,
socially, politically
and environmentally
sustainable
in order to
enable our long-term survival. Fuel refers to substances with combustion properties and that
can be used in internal combustion engines. Petroleum fuel refers to fuel manufactured from
crude or fossil oil. Biofuel is fuel produced
from renewable
biological
resources.
The
commercial production and utilisation of biofuel is a relatively new development in the South
African fuel industry. Currently, biofuel is receiving serious attention of practically
all the
stakeholders in the fuel industry.
This chapter provides an introduction on the oil industry per se, the field of study, competitive
forces in the biofuel industry, macro-environment
forces, forces that affect the profitability of
biofuel, the objectives of the study, and the outline of the study.
Oil is a blend of organic compounds.
It consists primarily of hydrogen, carbon and oxygen.
This oil took millions of years to form from the remains of small aquatic plants and animals
that were exposed
2002:n.p.).
to the effects
of time and heat (San Joaquin
Geological
Society
Oil is one of the most utilised sources of energy in the modern world. Oil is
currently the main provider of power, fuel for transport, heat and lubrication. It is also used as
a source of chemical raw materials (carbon, hydrogen and oxygen) in the production of
valuable commodities
paints, solvents,
such as plastics, synthetic fibres, detergents,
pesticides,
aromatic
compounds
fertilisers,
explosives,
and many other products
(Tugendhat
1968:i). The supply of fossil oil is limited. There may still be vast quantities of oil reserves in
the earth, but they may be located in places too remote or dangerous for these resources to
be extracted profitably.
According
to Stern (2005:245), oil is probably one of the most controversial
of all energy
resources. On the one hand, the power that is associated with possessing oil resources is a
very important reason why some governments
engage in "oil wars". On the other hand, we
have developed our world to a very large extent around a depleting natural resource, the use
of which has side effects that threaten the long-term survival of life on the planet if these side
effects are not dealt with properly in time.
The production and use of petroleum causes air, water and soil pollution which has serious
effects on the environment.
This results inter alia in increased health care costs, fuel spill
cleanup costs, possible pollution penalties and taxes. Global warming, which is mainly due to
carbon dioxide emissions from fuel burning, can have a catastrophic
Hence, many govemments
impact on the globe.
now promote initiatives to reduce these emissions and enforce
strict regulations through penalties and taxes (Stem 2005:246).
A country's development depends largely on the availability of affordable fuel. No major oil
fields have been discovered in South Africa and fuel therefore has to be imported to meet the
demand, or has to be produced in other ways. To ensure a continued supply of fuel, the
South African govemment
Suid-Afrikaanse
has established enterprises such as Sasol Ltd (the acronym for
steenkool olie en gas) to manufacture fuel and other related products using
coal to liquid (CTL) and gas to liquid (GTL) technology. Unfortunately, Sasol cannot
meet the
full local demand, and the country still relies largely on imports.
Imports have a negative impact on the balance of payments and oil prices are currently high.
These two factors could prevent economic growth targets being reached. Moreover, some
important oil exporting countries are currently perceived to pose a high political risk. This
situation
encourage
threatens
the ready availability
the government
and affordability
of fuel. These factors
could
and citizens of the Republic of South Africa to promote the
production and use of alternative energy sources such as biofuel.
Biofuel has the same chemical elements and therefore the same beneficial properties as
petroleum fuel. However, it is produced from renewable biological resources or biomass. The
feedstock for the manufacturing process of biofuel includes field crops, crop residues, wood
and basically any other organic matter. South Africa has enough arable farm land available
to produce such resources and farmers are continually searching for new and more profitable
markets for their produce.
Sulphur oxide and nitrogen oxide emissions from petroleum fuel burning are hazardous to
living organisms. The sulphur and nitrogen that are present in fossil oil are costly to remove
and oil producers are therefore hesitant to do so unless the final consumers are willing to pay
relatively
high prices. Only small traces of sulphur and nitrogen are normally found in
biomass, which makes biofuel burning less hazardous to planetary health.
Biofuel can therefore be an answer to many of the problems that the govemment and society
of the Republic of South Africa face. The increasing demand for fuel will continue to prompt
price increases, which may enable oil companies
to be highly profitable.
However, the
question is whether this profitability also currently applies to biofuel manufacturers
in the
Republic of South Africa. The study set out in this research report endeavours to answer this
question, amongst others, qualitatively as well as quantitatively.
The development of biofuel has not received much attention in the Republic of South Africa
until recently, mainly because Sasol's fuel supply was previously subsidised by government,
and because the cost of imported fuel was relatively low. The increase in the average
nominal
price of crude oil from approximately
discussed
$13/bbl
(bbl stands for blue barrel, as
in more detail in Section 4.2.1.1) in 1998 to $55/bbl in 2005 (Forbes 2006:n.p.)
and to almost $80/bbl in 2006 possibly presents an opportunity for various manufacturers
and entrepreneurs to enter the biofuel industry. So, for example, Ethanol Africa (pty) Ltd is
establishing
a plant for the manufacture
of bio-ethanol
from yellow maize at Bothaville.
Bothaville is a well-known maize production area in the Free State province of South Africa.
This plant is the first of eight plants Ethanol Africa is planning to establish at an expected
cost of R700 million each (Van Burick 2006d:n.p.).
Ethanol Africa (pty) Ltd is discussed in
more detail in Chapter 2.
The main objective of a biofuel manufacturer is to generate a profit on its investment in the
long term. Such manufacturers
may have secondary
objectives,
such as creating
new
markets for struggling producers (especially maize producers), but only if such an endeavour
still supports the primary objective. The pure economic objectives
of any enterprise
may
include a required rate of return on investment and a positive net present value of future cash
flows. On the other hand, socio-economic
objectives form part of a business's
corporate
social responsibility. They may look only like a short-term expense, but the absence of such
objectives
may jeopardise
future
business
(Marx,
Van
Rooyen,
Bosch
& Reynders
1998:112).
No profit-driven South African company will, under normal circumstances,
be able to raise
capital from investors or financial institutions for a new business or to create shareholder
wealth without information on its profitability. A profitability analysis is therefore an important
requirement for a biofuel manufacturer's
decision-making.
The field of study consists of two parts. Below, first, an outline of the field of study is given
and then the main elements in the field of study are briefly explained.
The field of study covered in this research is the environmental
manufacturers
and that
manufacturers.
The main elements of the business environment
manufacturers
have
a large
or small
include biofuel manufacturers'
biofuel industry and macro-environment
impact
forces that affect biofuel
on the
profitability
of these
that have an impact on
value chain activities, competitive forces in the
forces. The field of study is presented visually in
Figure 1.1.
The concentric circles in Figure 1.1 represent the interacting forces and the relative size of
their impact on a biofuel
manufacturer's
profitability.
The arrows
indicate the level of
influence and interaction between these forces.
A few remarks on the main elements of the field of study as presented in Figure 1.1 may be
helpful.
The strategies used by biofuel manufacturers
Figure 1.1. Biofuel manufacturers
and objectives.
These
strategies
are represented by the inner circle, Circle I in
develop their strategies according to their vision, mission
include
corporate
strategies
that cover the plan for
managing the group of businesses; business strategies. such as actions to expand a biofuel
manufacturer's
capabilities; functional-area
strategies that support the overall business of the
biofuel manufacturer; and operating strategies, which provide the detail for the business and
functional
strategies.
environment
2005:35).
elements
These strategies are tailored according to the influences of macroand competitive
forces on the biofuel
manufacturer
(Thompson
Strategies
Value chain
management
Competitive
forces
Macroenvironment
Source: Adapted from Marx et al. (1998:1), and Thompson, Strickland and Gamble
(2005:51,99)
c
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ns
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+
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.5 I
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CD
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C
CD
=
;:
c
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I
I
I
I
I
I
•
CII
Q)
:;:::
-
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CII
.'OCII
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o c
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en
Figure 1.2 shows the flow of primary activities and their associated costs through a biofuel
manufacturer's
value chain. These primary activities and costs, indicated by the block
arrows, begin with the supply chain management and end with the profit margin that the
biofuel manufacturer adds to the total cost of the biofuel produced. As indicated by the
arrows, other activities support the primary activities in the value chain.
A biofuel manufacturer's value chain activities are managed according to the set strategies
which aim to attain the required rate of return for the enterprise. The value chain in this report
is defined as the primary activities performed by the enterprise that directly create customer
value. The related support activities performed by the enterprise facilitate and enhance the
primary activities (Thompson et al. 2005:98).
The primary activities and costs in the biofuel manufacturer's value chain that influence
profitability may include supply chain management (feedstock, additives and consumables
management),
management,
manufacturer's
profitability
biofuel
sales
manufacturing
and
marketing
(the
conversion
management,
process),
service
biofuel
delivery,
and
distribution
the
biofuel
profit mark-up. The support activities in the value chain that influence
can include research and development
(feedstock,
manufacturing
process,
equipment and computer software), human resources management (recruitment, training
and development) and general administration
security and information
systems) (Thompson
(managing finance, legal aspects, safety,
et al. 2005:99). Activities
in a biofuel
manufacturer's
value chain that influence
the profitability
of biofuel
manufacturers
are
discussed in Chapters 3, 4 and 5.
Biofuel manufacturers
are one of several entities in the biofuel industry, as set out in Figure
1.3. Biofuel manufacturers'
position in the value chain is relevant to an understanding of the
logic behind the strategies followed
activities.
by biofuel manufacturers
Some of these entities are competitive
through
their value chain
forces that exert pressure
on biofuel
manufacturers, as discussed in Section 1.2.2.3.
Final
consumers
The blocks in Figure 1.3 indicate the various entities in the biofuel industry. The arrows
indicate the flow of value added products from one entity to another. A biofuel manufacturer's
customers may include any combination of other manufacturers, wholesalers and/or retailers,
and final biofuel consumers.
These customers
may therefore
be oil companies,
such as
Sasol, who are required to blend biofuel into their petroleum fuel or motor vehicle owners.
If, for example, there is backward integration in the value chain, these biofuel manufacturers
would also be involved in the production of the required feedstock. In other words, a biofuel
manufacturer
seeds.
could also be a grain farmer or cultivate feedstock such as jatropha
This would
manufacturer's
require other unique
management
skills and an expansion
curcas
of the
value chain activities.
Competitive forces in the biofuel industry environment are represented in Circle III of Figure
1.1. Thompson et al. (2005:51), cite Michael Porter (1979), and share Porter's opinion that a
biofuel manufacturer has to deal with at least five types of competitive forces. These forces
are competition
manufacturers;
between existing biofuel manufacturers;
the threat of potential new biofuel
alternative energy products such as petroleum fuel and electricity generated
by solar, wind and nuclear power; producers of feedstock such as grain farmers; and biofuel
manufacturers'
customers. Competitive forces in the biofuel industry have a vital influence on
a biofuel manufacturer's
strategies
and value chain activities and therefore
on a biofuel
manufacturer's
environment
profitability.
The biofuel
to some extent.
industry forces
Competitive
forces
may also influence
that influence
biofuel
the macro-
manufacturers'
profitability are discussed in Chapter 6.
Circle IV in Figure 1.1 contains
manufacturers.
the main macro-environment
A biofuel manufacturer's
macro-environment
forces that affect biofuel
includes government
legislation), general economic conditions, societal values, demographics,
ecological,
2005:47).
institutional
These
competitiveness
and international
macro-environment
forces
forces
(Marx et al. 1998:1;
influence
in the biofuel industry. Govemment
biofuel
and technological,
Thompson
manufacturers
can implement
(through
et al.
and their
company taxes, fuel
levies and regulations, such as the compulsory blending of biofuel into petrol and diesel; and
this may affect a biofuel manufacturer's
profitability either positively or negatively, and will
also affect the profitability of its competitors.
Governmental
macro-environment
forces that
influence the profitability of biofuel manufacturers are reviewed in Chapter 7.
From Figure
manufacturer's
1.1, the influence
environment
and interaction
between
is clear. This interaction
various
is represented
elements
in a biofuel
by the up and down
arrows on the right hand side of Figure 1.1. In this report, the forces that have been identified
as interacting to affect the profitability of biofuel manufacturers
are strategies, value chain
activities,
(Section
competitive
forces,
and macro-environment
forces.
1.6 explains
how
these forces are dealt with in this report.)
Biofuel has utility values similar to petroleum fuel. It is produced from renewable organic
resources or biomass. In this context the term refers to bio-ethanol
Chapter 2 for a more detailed discussion of biofuel.).
and/or biodiesel (see
The main entities in the value chain of the biofuel industry, as set out in Figure 1.3, include
producers
of organic
feedstock,
and/or retail distributors,
product(s)
to biofuel
customers
include
biofuel
manufacturers,
and final consumers.
manufacturers
other
for
Organic feedstock
conversion
manufacturers,
other manufacturers,
biofuel
to biofuel.
wholesalers
producers
Biofuel
or retailers,
wholesale
deliver their
manufacturers'
or the final
consumers.
The biofuel
manufacturers
referred
to in this report
are only involved
in the biofuel
manufacturing segment of the value chain. Other enterprises perform the remaining activities
in the value chain. In this report only biofuel manufacturers who operate in South Africa are
referred to. Biofuel manufacturers are registered under the South African Companies Act, Act
61 of 1973 (South Africa 1973) as amended. This biofuel manufacturer has shareholders and
directors whose main objective is to attain the required rate of return on the investment made
through legal and sound business practices.
Profitability
is the extent to which the primary objectives of an enterprise,
biofuel manufacturer,
are achieved. The primary objectives
in this case, a
include maximisation
of profit,
achieving the required rate of return on investment, and creating shareholder wealth. Profit is
the surplus of sales income achieved over the total expenses incurred. Return on investment
is the profit as a percentage
indicator
of the biofuel
of the total assets utilised. Shareholder
manufacturer's
actions
and future
value is a dynamic
profit potential
(Marx et al.
1998:117-119,121).
The forces and activities included in Figure 1.1 influence a biofuel manufacturer's
expenditure
sales and
directly or indirectly. The aspects that influence profitability referred to in this
report include
•
value chain activities
the cost of feedstock, such as grain;
biofuel sales; and
other revenues, such as from the sale of by-products,
and related expenses (the
exact impact on profitability of those other activities are not easily determined and are
therefore only discussed briefly in this report;
•
competitive forces
other existing biofuel manufacturers;
potential new biofuel manufacturers;
alternative energy products, such as petroleum fuel and electricity generated by wind,
solar, hydro and nuclear power;
feedstock producers' bargaining power, in other words, farmer demands; and
biofuel customers'
bargaining
power, for example, oil companies
or motor vehicle
owners' demands;
•
macro-environment
government
forces
forces through legislation and regulations,
such as compulsory
use of
biofuel, levies and taxes;
Other forces, such as global economic conditions, political stability, and ecological forces
exist in a biofuel manufacturer's
forces
on a biofuel
macro-environment.
manufacturer's
profitability
The exact impacts of those other
are not easily quantifiable
and are
therefore not discussed in detail in this report.
This study aims to identify, describe and quantify certain aspects and forces that influence
the profitability of a biofuel manufacturer in the Republic of South Africa. This is done using
the model in Figure 1.1.
Furthermore,
manufacturers
•
the objectives of this research are to analyse the profitability of local biofuel
using the following focus areas:
Introduction to biofuel in South Africa
Describe the properties of biofuel.
Determine the necessity of biofuel manufacturing
in South Africa. This aspect may
indicate the biofuel manufacturer's potential sustainable profitability.
Identify and describe the biofuel manufacturing
processes
and estimate the total
capital investment for certain biofuel manufacturing outputs.
•
Biofuel manufacturer value chain activities
Identify and describe the supply and estimate the cost of renewable
feedstock to the biofuel manufacturing process.
resources or
Describe the market demand and estimate the selling price of biofuel, fuel production,
consumption and price trends.
Identify, describe and quantify revenues from by-products and related expenses in
biofuel manufacturing.
•
Competition in the biofuel industry
Describe the impact of competition on the profitability of a biofuel manufacturer with
reference to the competitive forces: other biofuel manufacturers,
manufacturers,
potential new biofuel
alternative sources of energy, farmers and consumers.
Suggest solutions on how to deal with competition.
•
•
Macro-environment
forces of biofuel manufacturers
Identify and describe
governmental
biofuel manufacturers'
profitability.
incentives,
legislation
and regulations
that affect
Related matters that influence biofuel manufacturer profitability
Identify
and describe
mechanisms
available
to a biofuel
manufacturer
to manage
financial risks.
The following assumptions are made in this report:
•
Biofuel manufacturers
buy feedstock from local farmers, manufacture locally, sell to local
customers, and sales and expenses are transacted in South African Rand.
•
Biofuel
manufacturing
technology
can be researched
with relative ease and expert
enterprises are locally available to build turn key operating plants.
•
The gross selling price of biofuel is influenced directly by the price of crude oil.
•
South Africa has in place economic
and government
support structures
for biofuel
manufacturers.
The following delimitations are stated:
•
This report does not cover the impact of indirect or overhead costs. Many factors such as
the physical location of the suppliers, plant and customers, experience and management
style determine these costs and are unique to a certain enterprise; and it is therefore
difficult to give exact figures.
•
Global politics, economic conditions, society, technological
advances and environmental
risks have a definite influence on the oil and biofuel industry. However, a discussion of
these falls beyond the scope of this research report.
Secondary literature was used to obtain information on the aspects included in Figure 1.1 to
clarify their impact on the profitability of biofuel manufacturers.
In order to identify the aspects which have an impact on the profitability
manufacturer,
necessity
the following
information
of a biofuel
is required: what biofuel is, how it is made, the
of biofuel in the South African context, and an indication
investment required in a biofuel manufacturing
of the size of the
plant in relation to its capacity. These areas
are discussed in Chapter 2.
The production of suitable feedstock in South Africa is researched. The cost of feedstock and
yields are analysed in Chapter 3. Sales are one of the most important aspects of a biofuel
manufacturer's
profitability and are influenced by supply, demand and price, amongst other
things. Each of these factors is researched and analysed before reaching a conclusion on
the achievable
sales. Biofuel sales are discussed in Chapter 4. Other revenues from by-
products and some other expenses are discussed briefly in Chapter 5.
Competition
is part of normal business in a free market economy. It forces management to
develop strategies to counter competitive forces in order to gain profitable advantages. The
five competitive
manufacturers,
forces discussed
in Chapter 6 are competition
between existing biofuel
the threat posed by potential new biofuel manufacturers,
products, feedstock
producers'
bargaining
General competitive strategies are suggested.
power, and the customers'
alternative energy
bargaining
power.
Government
plays an important role in the fuel industry through incentives, taxes, research
and other regulations. An investigation of these aspects is necessary in order to identify the
impact governmental
regulation
has on the profitability
of biofuel manufacturers.
These
aspects are dealt with in chapter 7.
The financial risks related to operations, sales, and the cost of feedstock can be managed
through comprehensive
risk management
plans, hedging through financial instruments and
contracts and short-term insurance, as reviewed in Chapter 8.
The aspects which affect the profitability
Chapter
9. Recommendations
suggested.
of a biofuel manufacturer
are made and possible
areas
are summarised
for future
research
in
are
CHAPTER 2:
BIOFUEL, MANUFACTURING
INVESTMENT
PROCESSES AND CAPITAL
CHAPTER 2
BIOFUEL, MANUFACTURING
PROCESSES AND CAPITAL INVESTMENT
This chapter provides an overview of the background on biofuel and discusses the need for
biofuel
in South
feedstocks
Africa.
are discussed
The
manufacturing
processes
that are available
briefly and the capital investments
for several
required for manufacturing
plants are estimated.
It is important in the context of this study to know what biofuel is, and what its historic use
and its energy
value
are. The
main source
used for this
background
is Wikipedia
(2006c:n.p. ).
Biofuel refers to any fuel that is manufactured from biomass. Biomass can be defined as any
recently living organism or its metabolic by-products. This includes agricultural produce such
as maize, sunflowers
and soybeans,
agricultural
waste,
lumber,
manure,
sewage and
rapeseed (see also Section 1.3.1). Unlike the sources of petroleum fuels such as crude oil,
coal and natural gas, the sources of biofuel are renewable.
Biomass has energy stored up (like coal and petroleum),
through the process of photosynthesis
and this is obtained
primarily
in living plants. This biomass energy can be stored
safely for a long time. (National Research Council 1999:n.p.)
Biofuel has been used since the beginning of the motor vehicle industry. Otto von Nicklaus
invented the explosion engine, which ran on ethanol. Rudolf Diesel invented the combustion
engine, which ran on peanut oil. The Model T Ford, which was produced from 1903 to 1926,
also ran on ethanol. However, fossil oil was extracted in large volumes and became cheaper
to produce than biofuel, and soon biofuel was largely replaced. The competition
between
these two sources of fuel, which can impact on the profitability of a biofuel manufacturer,
discussed in detail in Chapter 6.
is
The cost of energy in Rand per joule to the final consumer
is one important factor that
determines the demand for biofuel. If the total cost of biofuel per litre is higher than that of
other types of fuel which also fulfil consumers' expectations,
then the demand for biofuel
would probably decrease significantly. In some developed countries, such as Germany, the
price of food per joule is cheaper than fuel. This is one of the reasons why Germany
produces relatively large quantities of biofuel.
It is therefore relevant to note the energy value of biofuels compared to the energy values of
alternative sources of energy, as set out in Table 2.1. Table 2.1 lists various types of fuel in
the first column and their energy content in mega-joules per kilogram for the particular fuel
type in Column 2. Mega-joules per litre for the particular fuel type are listed in Column 3.
According to Table 2.1, for example, biodiesel has an energy content of 33 mega-joules per
litre to 36 mega-joules per litre, compared to petroleum diesel which has an energy content
of 40 mega-joules per litre. Biodiesel therefore has less energy per volume than petroleum
fuel diesel and therefore less utility value to the consumer
per volume. Biodiesel should
therefore cost less per litre to the final consumer than petroleum fuel diesel, if utility per
volume is the only requirement
of the consumer.
It can then be calculated that the final
consumer of biodiesel may therefore expect to pay prices of between 82.5 per cent and 90.0
per cent for biodiesel of the price per litre of petroleum diesel, excluding fuel taxes and
levies. The selling price of petroleum diesel, including wholesale and retails profit margins,
but excluding fuel levies, taxes and transport, is around 70 per cent of the pump price. If the
pump price of diesel is R7 per litre, then the final biodiesel consumer will be willing to pay
between R4.04 per litre (R7 multiplied by 70 per cent and by 82.5 per cent) and R4.41 per
litre (R7 multiplied by 70 per cent and by 90 per cent) for biodiesel.
Fuel type
Energy density
Energy density
Specific
volumetric
Mega-joules per kilogram
Mega-joules per litre
Solid biofuel
Dried plants
10 -16
not available
Wood fuel (CeHs01o)n
16 - 21
not available
Liquid biofuel
Methanol (CH3OH)
20-23
16
Ethanol (CH3-CH2-OH)
23 -27
18 - 21
Biodiesel
38
Sunflower oil (C18H3202)
39
33-36
33
Gaseous biofuel
Methane (CH4)
55
23 (liquefied)
Hydrogen (H2)
120 -142
9 - 10 (liquefied)
Petroleum fuel
Coal
40-74
29 -33
Crude Oil
28 - 31
42
32-35
Petrol
45 -48
Diesel
48
40
38 -50
26- 29
77000000
1 470700000 (pure)
300000000
53 413 378 (liquefied)
Natural Gas
Uranium 235 (<I;j:>U)
Nuclear fusion (<lH-;jH)
Fuel cell energy storage
Direct Methanol
3.6
4.5
Battery energy storage
Lead-acid battery
Lithium-ion battery
Bio-ethanol
0.1
0.5-0.7
0.1
0.9 -1.9
can be used as a blending fuel in petroleum fuel. The energy content of bio-
ethanol, according
to Table 2.1, is 18 mega-joules
per litre to 21 mega-joules
per litre.
Compared to the energy content of petrol, which is between 32 mega-joules per litre and 35
mega-joules
per litre, the energy per litre of bio-ethanol is much lower. The utility value of
bio-ethanol can therefore be calculated as between 51.4 per cent and 65.6 per cent of the
utility of petrol. (The calculations were 18 divided by 35, and 21 divided by 32.) The final bio-
ethanol consumer may therefore expect to pay between 51.4 per cent and 65.6 per cent of
the basic cost of petrol, plus wholesale and retail profit margins, per litre. If the price of petrol
is R7 per litre, and the fuel taxes and levies and the cost of petrol transport amounts to
around 35 per cent of that selling price, then the basic cost of petrol and the wholesale and
retail profit margins should be around R4.55 per litre. The selling price of bio-ethanol should
therefore be between R2.34 per litre (R4.55 multiplied by 51.4 per cent) and R2.98 per litre
(R4.55 multiplied by 65.6 per cent).
Various similar calculations can be made on the basis of the data in table 2.1, however, the
fuel attributes should also be more or less the same. In other words, the applications of the
energy products should be more or less the same. For example, the energy density of
nuclear fusion is 53 413 378 mega-joules per litre, compared to bio-ethanol's energy density
of 18 to 21 mega-joules
per litre, thus 2.5 to 2.9 million times higher.
However,
applications of the two fuel types are different and these two fuels are not interchangeable.
certain circumstances,
the
In
liquid biofuel products may be compared to each other, such as bio-
ethanol to methanol or sunflower oil; and to other fuel types such as solid biofuel, which
consist of dried plants and wood fuel; gaseous biofuels, such as methane or hydrogen;
natural gas and/or coal.
From Table 2.1 it can be concluded that biofuel has some value as an energy product. The
question of whether biofuel should be manufactured locally is answered in Section 2.2 below.
Biofuel manufacturing
environmental
in South Africa seems necessary, given the high cost of fuel imports,
considerations
and the potential for creating new markets for the agricultural
industry. These aspects are discussed in the subsections below.
South Africa lacks commercially
producible fossil oil and therefore
relies heavily on fuel
imports and fuel production by Sasol Ltd to meet demand. Fuel imports have a negative
impact on the balance of payments. Furthermore, global inflation, driven by the escalating oil
price, has resulted in an increase in the production cost of imported goods. This contributes,
inter alia, to the country's current account deficit of R103.1 billion: the 2006 annualised
increase in the production cost of imported goods was 6.1 per cent, which contributed to the
current account deficit (South African Reserve Bank 2006:3, 15, 21).
Global warming
quantitatively
warming;
results, inter alia, from excessive
carbon dioxide emissions.
Compared
to the rest of the world, South Africa is not a very large contributor to global
however, South Africa should put policies and regulations
in place at an early
enough stage to limit carbon dioxide emissions from fossil fuels. The net effect of carbon
dioxide emissions over time is very low if the fuel is manufactured from a vegetable resource.
The quantity of carbon dioxide absorbed by vegetation
during the growing stage and the
quantity released when such a fuel is burned are almost the same.
South African agriculture
currently
contributes
seven per cent (2006 annualised)
to the
country's gross domestic product (South African Reserve Bank 2006a:4). All people in South
Africa are affected by changes in the agricultural sector, since everyone must eat to stay
alive. Information on the arable land available, employment
and gross farming income is
given in Table 2.2, listed per province. This information was obtained from the 2002 census,
conducted by Statistics South Africa with the Department of Agriculture and Land Affairs.
Province
Total employment
arable land
income
hectares
percentage
number
percentage
R1000
percentage
2
3
4
5
6
7
17.3
219091
22.2
10653332
20.1
3.2
114214
11.6
3888950
7.3
1
Western Cape
Gross farming
Total commercial
2545788
Northern Cape
454465
North-West
2408484
17.0
90174
9.1
5145873
9.7
Mpumalanga
1 596998
11.3
124012
12.6
7013824
13.2
Limpopo
1 169742
8.2
78955
8.0
Kwa-Zulu Natal
838975
5.9
120982
12.3
6027672
11.4
Gauteng
438623
3.1
3.2
4130428
7.8
Free State
7.2
29.5
132005
13.4
8777228
16.6
643501
4.5
75543
7.7
3522871
6.7
14192099
100.0
986842
100.0
52971232
100.0
4186523
Eastern Cape
Total
31 866
3811 054
Sources: Adapted from Statistics South Africa (2002:3-6) and Department of Agriculture and
Land Affairs (2005:5)
Table 2.2 shows the total commercial arable land (Columns 2 and 3), the total number of
farmers and paid employees (Columns 4 and 5), and the gross farming income (Columns 6
and 7) per province (Column 1). The Free State has the highest amount of commercial
arable land available at 4 186 523 hectares, which is 29.5 per cent of the total arable land
available in South Africa. The Western Cape has the highest employment level at 219 091
farmers and paid employees, constituting 22.2 per cent of the total number of people working
in the agricultural sector. Almost one million people are making a living in the commercial
agriculture sector as farmers or paid employees in South Africa. The Western Cape also has
the highest gross annual farming income at R10 653 332 000 out of a total gross farming
income of R52 971 232 000. These figures were obtained from the 2002 census, which is the
latest census performed by Statistics South Africa. The actual figures for 2006 may differ to
some extent. The information
given in Table 2.2 provides evidence of the importance
of
agriculture in South Africa.
In many cases, South African farmers
manufacturers
need new markets for their crops. New biofuel
can meet this need. The additional demand for certain crops may lead to
higher income for farmers. This higher income can be the result of either higher prices or
increased volumes sold. Johan Hoffman, director of Ethanol Africa (pty) Ltd, states that
South African maize farmers have a choice between supporting bio-ethanol manufacturing or
more years of surplus maize stocks and low prices (Van Burick 2005b:n.p.). Maize surpluses
between 3.5 million and 3.8 million tonnes could develop in South Africa over the next fifteen
years.
Bio-ethanol
plants that consume
375 000 tonnes of maize annually will, largely
eliminate these maize surpluses (Van Burick 2006a:n.p.). A relatively constant demand for
maize generally
manufacturers
means that surplus production
leads to lower prices. However,
biofuel
could require more maize than is locally produced. This may lead to price
increases for maize as a feedstock for the biofuel manufacturing
process. This aspect is
discussed in more detail in Chapter 3.
For the South African economy as a whole, a higher income for farmers and other local
businesses will be balanced by savings on fuel imports. This means that money that normally
flows to foreign countries or foreign enterprises for fuel supplied could remain in the country
instead. This can be achieved when biofuel, which should be manufactured
enterprises,
locally by local
is preferred above imported petroleum fuel by final fuel consumers.
circumstances,
In such
local farmers and enterprises in the biofuel value chain will benefit financially
to some extent. An increase in the revenue of local farmers and local enterprises may also
lead to job creation. Higher profits will lead to an increase in government
revenues through
taxes.
More taxes
paid to government
should
lead to better
services
rendered
by
governmental institutions, and so on, multiplying the positive outcomes of such a shift.
From the above, it is clear that South Africa should seriously consider manufacturing
biofuel. Government
regulations.
its own
plays an important role as a facilitator through incentives, taxes and
(The role of government
as a macro-environment
force is discussed
in more
detail in Chapter 6.)
If South Africa does embark
understand
on the local manufacturing
the various manufacturing
of biofuel,
it is important
to
processes which are available and suitable in the
South African context.
Various processes have been developed over the years for different kinds of feedstock. They
are described briefly in the sections below. (For a more detailed discussion of the different
kinds of feedstock, see Chapter 3.)
Bio-ethanol
is used as a blending
agent in petrol or used in a pure form in internal
combustion engines in some countries. The comparative cost of bio-ethanol to other fuels is
the most important determinant regarding future developments.
regulate
the emission
ethanol's competitiveness
of the so-called
greenhouse
Environmental regulations to
gases may, however,
improve
bio-
(National Research Council 1999).
Acid hydrolysis and the fermentation of wood and straw, the malting and the fermentation of
wheat, the fermentation
processes
relevant
resource
of maize, sugar cane and sugar beet are the most important
used in the manufacture
here. Sections
of bio-ethanol.
A few remarks on each process are
2.3.1.1 to 2.3.1.4 are based on the report on the International
costs of biodiesel
and bio-ethanol
published
by the Department
for Transport
(2003:10-12).
eb (134-0512
\'~loq22Z9
I
WOODCHIPS
OR STRAW
•.IAcid hydrolysis 1--1 Enzymic
IAll
lignin
r----.-I
Electricity
I
TI
fermentation
~
Figure 2.1 shows the process of bio-ethanol
manufacturing
using wood and straw as
feedstock. The arrows indicate the process flow. An acid is added to wood chips or straw for
an acid hydrolysis process before the mixture is subjected to enzymic fermentation,
which
produces bio-ethanol.
I
I WHEAT I--.J Malting
process
I
Fermentation
1----'[
Electricity
Distillation
1
t-----.
IVELI
The process flow in Figure 2.2 is indicated by the arrows. Wheat is crushed or milled before
enzymes
in the wheat break down the starch to C6 sugars at certain temperatures
and
humidity levels. This is called malting or hydrolysis. This slow process can be accelerated by
the addition of artificial enzymes. The sugars are washed out with water and the remains can
be used for animal feed. Yeast is added to the sugars and at temperatures of 32°C to 35°C
and at a pH of 5.2 the mixture produces ethanol, which then has to be distilled.
I
ENZYMES
I
I
1- ----_.
Corn gluten meal, corn
gluten feed or corn oil
Wet milling to break do~n
starches to sugars
OR.
Dry
i
I
milling to break down
starches to sugars
ENZYMES
I
I Fermentation
~~~
I
i
YEAST
:
I
I
Figure 2.3 shows the basic process of bio-ethanol production using maize as feedstock. The
arrows indicate the flow of the process. The maize can be either wet-milled
before fermentation.
Wet-milling produces several by-products,
or dry-milled
such as maize gluten meal,
gluten feed and oil, while dry milling produces only animal feed as a by-product. Enzymes
break down the starches into Cs sugars, which are fermented
and distilled, similar in the
process used for wheat, as described above.
The production of bio-ethanol using another feedstock type, sugar cane and sugar beet, is
depicted in Figure 2.4.
SUGAR
CANE
I
~
Sugar cane crushed and
soluble sugars washed out
~I
I
Fermentation:
t
YEAST
I
The arrows in Figure 2.4 show the process flow in the production of bio-ethanol from sugar
cane and sugar beet. The sugar cane or sugar beet is crushed, and the soluble sugars are
washed out with water. Yeast is added for fermentation,
as in the processes for wheat and
maize. As can be seen from this figure, this process is shorter than the process for wood,
wheat or maize as feedstock. (Sugar cane and sugar beet are not discussed as a feedstock
in Chapter 3, because information on its production history, biofuel yields and cost per ton is
limited.)
Biodiesel can be used as a blending agent in petroleum diesel, or it can be used in a pure
form in compression-ignition
(diesel) engines (National Biodiesel Board 2006). Biodiesel can
be produced from a range of vegetable oils, such as sunflower oil, soybean oil and rapeseed
oil. The esterification of vegetable oil and the gasification and Fischer- Tropsch processing of
wood and straw are the most important processes used in the manufacturing
of biodiesel. A
few remarks on each process are made below. Sections 2.3.2.1 to 2.3.2.2 are based on the
document
International resource costs of biodiesel and bio-ethanol
released
by the
Department for Transport (2003:10).
The production of biodiesel through the esterification
2.5.
of vegetable oil is depicted in Figure
Extraction
IOIlSEEDS HI mechanical
Esterification in the
presence of an alkaline
catalyst at 50°C
of oil by
r:rushing
or solvent extraction
-.
Separation and
purification of
methyl esters
!
~ANOLl
Figure 2.5 illustrates the manufacture of biodiesel from vegetable oil. The arrows show the
process flow. Vegetable oil is derived from the crushing of oil seeds. The oil is mixed with
ethanol or methanol at around 50°C. The esterification
process produces mainly fatty acid
methyl esters, in other words, biodiesel. Small quantities of glycerine are also produced and
these are used in soap manufacturing. The remains of the crushed seeds or "cake" are rich
in proteins and are used as animal feed.
Biodiesel can also be manufactured through the gasification of wood and straw. This process
is illustrated in Figure 2.6.
I Electricity I
WOOD OR ~
STRAW
1____
Gasifica~ion
to
synthesIs gas
I
;-----tool
(H2, CO)
The process of biodiesel production is indicated in Figure 2.6. Again, the arrows show the
process flow. Feedstock
is gasified into a synthesis gas or syngas comprised
mainly of
hydrogen and carbon monoxide. This gas is converted into liquid fuels in a Fisher-Tropsch
reactor by means of a catalyst. Much heat is generated by the reactor which can be used
effectively for other purposes, such as steam generation which is required in the gasification
of the wood feedstock. This process was originally developed for the large scale conversion
of coal to liquid fuels, but it can also be applied to wood or straw. The availability of wood and
straw in a region dictates the size of the plant, which would normally be much smaller than
one using coal as feedstock.
Some chemical engineering firms, such as Shaval BioDiesel, can establish tum key biofuel
plants. This means that a potential new biofuel manufacturer does not necessarily need to
possess an in-depth knowledge of all the engineering details required to build a new biofuel
manufacturing
plant.
The
manufacturers
more
competitive.
competitive
disadvantage,
availability
of such
Conversely,
since future
expertise
makes
potential
a lack of knowledge
improvements
to productivity
new
may
biofuel
result
in a
and manufacturing
efficiency may be neglected. (Competitive forces are described in detail in Chapter 6.)
The above short description of the various manufacturing
processes used to produce bio-
ethanol and biodiesel is necessary because the process used has a direct influence on the
capital investment required.
Economies of scale are a very important aspect of the profitability of a biofuel manufacturer.
The direct capital investment to biofuel output capacity ratio needs to be kept as low as
possible. This means that the biofuel output capacity should be as high as possible, at the
lowest possible capital investment. For example, a process that yields 4 000 litres of biofuel
per day may require a capital investment of R1 million. Another process, using another type
of feedstock, may also yield 4 000 litres of biofuel per day, but the process may be simpler
and may therefore
require a capital investment of only R800 000. Furthermore,
capacity
should preferably neither exceed the expected market demand for biofuel nor the expected
availability of feedstock for the process. The biofuel manufacturer
fact that the higher the capital investment,
should also consider the
the higher the maintenance
costs and the
depreciation expense in the financial statements may be.
Below, capital investment estimates are presented for turn key biodiesel plants, as well as a
short description
manufacturer,
and the budgeted
Ethanol Africa (pty) Ltd.
capital
investment
of a South African
bio-ethanol
A South African firm, Shaval BioDiesel (pty) Ltd, is a specialist
in the establishment
of
relatively small biodiesel plants and biofuel manufacturing technology. They can establish a
biodiesel
plant that delivers 1 000 Iitres of biodiesel per day at a capital investment
approximately
of
R560 000. For R705 000, a biodiesel plant can be established that has an
output of 2 000 litres per day. A plant that delivers 4 000 litres of biodiesel per day may
require an investment of approximately
production
equipment
and excludes
(Shaval BioDieseI2006:n.p.).
R862 000. This capital investment
all other capital investments
is only for the
that may be required
Other capital investments may include land, buildings, vehicles
and working capital. These other capital investments
may vary considerably
manufacturer
a sunflower
to biofuel manufacturer.
For example,
farmer
from biofuel
may decide to
integrate forward in the biofuel value chain. The farmer may already have the required land,
buildings, vehicles and sunflower feedstock. The only additional expenditure, apart from the
equipment, is the financing cost for the extra time it takes to sell the sunflowers in the form of
biodiesel.
Shaval BioDiesel's
batch system process, as illustrated in Figure 2.7, is somewhat more
elaborate than the process described above in Section 2.3.2.1, but the process in essence
•••••
remains the same. The process, as shown in Figure 2.7, basically consists of oil pretreatment,
the esterification
in the reactor, the settling of biodiesel and the by-product,
glycerine, the washing of the biodiesel, the addition of additives and the storage of products.
The arrows in the figure indicate the process flow.
Ethanol Africa (Pty) Ltd envisages that it will establish eight major plants at a total capital
investment of R700 million each in suitable towns in maize production regions. The first bioethanol
plant is under construction
manufacturing
in Bothaville,
in the Free State. The total annual
capacity will be in the order of 1.4 billion Iitres of bio-ethanol,
made from
maize. Maize feedstock will be produced on contract mainly by farmers in the vicinity of the
manufacturing
plant. Ethanol Africa will provide production
Burick 2005a:n.p.; Van Burick 2006b:n.p.).
credit to these farmers
(Van
Ethanol Africa's feasibility study indicates the following:
•
One plant with an annual capacity of 180 million Iitres of bio-ethanol is best; and
•
The export of bio-ethanol is profitable when
Brent crude oil prices are more than $40 per barrel; and
The exchange rate higher than ZAR6/US$1 (Van Burick 2005a:n.p.).
Assuming that there are 360 manufacturing
days in a year, the total investment per daily
capacity of biodiesel is R1 400 for a 500 000 litre/day plant. The R1 400 cost of Ethanol
Africa's plant does not compare well with Shaval BioDiesel's cost of R250. However, Ethanol
Africa's cost includes the total cost of all assets and working capital, not only the direct
investment
in the equipment.
Detailed information on Ethanol Africa's R700 million capital
investment per bio-ethanol plant could not be obtained due to non-disclosure
agreements.
This information would have been useful to compare the capital investment in equipment by
Ethanol Africa and Shaval BioDiesel's capital investment in equipment.
It is not the objective of this study to give accurate details of all the fixed assets and working
capital that may be required by a biodiesel manufacturer. The cost of these fixed assets may
vary considerably from biofuel manufacturer to biofuel manufacturer.
For example, the cost
of land varies considerably for different sizes and locations of stands. A 4 000 m2 stand in
one town's industrial area may cost R250 000. This is equal to R625 000 per hectare. A 10
hectare plot outside of town may cost R400 000, which equals R40 000 per hectare.
Furthermore,
improvements,
such as electricity, water and fencing, available on the stand,
plot or farm may also influence the price. Another reason why the total capital investment
may vary from biofuel manufacturer
manufacturer's
to biofuel manufacturer
can be the particular
biofuel
decision to rent some of these assets rather than to purchase them outright.
Also, the purchasing decision between old or new assets may also influence the total capital
investment. Based on the limited information available, estimated total capital investments for
various capacities of a small biodiesel manufacturer
given in Table 2.3. These amounts
using sunflowers
exclude VAT and any transfer
as a feedstock
are
duties that may be
payable.
The estimated investments
are given in Columns 2, 4 and 6 per capital item (Column 1).
Indications of the relative sizes of items are shown in Columns 3, 5 and 7. Details of the
assumptions on the capital items (Column 1) and their respective investments (Columns 2, 4
and 6) are given below.
1)
2)
Land is an industrial stand of roughly 4 000 m2 in a small town.
Buildings should consist of at least 60 m2 of closed factory space at R1 500 per m2 (Shaval
BioDiesel
2006:n.p.)
LandbouWeekblad
3)
in a 9 x 18m store at roughly
R40 000, as advertised
in the
of 8 Sept 2006.
Sunflower feedstock may be stored in silos with a capacity of 30 tons or 60 m3 each. These
silos are equipped with augers and may cost approximately
roughly 10 days of sunflower feedstock
biodiesel manufactured.
R70 000 each. This equals
per 1 000 litres, 2 000 litres and 4 000 Iitres of
It should be noted that one large silo for a 4 000 litres per day
plant may cost less per volume than four smaller silos. The size of the silo(s) depends on
the required number of days of feedstock in storage available for biodiesel manufacturing
(Silo Warehouse 2006:n.p.).
4)
Feedstock equipment consists of a hammer mill at R16 000 (Staalmeester 2006:n.p.)
Capital investments:
Capital item
1 000 Iitres per day
1
Land
1)
Buildings
:l)
Feedstock storage
3)
Feedstock equipment4)
Biofuel equipment
Biofuel storage
5)
6)
By-product storage /)
Vehicles
B)
Working capital
Other
!:I)
1V)
Total
Biofuel manufacturer
2 000 Iitres per day
Rand
percentage
Rand
percentage
Rand
percentage
2
3
4
5
6
7
250000
16.5
250000
12.5
250000
8.8
130000
8.6
130000
6.5
130000
4.6
70000
4.6
140000
7.0
280000
9.8
16000
1.1
16000
0.8
16000
0.6
560000
36.9
705000
35.2
862000
30.3
8000
0.5
16000
0.8
32000
1.1
88000
5.8
176000
8.8
352000
12.4
250000
16.5
300000
15.0
400000
14.1
126000
8.3
252000
12.6
504000
17.7
20000
1.3
20000
1.0
20000
0.7
1 518000
100.0
2005000
Biofuel equipment cost
per output capacity
4 000 Iitres per day
100.0
2846000
560
353
216
1 518
1 003
712
0.31
0.20
0.12
0.84
0.56
0.40
100.0
Total capital
investment per output
capacity
Biofuel equipment cost
per total output over 5
years or 1 800 days
Total capital
investment per total
output over 5 years or
1 800 days
5)
Biofuel equipment consists of all the equipment, delivery, set up, and training by Shaval
BioDiesel. Some of the equipment used in the 1 000 litres per day plant is basically the
same as for the 4 000 Iitres per day plant. This is the reason why the 1 000 litre per day
plant costs more than a quarter of the 4 000 litre per day plant.
6)
Biofuel is storage in plastic tanks (such as a JoJo tank, for chemical storage) with a
capacity of 10 000 litres at R8 000 each. This tank will hold roughly 10 days of biofuel
produced per 1 000 Iitres, 2 000 Iitres and 4 000 litres of biodiesel manufactured
(JoJo
Tanks 2006:n.p.).
By-products, such as glycerine, are also stored in ordinary plastic tanks. One tank with a
7)
capacity of 10 000 litres at R8 000 will be sufficient to hold 20 days of manufacturing
per
1 000 litres of biodiesel per day. By-product oil cake can also be stored in a silo with a
similar
size than the silo used for feedstock
additional
equipment
storage.
However,
a larger auger and
may be necessary due to the nature of oil cake. This 60 m3 silo,
including additional equipment and larger auger, may cost roughly R85 000. This should be
sufficient for more or less 20 days of oil cake storage when manufacturing
1 000 litres,
2 000 litres and 4 000 litres per day of biodiesel manufacturing (JoJo Tanks 2006:n.p.; Silo
Warehouse 2006:n.p.).
Vehicles
8)
may consist
manufacturer
of a truck for the transportation
of feedstock
to the biofuel
and by-products to customers, as well as a fuel tanker for the transportation
of biodiesel to customers. The various options a biofuel manufacturer may choose from are
numerous.
One
option
is that
feedstock
suppliers
deliver
and
customers
collect
themselves.
Another option is to hire transport as required. A biofuel manufacturer
who
decides to buy its own trucks should consider the size of the trucks, such as 3 ton, 5 ton or
10 ton. This size depends on the quantity of feedstock and products in storage and which
configuration will result in the lowest possible capital investment and operational expenses.
A rough estimation of the cost of second hand trucks is made only for the purposes of
obtaining an approximate total capital investment.
Working capital is provided for 20 days supply of feedstock at R2 200 per ton per 1 000
9)
litres per day plant. It is assumed that products will be sold on average 20 days after the
date of manufacturing.
10)
Other assets are purely a provision for tools and other small equipment
that may be
required.
From Table 2.3 it is evident that biofuel manufacturing
equipment
is the largest capital
investment
(36.9 per cent, 35.2 per cent and 30.3 per cent respectively
capacities)
of a biofuel
manufacturer.
The total
cost
per output
for the various
capacity
decreases
considerably as the output capacity increases. For example, the total capital investment for a
1 000 litre per day plant costs R1 518 per capacity litre. This figure is 51.3 per cent higher
than the R1 003 total cost per capacity litre of a 2 000 litre per day plant. It is assumed that
these plants have a productive
lifespan of five years or 1 800 manufacturing
days before
major repairs and upgrading become necessary. The total capital investment for the 1 000
litre per day plant is RO.84 per litre of biodiesel produced, which is 110 per cent more than
the total capital investment of R0.40 per litre of biodiesel produced in the 4000
litre per day
plant.
A sunflower farmer, for example, may choose to integrate forward in the biofuel industry. The
farmer may already possess all the assets (land, buildings, silos and tanks) except for the
biofuel equipment.
Again economies of scale may influence the farmer's decision on the
plant size. For example, the biofuel equipment cost per output capacity increases by 63.4 per
cent from R216 (4 000 Iitres per day plant) to R353 (2 000 Iitres per day plant) and increases
further by 58.6 per cent to R560 (1 000 Iitres per day plant). The cost of the biofuel
equipment
over five years or 1 800 manufacturing
biodiesel manufactured
days amounts to RO.12 per litre of
(4 000 Iitres per day plant). This RO.12 per litre is a decrease of 40
per cent from R0.20 per litre (2 000 Iitres per day plant) and a decrease of 61.3 per cent from
RO.31 per litre (1 000 litres per day plant). Thus, from Table 2.3 it is evident that a feedstock
farmer that integrates forward into the biofuel industry has a competitive
advantage
over
independent biofuel manufacturers from a total capital investment perspective.
The cost of biofuel to the final consumer should be less than that of other energy sources
with similar utility values if the demand for biofuel is to be maintained.
feedstock
determines
the process, which in turn determines
The choice of
the product: bio-ethanol
or
biodiesel. Once a certain process has been chosen, it might prove difficult and expensive to
change the process for other types of feedstock. The capital investment in a plant is probably
the largest of all the expenditures a biofuel manufacturer will incur. The cost and efficiency
yields of various feedstocks are studied in Chapter 3.
In the interests of national energy security, local economic development and the preservation
of the environment,
South Africa should produce its own biofuel. Government therefore has
to promote biofuel manufacturing
through incentives and regulations. Local development
the bio-ethanol industry has already begun, with manufacturers
in
such as Ethanol Africa (pty)
Ltd, who is regarded by some as the saviour of South African maize producers.
CHAPTER 3: FEEDSTOCK FOR BIOFUEL MANUFACTURING
CHAPTER 4: BIOFUEL SALES
CHAPTER 5: REVENUES FROM BY-PRODUCTS AND EXPENSES
FOR BIOFUEL MANUFACTURERS
CHAPTER 3
FEEDSTOCK FOR BIOFUEL MANUFACTURING
Feedstock is an important variable that influences biofuel manufacturers'
biofuel manufacturer's
profitability.
In a
value chain, feedstock forms part of the supply chain which needs to
be managed efficiently.
(See Section
1.2.2 and Figure 1.1 for the position of feedstock
producers in the value chain.)
A number of crops have been recognised in South Africa as a viable source of feedstock for
the manufacturing
and jatropha
of biofuel. These include maize, sunflowers,
soybeans, wheat, palm oil
curcas. (Van Burick 2006a:n.p.). The consistency of the supply, biofuel yields
and costs of the various
manufacturers'
crops differ and therefore
have a different
impact on biofuel
profitability. A biofuel manufacturer therefore needs to decide carefully what
produce to use as feedstock.
This chapter focuses on the need for a consistent supply of feedstock to the manufacturing
process, as well as the cost of feedstock. The cost of feedstock is determined inter alia by
the purchase price per ton, transport costs and the biofuel conversion yield ratio.
Feedstock
may consist of any organic matter or biomass. However, economies
dictate that the most efficient quantity of feedstock
should always be introduced
of scale
to the
manufacturing
process. A consistent supply of small quantities of feedstock
manufacturing
plant with a smaller capacity and capital investment. Large and inconsistent
feedstock
investment.
supplies may require a manufacturing
may require a
plant with a larger capacity and capital
Furthermore, large supplies of feedstock result in relatively high storage costs.
Inconsistent feedstock supplies can lead to costs associated with idle time. These additional
capital
and operating
profitability.
costs may have a negative
impact on a biofuel
(See Sections 2.3 and 2.4 for descriptions
manufacturer's
of suitable biofuel manufacturing
processes and estimated capital investments.)
A consistent supply of feedstock to the biofuel manufacturing
process is one of the factors
that determine the size and capacity of a plant. Consistency can be achieved by selecting a
type of feedstock that can be produced on a continuous basis. Crops are seasonal bound,
which implies that the biofuel manufacturer needs to consider storage and the grading of the
feedstock if the feedstock is bought directly from farmers. Feedstock could also be acquired
on a regular basis from entities that store grain in silos, such as Afgri Ltd.
The biofuel manufacturing
plant should be close to the feedstock
minimise expensive transportation
suppliers
in order to
costs. The tonnage of the feedstock required is more than
the tonnage of biofuel produced from that feedstock (Van Burick 2005a:n.p.).
For example,
one ton of maize can yield roughly 420 litres of biofuel, and one litre of biofuel weighs
approximately
one kilogram. The biofuel manufacturer's
may therefore
be higher for feedstock
transportation
costs per kilometre
than for the value added biofuel. This concept is
illustrated in Figure 3.1.
Feedstock
supplier
~
•..•..
~
Biofuel
manufacturer
•••
•..•..
Biofuel
customers
From Figure 3.1 it is clear that the transport ratio of feedstock to biofuel yield is more than
1: 1. The manufacturing
plant should therefore be as close to the supply of feedstock
as
possible in order to minimise the total cost of transportation.
Different crops thrive in different ecological conditions. It is therefore important to note the
main provinces where certain crops are produced. Biofuel manufacturers
should be located
in the provinces where an abundant supply of the feedstock crop they require is produced in
order to minimise transportation costs.
Different
crops yield different
biofuel quantities
primarily due to the manufacturing
per ton (conversion
yield ratio). This is
process, the digestible starch content and the type of
yeast used. It is therefore important that the cost per ton of the feedstock should be as low as
possible. given its purchase price and biofuel conversion yield ratio (The mother earth news
1980:n.p.) (Dien, Bothast, Iten, Barrios & Eckhoff 2002:n.p).
The direct cost of feedstock
quantity
produced
to a biofuel manufacturer
and demanded
in South Africa.
is influenced
by the total annual
The direct cost of feedstock
is also
influenced by the international total cost of the feedstock, as reflected in the import parity
price. The import parity price is influenced, amongst other things, by the currency exchange
rate (South African Rand/United States of America Dollar).
The production,
biofuel conversion
wheat and jatropha
yield ratio and costs of maize, sunflowers,
curcas as feedstock
soybeans,
are discussed below. Other crops such as oats,
canola and sugar cane are also suitable feedstock, but in this report, these types of produce
are not discussed. Data on various aspects of maize, sunflowers, soybeans and wheat were
obtained from Grain SA reports. This data has been restructured
information for purposes of this report. This restructured
to provide meaningful
information is presented in tables
and graphs.
The total production of yellow and white maize in South Africa per province for the three
years from 2004 to 2006 is given in Table 3.1.
Table 3.1 indicates the production
of maize per province (Column
1) and the tonnage
produced per year (Columns 2, 4 and 6) from 2004 to 2006. The annual provincial production
as a percentage of the total production in South Africa for each year is given in Columns 3, 5
and 7. The three-year average production (Column 8 and 9) indicates the relative importance
of maize production provinces. The average annual production of maize in South Africa over
the past three years has been 8 930 000 tons. On average, the Free State produces the
most maize, at 3 039 000 tons annually. This represents
34.0 per cent of total maize
production
(34.0 per cent of the total
production),
in South
Africa.
Furthermore,
the
Free State
North-West (25.5 per cent of the total production) and Mpumalanga
(24.3 per
cent of the total production) are responsible for 83.8 per cent of the total maize production. A
biofuel manufacturer that uses maize as its feedstock would therefore build its biofuel plant in
one of these three provinces.
Production
years
Province
2003/2004
1
2
3
1000
percentage
tons
2005/2006
estimated
2004/2005
4
5
1000
7
6
1000
percentage
tons
Average for 3
years
percentage
tons
9
8
1000
percentage
tons
Western Cape
0
0.0
0
0.0
0
0.0
0
0.0
Northem Cape
511
5.4
557
4.9
385
6.5
484
5.4
Free State
3100
32.7
4113
1905
36.0
32.3
3039
34.0
Eastern Cape
82
0.9
88
0.8
70
1.2
80
0.9
Kwazulu-Natal
390
4.1
400
3.5
322
5.5
371
4.2
Mpumalanga
2219
23.4
2807
24.6
1482
25.1
2169
24.3
Limpopo
115
1.2
120
1.0
54
0.9
96
1.1
Gauteng
483
5.1
483
4.2
280
4.8
415
4.6
North-West
2568
27.1
2863
25.0
1 397
23.7
2276
25.5
Total
9467
100
11430
100
5893
100
8930
100
One ton of maize can yield 420 litres of bio-ethanol.
Furthermore,
an estimated 330kg of
animal feed is produced as a by-product per ton of maize used for bio-ethanol manufacturing
(Van Burick 2005a:n.p.).
The maize SAFEX (South African Futures Exchange)
price per ton and the production
quantities from January 2003 to June 2006 are indicated in Figure 3.2.
The graph in figure 3.2 shows the impact of maize production in 1 000 tons per annum (Yaxis right) on the SAFEX price per ton (Y-axis left). The vertical lines indicate the annual
maize production quantities as well as the dates: June 2003, June 2004, June 2005 and
June 2006 (estimated). From Figure 3.2 it is clear that the estimated production of maize in
2006 (5 893 000 tons) was 48.4 per cent lower than the 11 430 000 tons produced in 2005.
This resulted in a 108.1 per cent increase in the price of maize from R600 per ton in
June 2005 to R1 249 per ton in June 2006.
1,600
1,400
C 1,200
0
~
"0
t:
III
10,000
1,000
~
CI)
u
><
w
600
e(
fI)
400
S
8,000
8
0
6,000
t:
~
::s
800
.t;
D..
Ui
:!:.
"0
ll-
4,000
e
D..
200
0
~~
~
':,~~
~
c,~
~
~
~
':,'>~
':,'>~
c,"
':,'>~
January 2003 to June 2006
1-
I
Price --+-- Production
The influence of the exchange rate on the import parity prices of maize is indicated in Figure
3.3.
1,800
10.00
C 1,600
.s
9.00
:at:
1,400
8.00
~
~
1,200
................. ,
'1:
III
Q.
1,000
E
t:
j
t:
.2
6.00
tit
5.00
:a
800
4.00
600
3.00
400
2.00
200
1.00
0
0.00
"0
t:
t;.
~
c,~
':,~~
fI)
::)
t::
0
Q.
7.00
~
c,~
r6>~
':,'>~
':,'>~
I--Import
parity _
Exchangerate
I
t;.t:
The graph in figure 3.3 reveals the impact of the Rand/US$ exchange rate (dotted line) on
the Y-axis (right) as well as the import parity price per ton (solid line) on the Y-axis (left) over
the period from January 2003 to June 2006 (X-axis). The correlation coefficient between the
movements
in the average monthly Rand/US$ exchange rate and the import parity price of
maize is calculated
maize import
at 0.6. This means that the Rand/US$
parity directly.
However,
the influence
exchange
rate influences the
is not as strong as expected
(a
correlation coefficient of one is strongest). This may be due to changes in the international
basic cost of maize as a result of international supply and demand. The movement in the
average monthly exchange rate, according to Figure 3.3, correlates by a factor of 0.4 to the
SAFEX price. Other local market forces also have an effect, which may result in the lower
correlation.
According to Figure 3.2, the SAFEX cost of maize in June 2006 was R1 249 per ton. One ton
of maize converts into 420 Iitres of bio-ethanol. The direct feedstock
cost per litre of bio-
ethanol in June was therefore R2.97 per litre.
Sunflowers are ana lysed next. A similar structure as the one used in the discussion of maize
is followed.
The production of sunflowers in South Africa per province for the three years from 2004 to
2006 is indicated in Table 3.2.
Table 3.2 indicates the production of sunflowers per province (Column 1) and the tonnage
produced per year for three years (Columns 2, 4 and 6). The annual provincial production of
sunflowers as a percentage of the total production in South Africa is given in Columns 3, 5
and 7. The three-year
average
production
(Columns
8 and 9) indicates
the relative
importance of sunflower production provinces. The Free State province produces the most
sunflowers at 252 000 tons annually on the three-year average, which is 41.4 per cent of the
total production in South Africa.
Production
Province
1
2003/2004
2004/2005
2
4
3
1000
percentage
tons
2005/2006
Estimated
5
1000
percentage
tons
years
Average for 3
years
7
6
1000
percentage
tons
9
8
1000
percentage
tons
Western Cape
0
0.0
0
0.0
0
0.0
0
0.0
Northem Cape
1
0.2
1
0.2
2
0.4
1
0.2
Eastem Cape
0
0.0
0
0.0
0
0.0
0
0.0
276
42.6
260
41.9
221
39.7
252
41.4
0
0.0
0
0.0
0
0.0
0
0.0
Mpumalanga
46
7.1
46
7.4
59
106
50
8.2
Limpopo
37
5.7
36
5.8
41
7.4
38
6.2
Gauteng
23
3.5
14
2.3
15
2.7
17
2.8
North-West
265
40.9
263
42.4
220
39.5
249
40.9
Total
648
Free State
Kwazulu-Natal
North-West
100
620
100
557
100
608
100
produces, on the three year average, almost as much as the Free State, at
249 000 tons per annum. This is 40.0 per cent of the total production.
The total average
annual production of sunflowers in South Africa is 608 000 tons of which the Free State and
North-West
collectively
produce 82.3 per cent. A biofuel plant which uses sunflowers
as
feedstock should therefore be in the Free State or in North-West.
One hectare of sunflowers
2006a:n.p.;
can yield an average of 560 litres of biodiesel
Grain SA 2006b:n.p.).
This translates
(Van Burick
to an average yield of 350 Iitres of
biodiesel per ton of sunflowers if roughly 1.6 tons of sunflowers are produced per hectare. An
estimated 620 kilograms of oil cake and 18 per cent glycerine can also be obtained (Shaval
BioDiesel 2006:n.p.).
3,500
3,000
'i:
620 Ui'
s::
0
'!:: 2,500
'tI
s::
~ 2,000
.s
6008
o
580 ~s::
CD
u
'C
Q.
><
W
u.
~
en
o
1,500
;;
560
g
'tI
1,000
540
e
Q.
500
0
~":>
rt'
)~<::-
~":>
rt'
)~<::-
•.•••~
•.•••<::l'=>
'1>'
'1>'
)~<::-
)~<::-
January 2003 to June 2006
1- Price -
Production
I
The graph in figure 3.4 shows the impact of sunflower production in 1 000 tons per annum
(Y-axis right) on the SAFEX price per ton (Y-axis left). The vertical lines indicate the annual
sunflower production quantities as well as the dates: June 2003, June 2004, June 2005 and
June 2006 (estimated).
The production
of sunflowers
decreased
by 10.1 per cent; from
620000 tons in 2005 to 557 000 tons in 2006. This contributed to the 30.3 per cent increase
in the price of sunflowers from R1 682 per ton in June 2005 to R2 192 per ton in June 2006.
The influence of the exchange rate on the import parity prices of sunflowers are indicated in
figure 3.5.
The Rand/US$ exchange rate (Y-axis right), shown as a dotted line in Figure 3.5, affected
the import parity price per ton of sunflowers
(Y-axis left), shown as a solid line, over the
period JanuarY 2003 to June 2006 (X-axis). The correlation coefficient between the average
monthly movement of the Rand/US$ exchange rate and the import parity price of sunflowers
is calculated at 0.6. Thus, movements in the exchange rate influence the import parity price
to a large extent. The movement
between the monthly average exchange
rate and the
SAFEX price of sunflowers correlates with a factor of 0.4. It is noted that these correlation
coefficients between the movement of the average monthly exchange rate and import parity
or SAFEX prices of maize and of sunflowers are the same. This may be coincidental.
'2
~s::
~
~
.1:
4,000
10.00
3,500
9.00
8.00
3,000
7.00
2,500
III
6.00
1:: 2,000
5.00
E
s::
4.00
Q.
0
Q.
j
1,500
.e
s::
500
1.00
0
0.00
'a
III
::»
:as::
III
iii:
3.00
1,000
s::
tit(/)
2.00
iii:
~~
~ro
~
~
r;)~
~
••:;~t::-
~
'),~
••:;~t::-
r;)':>
r;)l"o
~
••:;~t::-
,:>vt::-
January 2003 to June 2006
!--Import
The price of sunflowers,
parity------- Exchangerate
I
according to Figure 3.4, was R2 192 per ton in June 2006. The
direct cost of feedstock in biodiesel manufacturing was therefore R3.91 per litre, if sunflowers
were used as feedstock.
This calculation
is based on the assumption
that 560 Iitres of
biodiesel are produced from one ton of sunflowers.
The production of soybeans in South Africa per province for the three years from 2004 to
2006 is given in Table 3.3.
Production
years
Province
2005/2006
2003/2004
1
2
200412005
3
1000
percentage
tons
5
4
1000
percentage
tons
Average for 3
years
estimated
6
7
1000
percentage
tons
9
8
1000
percentage
tons
Western Cape
0
0.0
0
0.0
0
0.0
0
0.0
Northern Cape
0
0.0
0
0.0
2
0.5
1
0.3
Eastern Cape
0
0.0
1
0.4
1
0.3
1
0.3
Free State
29
13.2
30
11.0
59
15.4
39
13.4
Kwazulu-Natal
36
16.4
39
14.3
61
15.9
46
15.8
110
50.0
137
50.3
203
53.0
150
51.4
Limpopo
10
4.5
27
9.9
30
7.8
23
7.9
Gauteng
8
3.6
9
3.3
11
2.9
9
3.1
26
11.8
29
10.6
18
4.7
24
8.2
220
100
273
100
383
100
292
100
Mpumalanga
North-West
Total
The production of soybeans per province (Column 1) and the tonnage produced per year
(Columns 2, 4 and 6) are indicated in Table 3.3. Columns 3, 5 and 7 show the annual
provincial production of soybeans as a percentage of the total production in South Africa.
The three-year average production is given in Columns 8 and 9, which indicates the relative
importance
of soybean
production
in those provinces.
The three-year
average
annual
production of soybeans in South Africa is 292 000 tons, of which Mpumalanga produces on
average 150000
tons. This is 51.4 per cent of the total soybean production in South Africa
and exceeds that of the other provinces by far. Kwazulu-Natal (15.8 per cent of the total) and
the Free State (13.4 per cent of total) on average produce collectively
85 000 tons of
soybeans per annum. Mpumalanga is therefore the preferred province for the location of a
biofuel plant that uses soybeans as its feedstock.
The biofuel manufacturer can expect to obtain an average of 260 litres of biodiesel from one
ton of soybeans.
It should be noted that other estimates
indicate a yield of 170 litres of
biodiesel per ton of soybeans. Furthermore, an estimated 800 kg of animal feed is produced
as a by-product per ton of soybeans (Van Surick 2006a:n.p.; Grain SA 2006c:n.p.).
3,000
400
2,500
350 _
en
'i:
0
'!::
"
~
~
CD
.u
.:;
a.
><
w
II.
2,000
300
~
S
g
250 ~
1,500
~
200 ~
150
1,000
c(
.s
e
100 a.
en
500
0
e":>
~
~q,~
e":>
~
~'>~
f::)~
~~
~.;s
f::)r::,<O
~
~'>~
January 2003 to June 2006
1-
Price -
Production
I
The graph in figure 3.6 reveals the impact of soybean production in 1 000 tons per annum
(V-axis right) on the SAFEX price per ton (Y-axis left). The vertical lines indicate the annual
production quantities of soybeans as well as dates: June 2003, June 2004, June 2005 and
June 2006). The production of soybeans increased by 40.3 per cent from 273 000 tons in
2005 to an estimated 383 000 tons in 2006. An unexpected increase in the price of soybeans
followed. The price increased by 17.1 per cent from R1 492 per ton in June 2005 to R1 747
per ton in June 2006. This increase may be attributed to an increase in the import parity price
and/or other market influences, such as a general increase in the demand for soybeans.
The influence of the exchange rate on the import parity prices of soybeans are indicated in
Figure 3.7.
10.00
4,000
'2
.s
=ac
~
~
'I:
.. - - ~....
3,500
9.00
.. ,
3,000
8.00
,
............
7.00
2,500
6.00
2,000
5.00
1,500
4.00
Cll
Q.
~
0
Q.
E
c
j
;:)
=a
G.c
3.00
c
1,000
c
"
a:
500
.e
MIl)
2.00
Cll
1.00
0.00
0
r§'~
~~
')
).;:,<::-
~
_b.
R)\J.
r;:;~
,,~
R)~
~'V
":j;:'<::-~
).;:,<::-
~~
)'5
January 2003 to June 2006
I--Import
parity------- ExchangerateI
Figure 3.7 indicates the impact of the Rand/US$ exchange rate (Y-axis right) on the import
parity price per ton of soybeans (Y-axis left) over the period from January 2003 to June 2006
(X-axis). A relatively weak, although still positive, correlation coefficient of 0.4 exists between
the movement in the monthly average exchange rate and the import parity price of soybeans.
The correlation coefficient between the monthly average Rand/US$ and the SAFEX price per
ton of soybeans is even weaker at 0.3. The relatively low production quantities of soybeans
(a three-year average of 292 000 tons) in South Africa, compared to maize (a three-year
average of 8 930 000 tons) may make the soybean market more volatile than the maize
market. Small market influences,
feedstock
for biofuel
soybeans
per ton. The direct
such as an increase in the demand for soybeans
manufacturing,
may have relatively
cost per ton of soybeans
as
large effects on the price of
as a feedstock
for biofuel
manufacturing is therefore a relatively large financial risk for a biofuel manufacturer. A biofuel
manufacturer
attempt
using soybeans as a feedstock
to hedge against the relatively
soybeans, to some extent.
should produce the soybeans
large fluctuations
itself, in an
in the direct cost per ton of
According to Figure 3.6, the SAFEX cost per ton of soybeans in June 2006 was R1 747. The
direct feedstock
cost to produce biodiesel was therefore
R6.72 per litre, if 260 Iitres of
biodiesel was yielded from one ton of soybeans.
The production of wheat in South Africa per province for the three years from 2004 to 2006 is
set out in Table 3.4.
Production
Province
2003/2004
1
1000
percentage
tons
2005/2006
2004/2005
3
2
4
tons
Average for 3
years
estimated
5
1000
years
percentage
6
1000
tons
percentage
9
8
7
1000
tons
percentage
Western Cape
530
34.4
520
31.0
645
35.1
565
33.5
Northem Cape
280
18.2
300
17.9
287
15.6
289
17.1
9
0.6
14
0.8
14
0.8
12
0.7
480
31.2
510
30.4
551
30.0
514
30.5
Kwazulu-Natal
32
2.1
34
2.0
43
2.3
36
2.1
Mpumalanga
36
2.3
80
4.8
82
4.5
66
3.9
Limpopo
35
2.3
63
3.8
60
3.3
53
3.1
Gauteng
9
0.6
14
0.8
14
0.8
12
0.7
130
8.4
145
8.6
143
7.8
139
8.2
1540
100
1680
100
1839
100
1686
100
Eastern Cape
Free State
North-West
Total
Table 3.4 indicates the production of wheat (Columns 2, 4 and 6) per production year per
province (Column 1). The relative size of each province, expressed as a percentage of the
total production,
is given in Columns 3, 5 and 7. The average three-year
production,
as
indicated in Columns 8 and 9, shows which provinces in South Africa can be considered the
main wheat producers. The Western Cape is the largest producer of wheat, at a three-year
average of 565 000 tons per annum. The Free State produces, on the three-year average the
second most wheat at 514 000 tons annually. The Western Cape (33.5 per cent of the total
production) and the Free State (30.5 per cent of the total production) collectively produce 64
per cent of the total three-year average annual production of wheat in South Africa. This is,
on average, 1 079 000 tons of wheat out of a total 1 686 000 tons per annum. A biofuel
manufacturer that uses wheat as a feedstock for biofuel manufacturing should preferably be
in the Western Cape or in the Free State.
The conversion yield for wheat is estimated at 420 Iitres of bio-ethanol per ton of wheat. This
yield is approximately the same as for maize (The mother earth news, 1980).
2,000
1,800
I:
0
1,600
~
'tJ
1,400
III
1,200
r::
~
Gl
u
Ui'
r::
2,000
1,000
><
w
II.
c(
rn
g
1,500 :
o
".::
a.
S
t;
800
1,000 ~
e
600
a.
400
200
0
tfl~~
~~<::-
tfl~~
~'><::-
,,~
,,<;:>'=>
'l>'
~'><::-
'l>'
~'><::-
January 2003 to June 2006
1-
Price -
Production
I
The impact of wheat production in 1 000 tons per annum (Y-axis right) on the SAFEX price
per ton (Y-axis left) is shown in Figure 3.8. The vertical lines indicate the annual production
quantities as well as the dates: June 2003, June 2004, June 2005 and June 2006. In 2006,
an estimated 1 839 000 tons of wheat were expected to be produced, while in 2005, a total of
1 680000
tons were produced. This 9.4 per cent increase in the tonnage of wheat produced
resulted in an expected 2.4 per cent decrease in the price of wheat from R1 608 per ton in
June 2005 to R1 568 per ton in June 2006.
The influence of the exchange rate on the import parity prices of wheat is indicated in Figure
3.9.
2,500
C
.s
:aI:
10.00
..
2,000
III
9.00
- .. -
8.00
~
~
·C
7.00
1,500
a.
1::
0
a.
E 1,000
6.00
III
5.00
4.00
I:
l/)
::::)
:a
I:
11
3.00
j
I:
.2
~
2.00
500
'C
I:
1.00
III
a::
0
~~
~rp
,)'"6
0.00
~~
~rp
')'$
~~
~~(,;)
~rp
'l-#
rp
,:;;j
'),>t::-
'),§:.
January 2003 to June 2006
I--Import
parity
Exchangerate
I
Figure 3.9 reveals the influence of the Rand/US$ exchange rate (Y-axis right) on the import
parity price per ton (Y-axis left) of wheat over the period from January 2003 to June 2006 (Xaxis). The correlation coefficient between the movements of the monthly average exchange
rate and the import parity price of wheat is 0.6 and it is in line with the correlation coefficients
for maize and sunflowers. The correlation coefficient between the movements of the monthly
average exchange rate and the SAFEX price per ton of wheat is also 0.6, which is the
highest of the four grains. A biofuel manufacturer should therefore expect an increase in the
direct cost of wheat as a feedstock when the Rand/US$ exchange rate increases.
The SAFEX price of wheat in June 2006 was R1 568 per ton, according to Figure 3.8. If 420
litres of bio-ethanol
is manufactured from one ton of wheat, the direct cost of wheat as a
feedstock for bio-ethanol manufacturing in June 2006 was R3.73 per litre.
The last feedstock to be discussed for the purposes of this report is jatropha
curcas. The
biofuel yields and the cost of jatropha cur cas as a feedstock follow a short description of its
production.
Jatropha cur cas L., also known as physic nut, is a relatively small tree that produces seeds
with high oil content. A tree can be expected to have a productive seed-bearing
approximately
lifespan of
35 years. Currently, this tree occurs in many parts of the world, including the
Republic of South Africa. However, the tree does not thrive in all areas in South Africa and
not much information
is available on the commercial
production of jatropha
curcas in the
Republic of South Africa. Jatropha curcas cultivated for oil production is normally planted at
2m x 2m; 2.5m x 2.5m; or 3m x 3m planting distances, depending on soil fertility and the
availability of water. This is equivalent to a plant density of 2 500, 1 600 or 1 111 plants per
hect~re. This tree is drought-resistant
as a suitable
feedstock
and it may grow in marginal soil. It is locally regarded
for the production
of biodiesel.
The seeds,
however,
contain
substances that are toxic to humans and animals. The press cake can therefore only be used
or sold as organic manure (Heller 1996:40-42, Van Burick 2006a:n.p.).
Jatropha curcas seeds yield 3 000 to 6 000 litres of biodiesel per hectare. The yield depends
inter alia on the quantity
of water that the tree received during the year (Van Burick
2006a:n.p.). Duke (1983:n.p.) states that 6 to 8 tons of seed per hectare with an oil content of
37 per cent can be expected. This is equivalent to 2 100 to 2 800 litres of biodiesel per
hectare without irrigation. It can therefore be calculated that some 350 litres of biodiesel are
yielded per ton of jatropha curcas seeds produced. This is calculated by dividing 2 100 litres
per hectare by six tons of seed per hectare.
In the Republic of South Africa, jatropha cur cas is produced on a commercial scale for the
manufacturing
of biodiesel. Currently, the producers of jatropha curcas seeds are relatively
small and there is no open market for these seeds. These producers normally use the seeds
themselves
to manufacture
biodiesel.
If a biofuel manufacturer
seeds as its main feedstock at this stage, the manufacturer
itself.
chooses jatropha
curcas
has to produce the feedstock
The total cost of jatropha curcas as feedstock is the aggregate of all the capital and
operating
costs to produce jatropha
cur cas, divided by the annual tonnage of the seeds
produced. (It is not the objective of this report to determine the detailed direct and indirect
costs that may be associated with the production of jatropha curcas.)
Further
research
should therefore
be done on the production
and associated
costs to
produce jatropha curcas seeds for biodiesel manufacturing in the Republic of South Africa.
3.5
COMPARISON
BETWEEN
MAIZE,
SUNFLOWER,
SOYBEAN,
WHEAT
AND
JATROPHA CURCAS AS A FEEDSTOCK
Maize, sunflowers, soybeans, wheat and jatropha
information
curcas are compared
in Table 3.5. The
in Table 3.5 was obtained from preceding figures and paragraphs.
does not intend to suggest the best crop as feedstock
for the manufacturing
This table
of biofuel.
Excluding the income from by-products, the following remarks can be made about Table 3.5:
•
Maize has the largest potential as a feedstock for bio-ethanol manufacturing,
both on the
basis of the average three-year annual production (8 903 000 tons) and the direct cost of
feedstock
per litre (R2.97
per litre). The total
potential
bio-ethanol
that
can
be
manufactured from all the maize that is produced in South Africa is 3 739 million Iitres.
Maize is therefore a preferred feedstock for bio-ethanol to be blended in E10-fuel (10 per
cent of bio-ethanol per litre of petrol) or E85-fuel (85 per cent of bio-ethanol per litre of
petrol).
South Africa
consumes
roughly
10 000 million
Iitres of petrol
per annum
(Department of Minerals and Energy 2005:40), which means that 1 000 million litres of
bio-ethanol
are required for E10 fuel. In other words, 2 381 000 tons of maize are
required for bio-ethanol manufacturing for E 10 fuel.
•
The Free State seems to be a relatively
important
province for the production
of
feedstock, since three of the largest feedstocks (tonnage wise) namely maize, sunflowers
and wheat are produced mainly in this province. The Free State may therefore be the
obvious choice for the location of a biofuel manufacturing plant.
Average
SAFEX
Import
Conversion
Main production
three year
Feedstock
Feedstock
yield per
price June
parity price
2006
June 2006
potential
rate June
provinces
production
Total
Exchange
ton of
Type of
feedstock
biofuel
2006
Province (percentage
1 000 tons
Rand/ton
Rand/ton
Rand/US$
Litres
1 249
1 387
6.98
420
direct cost
biofuel
Rand/litre
Million litres
2.97
3739
of total production)
Free State (34.0)
Maize
Bio8903
North-West
(25.5)
ethanol
Mpumalanga (24.3)
Free State (41.4)
Sunflower
608
2192
2956
6.98
350
Biodiesel
3.91
340
1 747
2272
6.98
260
Biodiesel
6.72
76
1 568
1 979
6.98
420
3.73
708
Not
Not
available
available
North-West (40.9)
Soybean
292
Wheat
1 686
Mpumalanga (51.4)
Free State (30.5)
Bio-
Western Cape (33.5)
Jatropha
curcas
Not
ethanol
Not
Not
Not
Not available
available
350
applicable
applicable
applicable
Biodiesel
•
Soybeans at 260 Iitres of biodiesel per ton of feedstock and a direct cost of feedstock per
litre of R6.72 perform relatively poor compared with other feedstocks.
In this regard,
however, it must be emphasized that income from the by-products of soybean feedstock
is substantial.
•
Jatropha curcas seeds yield roughly 350 litres of biodiesel per ton of feedstock. This yield
is the same as for sunflowers.
However, the total cost to produce one ton of jatropha
curcas seeds as feedstock cannot be determined exactly at this stage. Ajatropha
tree produces seeds productively
curcas
for 35 years and therefore the total cost per ton of
seeds may be relatively low. It should be noted that the by-products are not marketable
as animal feed, but can only be used as organic fertilisers.
Biofuel manufacturers would probably locate their manufacturing plants in the area where the
crop to be used as their feedstock
minimise transportation
is produced
in sufficient quantities.
This is done to
costs.
The direct cost of a certain crop as feedstock
is mainly determined
by the production
quantities and import parity price of that crop. The import parity price is largely influenced by
the Rand/US$ exchange rate, as well as the basic international price of the crop, which is a
result of international supply and demand. The conversion yield of the relevant feedstock has
a large impact on the total cost per biofuel litre manufactured.
The various crops as feedstock also yield various marketable by-products such as glycerine
for soap manufacturing, for the use in animal feeds, or organic fertiliser. The direct cost per
litre of biofuel manufactured
crop to use as feedstock.
should therefore not be the only factor when deciding on which
Income from the sale of by-products may, for instance, influence
the profitability of a biofuel manufacturer substantially.
CHAPTER 4
BIOFUEL SALES
The
sale of biofuel
manufacturer's
is one of the
profitability.
most
important
aspects
that
influence
Sales as a value chain activity should therefore
a biofuel
be managed
properly. (See Figure 1.2 for a visual representation of the value chain activities of a biofuel
manufacturer that affect on profitability.)
Biofuel sales are a function of the supply of, demand for and price of this product. In one
respect, biofuel manufacturers
industry,
are positioned closer to agriculture as an industry than the oil
because the direct cost of sales is primarily driven by the cost of agricultural
feedstock. However, the selling price of biofuel is largely linked to the price of crude oil, since
biofuel has, to a large extent, the same utility as petroleum fuel. An analysis of oil prices and
oil production is therefore relevant to the objectives of this study. The market demand for
biofuel in general and the total supply of biofuel by all biofuel manufacturers
influence biofuel manufacturers'
should greatly
profitability. In this chapter, attention is paid to the prices of
petroleum fuel and biofuel, which are largely the result of the supply of and demand for fuel.
The petroleum fuel price is analysed focusing on the history of oil prices, oil demand, oil
supply and economic forecasts.
The price of oil, such as the North Sea Brent crude oil price, is given in US dollars per barrel.
A description of the unit of measure is therefore relevant to an understanding of the price of
fuel in the South African context.
Barrels were used as containers in the 1860s when the oil industry started to flourish in the
United States of America. The volumes of those initial barrels varied widely, which caused oil
pricing to be problematic.
In order to promote uniformity, the capacity of a barrel was set in
1870 at 42 gallons (Pees 2004:n.p.).
The Standard Oil Company of John D. Rockefeller largely dominated the early oil industry in
the United States and in the world. Standard Oil painted their barrels blue. The prices were
quoted in US dollars per blue barrel. The shortened form of barrel today is bbl, which still
refers to Standard Oil's blue barrel. Today oil is no longer kept in barrels, but the price is still
quoted in US dollars per barrel. So, for example, in South African terms a price of US$70/bbl
amounts to R3.08 per litre at R7/US$ and 158.98 litres per barrel.
$80
$70
$60
~•.. $50
lU
OJ
~
$40
"It
g
$30
N
,
$20
$10
$0
1869 1879 1889 1899 1909 1919 1929 1939 1949 1959 1969 1979 1989 1999
1874 1884 1894 1904 1914 1924 1934 1944 1954 1964 1974 1984 1994 2004
1869 - 2004
The graph in Figure 4.1 shows the price of oil from 1869 to 2004, expressed in 2004 US
dollars. Over this period, the average world crude oil price was $19.41/bbl. Prior to the 1870s
oil was a highly valued and scarce commodity, primarily obtained from whales. The rich oil
fields in the US Oil Region and Azerbaijan
have been commercially
exploited since the
mid-nineteenth
century. This abundance of crude oil led to a decrease in the price of crude
oil (Tarbell 1904; Mir-Babayev 2002:n.p.).
A new trend has, however, developed over the past few years: the price of oil has increased
considerably.
The price movement of North Sea Brent crude oil over the past 10 years is
shown in Figure 4.2.
80.00
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....,
Year
1-
Price movement
I
The North Sea Brent offshore oil platform commenced production in July 1976. The price of
its crude oil at the time was US$12.80/bbl. The price increased considerably, from US$18/bbl
in 1999 to $76/bbl on 14 July 2006. The exact reasons for this considerable increase in the
average
price of oil are not known. One explanation
may be high price setting at low
volumes. This practice will protect oil companies' reserves and yield sustainable profits in the
long run. This was also practised by the Organisation of the Petroleum Exporting Countries
(OPEC). (Cowen 2000:10). To a large extent, fuel has become a necessity for economic
survival and price increases are thus tolerated by the market.
Previous oil crises and price fluctuations can largely be attributed to particular world events.
The impact of these events is discussed below.
World
events
manufacturers
may
influence
the supply
of, demand
for
and
price
of fuel.
Biofuel
should be aware that these types of events may influence their profitability.
Aspects of the macro-environment
are discussed in Chapter 7 and 8. The following graphs
(Figures 4.3 to 4.8) from British Petroleum Pic (BP 2006a) and WTRG Economics (2005)
show the impact of world events and OPEC production variances on oil prices.
Crude oil prices since 1861
us dollars par barrel
1M01' Id evens
t
-;;;;;;.;
Ru~i;n
~~~
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It FlBsllllLnl.
1 EQ4- 2005 Breot dllEd.
The graph in Figure 4.3 shows the impact of selected world events from 1861 to 2005 on the
2005 US dollar oil price. The Arab oil embargo in 1973 and the Iranian Revolution in 1979
contributed to steep increases in the price of oil. These two events are respectively referred
to as the world's first and second oil crisis. The third oil crisis resulted in a collapse in the oil
price in 1986 after a considerable decline in oil prices from the high prices in the early 1980s.
Oil producers became aware of the need for joint action if reasonable oil prices and market
stability were to be achieved. This was achieved through oil production cuts. The outbreak of
hostilities
in the Middle East in the 1990s contributed
to oil price increases in panicking
markets. This fourth oil crisis was largely prevented through production output increases by
OPEC members. The South East Asia economic
downfall
h
W
in 1998 caused oil prices to
collapse again. A recovery was made thanks to OPEC and leading non-OPEC producers'
collective actions (OPEC 2006). Other events and oil production quotas also has an impact
on the fuel price. These include the North Sea oil field discoveries in 1969, United States of
America
market control slacks in 1971 and 1982 and the 11 September
2001 terrorist
attacks.
OPEC is a major role player in the oil industry. Increases and cuts in the OPEC production
quotas imposed on its member countries have had a noticeable influence on the oil price.
Detailed graphs indicating world events and crude oil prices are presented in Figures 4.4 to
4.8.
$3.50
I
m
$3.00 ;.
$16
ID
'ii
.~
a.
U
~
m
$2.50 ::
- $15
~
~
tU
.c
o
•..~
u
Eisenhower imposes
import quotas
N
$14
$2.00 ~
.•..CIJ
Vietnam troop
increase begins
en
$1.50
$12
I
I
I
I
I
I
I
I
I
I
I
,
I
,
I
I
,
I
I
I
I
I
I
I
I
I
I
:i
$1.00
474849505152535455565758596061626364656667686970717273
1947 -1973
Figure 4.4 reveals the impact of selected world events from 1947 to 1973 on the 2004 US
dollar real oil price. The Korean War, which lasted from 1951 to 1953, led crude oil prices to
increase.
decreases.
The United States of America's
Further decreases
North Sea discoveries
recession
from around
1958 led to oil price
in the price of crude oil resulted from the North Slope and
in 1968 and 1969. When the United States of America relaxed its
control over oil markets in 1971, the price of crude oil decreased.
World events and crude oil prices during the period from 1973 to 1981 are shown in Figure
4.5.
$80
$40
$70
$35
$60
$30
iG
$26~
•..
~$60
-
m
lIS
m
$20 ~
ftS
c
$15 E
- $40
~
'I:t
g$30
N
0
Z
$20
$10
$10
$5
$0
$0
76
73
77
81
78
1973 -1981
The graph in Figure 4.5 indicates the impact of selected world events on the 2004 US dollar
oil price from 1973 to 1981. The Arab oil embargo of 1973 caused a rise in the price of crude
oil. Brent oil production in the North Sea commenced in 1976 and North Slope marketed oil
from 1977. These increases in oil production stabilised the oil price for a few years before the
Iranian revolution in 1978 caused steep increases. World events in the period from 1981 to
1998 are shown in Figure 4.6.
The impact of selected world events on the 2004 US dollar oil price from 1981 to 1998 is
shown in Figure 4.6. OPEC realised the power it possessed and began to influence the
international
price of oil through
several
production
increases
and cuts by its member
countries. OPEC supply increases and cuts and the influence on oil prices for the period from
1997 to 2003 are shown in Figure 4.7.
Figure 4.6 - World events and oil prices, 1981 -1998
$40
$70 -
$35
$30
@ $50b
b
Q)
"-"ns
In
~
00
- $40-
$25
~
0
('j
c
"::i'
o
o
N
$30-
$20
E
0
Z
$15
$10 -
II
1111111111111111
OPEC increases
10%,2.5 million
Effective Jan 1
a.
o $20
I
~
I
t
MinimalY2K
problems
.~
Q)
$15
ff
~
)..
I
I
Kyoto protocol
III Asian
$5
II
97
Economi c Crisis
I
99
i
00
m'
~I-m j
OPEC cuts 1.5
million Feb. 1
OPEC increase
1.719 million
April 1
OPEC cuts
1.719 million
April 1
,
Iraq
Invaded
I
II r
OPEC cuts
1 million Apr. 1 I I I
OPEC cuts
1 million Sep 1 fl\AlJI
OPEC increase
708,000July 1
,
II
OPEC increase ~ Venezuelan
500,000Nov. 1
Strike Dec
~
rL
OPEC cuts
1.335 million
July 1
"'t:l
U
I
OPEC cuts
1.25 million
April 1
()$25
.~
2
1\
OPEC increases
800,000Oct. 1
I
Q)
$10
92
8'1 82 83 84
I I
II
II
OPEC incre ase
1 million Feb 1
11<
I U1
OPEC Apr24
increase quota 900,000
decrease prod. 2 million
Sep. 11
attack
I
d IIIII11111
I
I I II II I I
OPEC cuts
1.5 million Jan. 1
I III I II I
Bush Orders
SPR filled
II
II
01
~
rr
I
II
I
02
January 1997 - December, 2003
--
Imported RAC Price 2004$ --
Imported RAC Price
Figure 4.7 shows the impact of selected world events on the 2004 US dollar oil price from
1997 to 2003. The oil price was largely influenced by several OPEC supply increases and
cuts. More world events from 2001 to 2005 are shown in Figure 4.8.
OPEC abandons
Gulf Hurricane,
$22 "28' rice band
OPEC increase_
million Jarn
SPR release
~.. ,- - --...-'
1 7 '11"n b"l
\
:;1:5milli<\nFeb<l.
. ml 10
" ••
Venezuela C-havez
Venezuela prod.
ousted for 3 days
1.1 million I I I I
I~
11
.
",OPEC cuts:
1\ RU$Sla & Norway
Iraq
U 90d 600 Nov 1
OPEC cuts: 1.5 ~
restore production ~
Invaded
million Feb-.1 I
\
I
Iraq 1st
\
OPEC cuts 1.0
exports:
" OPEC increase
million Apr. 1
,v
. 500,000 Mar 1
Sep.11
..
OPEC
cuts:
OPEC
increases:
101/
attack
~\JHI
1 million Apr 1 C[;2million Jul1 _
:>
\
24 1
Y1
- OP:~E~I~
Ai>ir Jun
500,000 Aug 1
L-J
\
incr~«
uota 9oo,0~O
I
I\A
U.S. Oil stock
decre
d. 2 million I I I
20 Year Low
OPEC cuts: 1.0 l
II
Venezuelan
Strike
Dec
16
Ir-;-~;,'$~e~!~' ,Oi::~
Imillion Sep. 1?
SPR fill starts 1
prod falls: to 200,000
I'~~
,-.,Il,!\;'J:!!.. I' -"''''~
OPEC cuts.1.5 million Jan. 1
--'.1.3
5 non-OPEC cut 462,500
Q)
(,)
$40
$35
o
Q)
"0
l'
I'
•••
I I I I'
~
Jl
I '-
"i::
Q.
y
$30
...
:::::l
U $25
,
01
--
i
~ NI'f1
I I
,
02
03
04
January 2001 - Ma,y, 2005
Imported RAC Price 2004$ --
Imported RAC Price
The graph in Figure 4.8 indicates the impact of selected world events on the 2004 US dollar
oil price from 2001 to May 2005. The September
11 terrorist attacks, the Iraq war and
various OPEC production increases and cuts influenced the oil price.
South African biofuel manufacturers'
organisations
profitability is subject to world events and actions by
such as OPEC. Local biofuel manufacturers
types of macro-environmental
have no influence over these
forces. However, biofuel manufacturers
should be aware of
the probability that events may occur that may impact on their profitability. These risks should
be accounted for in a comprehensive risk management plan.
The demand for fuel at a certain price has a great impact on a biofuel manufacturer's
profitability. Table 4.1 shows the global demand for oil at certain oil prices from 1965 to 2005.
Year
Average
Change in
world
average
Annual oil
Change in
annual oil
consumption
population
population
2
3
1
Change in
Peak oil
price
consumption
7
6
4
5
Billion barrels
Percentage
2005 US$
Millions
Percentage
peak oil
price
Percentage
per barrel
1965
3310
not available
11.39
not available
9
not available
1968
3520
+6.3
14.25
+25.1
9
0
1971
3750
+6.5
18.89
+32.6
15
+0.7
1974
3990
+6.4
21.68
+14.8
59
+2.9
1977
4200
+5.3
23.23
+7.1
42
-0.3
1980
4410
+5.0
23.41
+0.8
88
+1.1
1983
4650
+5.4
21.18
-9.5
63
-0.3
1986
4890
+5.2
22.54
+6.4
36
-0.4
1989
5150
+5.3
24.04
+6.7
34
-0.1
1992
5400
+4.9
24.43
+1.6
30
-0.1
1995
5610
+3.9
25.51
+4.4
25
-0.2
1998
5870
+4.6
26.62
+4.4
18
-0.3
2001
6140
+4.6
27.74
+4.2
31
+0.7
2004
6410
+4.4
29.80
+7.4
55
+0.8
2005
6490
+1.2
30.70
+3.0
61
+0.1
Table 4.1 inter alia reveals the average world population (Column 2), annual consumption
(Column 4), and peak oil prices in US$ per barrel (Column 6) for a given year (Column 1).
The changes in the average world population (Column 3), annual consumption
(Column 5)
and peak oil prices (Column 7) are also shown. In 2005, a total of 30.7 billion barrels of oil
were consumed by 6 490 million people. Even at a peak oil price of US$61/bbl in 2005, oil
consumption
increased
by 3.1 per cent from 2004 to 2005. The correlation
between the annual oil consumption
coefficient
(Column 4) and the peak oil price (Column 6) can be
calculated at 0.46. However, a negative correlation factor was expected. In other words, an
increase in price should result in a decrease in consumption.
Furthermore,
the correlation
coefficient between the annual oil consumption (Column 4) and the average world population
(Column 2) is calculated at 0.92.
It is also evident from Table 4.1 that the increase in average oil consumption
(Column 5) is
not the result of lower peak prices (Column 7). For example, oil consumption
increased by
4.4 per cent from 1992 to 1995, while the peak price of oil decreased by only 0.2 per cent.
From 2004 to 2005, the increase
in consumption
was 3 per cent, and the peak price
increased by 0.1 per cent as well. The positive correlations
consumption
reveal that the increase in oil
is driven, by inter alia the increase in world population
and a rise in living
standards. Thus, the demand for oil seems relatively price inelastic and is therefore not very
sensitive to variations in the price of oil.
Fossil oil is a diminishing
natural resource.
supply of fossil oil may have a negative
However,
in the short term, the sustainable
impact on biofuel manufacturers'
profitability.
Information on the fossil oil reserves in the world is therefore relevant to this report. Current
proven fossil oil reserves are shown by region in Table 4.2.
2005
1995
1985
Region
Billion bbls percentage Billion bbls percentage Billion bbls percentage
North America
101.5
13.2
89.0
8.7
59.5
5.0
South and central America
62.9
8.2
83.8
8.2
103.5
8.6
Europe and Eurasia
78.6
10.2
81.5
7.9
140.5
11.7
431.3
56.0
661.5
64.4
742.7
61.9
Africa
57.0
7.4
72.0
7.0
114.3
9.5
Asia Pacific
39.1
5.1
39.2
3.8
40.2
3.3
770.4
100.0
1 027.0
100.0
1 200.7
100.0
Middle East
World
From Table 4.2 it is clear that the proven oil reserves of North America (United States of
America and Canada) have decreased by 41.4 per cent, from 101.5 billion barrels in 1985 to
59.5 billion barrels in 2005. North America now only has five per cent of the world's proven
oil reserves. Africa's proven oil reserves increased by 100 per cent, from 57 billion barrels in
1985 to 114 billion barrels in 2005. Oil reserves in all other regions of the world increased
from 1985 to 2005 as well. The total proven world oil reserve in 2005 is 1 200.7 billion
barrels. This figure reveals a 55.9 per cent increase from 1985. The Middle East in 2005 had
the most proven oil reserves in the world, at 742.7 billion barrels or 61.9 per cent of the total
proven world oil reserves. Proven oil reserves are shown according to OPEC membership in
Table 4.3.
OPEC membership
2005
1995
1985
per
per
per
Billion bbls
cent
Billion bbls
cent
Billion bbls
cent
OPEC
535.8
69.5
785.1
76.4
902.4
75.2
Non-OPEC
234.6
30.5
241.9
23.6
298.3
24.8
World
770.4
100.0
1 027.0
100.0
1200.7
100.0
Table 4.3 indicates the portion of proven oil reserves under the control of OPEC members.
From Table 4.3, it is clear that OPEC members controlled 535.8 billion barrels or 69.5 per
cent of proven world oil reserves in 1985. Their control over the world's total proven oil
reserves increased to 902.4 billion barrels or 75.2 per cent in 2005. Given the political risks
that are sometimes
associated
with OPEC members,
this relatively
high percentage
is
concerning.
From Tables 4.2 and 4.3 it is evident that petroleum fuel can still be supplied in adequate
quantities from the world's proven oil reserves. (Petroleum fuel as a competitive force in the
biofuel industry is discussed in Chapter 6.)
It is widely accepted that a country's economic growth depends, inter alia, on the availability
of affordable fuel. The price of Brent crude oil, according
to Figure 4.2, increased from
around US$12.70/bbl in 1998 to over US$75/bbl in 2006. This 490 per cent nominal increase
over the past eight years is relatively high and could therefore hamper economic growth.
However, the estimated economic growth on the gross domestic product and forecasts for
certain countries does not appear to be impaired. This is shown in Table 4.4.
Gross domestic product
Average annual
Actual annual
Estimated annual
growth percentage
growth percentage
growth
Country I region
percentage
1990-
2000-
2000
2004
2.1
2002
2003
2004
2005
2006
3.2
3.5
3.0
3.5
5.0
4.0
2.5
3.9
3.4
4.0
4.8
available
Europe
2.1
1.3
1.0
0.7
2.0
1.7
2.0
World
2.9
2.5
1.9
2.8
4.1
4.7
4.9
South Africa
Sub-8aharan
Sources:
Africa
Adapted
from Worldbank
Not
(2006:n.p.);
South African
Reserve
5.7
Bank (2006b:1);
McKillop (2006:n.p.); US Central Intelligence Agency (2006:n.p.)
Table 4.4 shows the growth percentages in the gross domestic products for various years for
South Africa, Sub-Saharan
Africa, Europe and the world. South Africa's economic growth
increased from an average growth rate of 2.1 per cent from 1990 to 2000, to five per cent in
2005. Sub-Saharan
Africa's economic growth rate has increased steadily, from around 2.5
per cent during the period from 1990 to 2000, to an estimated 5.7 per cent in 2006. The
world economic growth rate has increased from 1.9 per cent in 2002 to 4.7 per cent in 2005.
The world economic growth rate, as shown in Table 4.4, was on average more than 2.5 per
cent since 1990. McKillop
(2006:n.p.)
believes that economic
growth was not seriously
obstructed by increasing fuel prices. The relatively high fuel prices can therefore be expected
to remain high in the foreseeable future. The risk to biofuel manufacturers
that the price of
fuel might decrease significantly is therefore relatively low.
It can be deduced
increased
Furthermore,
in oil
over the same period can be deduced from Table 4.1, namely 19.2 per cent.
the increase
consumed
proven oil reserves have
by 16.9 per cent over the ten years from 1995 to 2005. The growth
consumption
Thus,
from Tables 4.2 and 4.3 that the world's
in oil consumption
the world's
current
exceeds
the increase
proven oil reserve
within 39 years at a consumption
in proven
of 1 200.7
oil reserves.
billion barrels will be
rate of 30.7 billion barrels per annum. This
period of 39 years excludes any growths in oil reserves and consumption.
petroleum fuel supply may not keep pace with global fuel consumption.
In the long run,
The demand for
biofuel will therefore increase steadily over time. This demand for biofuel is further increased
by govemmental
incentives to use biofuel to protect the environment,
develop the local
agricultural industry, and save on expensive fuel imports.
The pump fuel price in the Republic of South Africa consists of an intemational element and
a number of domestic elements. The international element, also referred to as the basic fuel
price, is the import parity price of fuel. The import parity price is the cost a fuel importer would
incur to import fuel from an international refinery. The main costs included in the basic fuel
price are the fuel purchase price and transportation
to a South African port. Other costs
included in the basic fuel price are insurance against losses at 0.15 per cent of the free on
board (FOB) and transportation
transportation
and insurance;
costs; ocean loss allowance
wharfage
at 0.3 per cent of FOB,
at R18.72 per kilo-litre of fuel; 25 days coastal
storage at 2.132 cents per litre; and 25 days stock financing costs at the current prime rate
less two per cent (SasoI2005:1-3).
The domestic cost elements include transportation from the nearest harbour, delivery costs
at the fuel depot, the oil companies' wholesale or marketing margin, the retail margin and
slate levy, which are payable to the oil companies for the time delays in pump prices. Taxes
and levies included in the fuel pumps price include an equalisation
fund levy, fuel tax, a
customs and excise levy, a road accident levy, and a slate levy (Sasol 2005:3-4). The South
African petrol pump price history from March 1990 to March 2005 is shown in Figure 4.9.
0.0
, , , , !
8
~
~
Source: Sasol (2005:6)
8
.•.•
The changes in the petrol pump price in South Africa are indicated by the graph in Figure
4.9. From the graph it is clear that the pump price of petrol increased by roughly 350 per cent
from around R1.00 in March 1990 to R4.50 in March 2005. The pump price of petrol has
since increased further to around R7 per litre in 2006. This represents a further increase of
55.6 per cent. The trend of increasing petrol prices is a direct result of the increase in the
cost of crude oil. The price of diesel is not regulated with regard to the retail margin;
however, the cost elements are basically the same and the price trend is similar to that for
petrol.
The
selling
price
manufacturers'
of
biofuel
is an
import
variable
which
greatly
influences
biofuel
profitability. The selling price movement of ethanol in Chicago (USA) in US
cents per gallon from January 2005 to July 2006 is given in Figure 4.10.
400.0
390.0
380.0
370.0
360.0
350.0
340.0
330.0
320.0
310.0
300.0
290.0
~ 280.0
'lie 270.0
~ 260.0
; 250.0
~ 240.0
u 230.0
220.0
210.0
200.0
190.0
180.0
170.0
160.0
150.0
140.0
130.0
120.0
110.0
In/05
2/18105 4/1105 5/13105 6/24105 8/5105 9/16105 10/28105 1219105 1/20106 313106 4/14106 5/26106 7nlO6
Figure 4.10 shows that the price of ethanol in Chicago was US$1.65 per gallon in January
2005. In July 2006 the ethanol price increased to US$3.60 per gallon. This represents an
increase of 118.2 per cent over 19 months. In South African terms, US$3.60 per gallon
amounts to R6.65 per litre at R7 per US Dollar and 3.785 Iitres per gallon. The price of Brent
crude oil, according to Figure 4.2, increased from approximately
US$47/bbl to US$75/bbl
over the same period. The growing demand for fuel and the rising oil price are probably the
main reasons for the increase in the price of ethanol.
In South Africa, the current ethanol selling price is apprOXimately R2.80 per litre. This price is
based on the fuel price, excluding fuel levies. Ethanol Africa (pty) Ltd estimated the price of
bio-ethanol at R2.60 per litre in their business feasibility study (Van Burick 2006d:n.p.). As
discussed in Section 2.1.3, the selling price of bio-ethanol should be between 51.4 per cent
and 65.6 per cent of the basic cost of petrol per litre plus the wholesale and retail profit
margins. This is due to its lower energy content, and therefore the lower utility, of bio-ethanol
compared to petrol. At a pump price of R7 per litre of petrol, which includes all levies, the
selling
price of bio-ethanol
should
be between
R2.34
per litre and
R2.98
per litre.
Furthermore, the selling price of bio-diesel in South Africa is currently equal to that of diesel
produced from fossil oil (Van Burick 2006d:n.p.). However, the final biodiesel consumer may
be willing to pay only between 82.5 per cent and 90.0 per cent of the price per litre of
petroleum diesel, excluding taxes and levies. This is due to the lower energy content of
biodiesel, compared to that of petroleum diesel. Lower energy content means less utility. At a
pump price of R7 per litre of diesel, which includes taxes and levies, a biodiesel consumer
may be willing to pay between R4.04 per litre and R4.41 per litre of biodiesel.
In Section 4.4, some remarks are made on perceptions
of and the possible demand for
biofuel by South African final consumers.
Biofuel has been commercially manufactured for a number of years by countries such as the
United States of America, Germany and Brazil. The practice of blending bio-ethanol
into
petrol and the use of biodiesel has been accepted by the final fuel consumers of these
countries.
Commercial
manufacturing
of bio-ethanol
and biofuel is relatively
new in the
Republic of South Africa. However, it is clear that not much effort would be required to
convince South African fuel consumers to accept the use of biofuel. The benefits that an oilpoor country, such as the Republic of South Africa, could gain from the use of biofuel are
evident. The demand for biofuel is therefore expected to outgrow the demand for petroleum
fuel, especially
if crude oil prices remain relatively high and global economic
growth is
maintained. As discussed in Section 3.5, enough maize feedstock is available for E10 fuel
(10 per cent bio-ethanol
in petrol). However, biofuel that replaces petroleum fuel requires
more feedstock than is currently produced. A total of 23 809 000 tons of maize would be
required to manufacture
10 000 million litres of petrol per annum, which is the current
demand for petrol. Currently
only 8 903 000 tons of maize are produced
annually
on
average, which also has to meet the demand for maize as food. One option that counters this
possible future shortage of maize as a feedstock for bio-ethanol is to increase the current
area
used
for
maize
production.
Environmental
factors
would
have to
be carefully
considered, though.
The increasing demand for fuel is driven by global economic growth, which contributes to
relatively high fuel prices. Furthermore, the growth in fossil oil reserves has not kept pace
with the growth
in fuel consumption.
South African
biofuel
manufacturers'
sustainable
profitability is thus promoted by current global economic trends, as well as by the benefits for
a country from the use of biofuel.
CHAPTER 5
REVENUES FROM BY-PRODUCTS AND EXPENSES FOR BIOFUEL
MANUFACTURERS
The direct cost per ton of various types of feedstock was discussed in Chapter 3, and the
sale of biofuel was discussed in Chapter 4. The gross profit can be calculated by subtracting
the direct cost per litre of biofuel manufactured
from the selling price per litre of biofuel.
Comparing the gross profits per feedstock type to each other may not give a true reflection of
the potential profitability of biofuel manufacturers.
the various by-products
could be substantial.
Revenues that may arise from the sale of
The sale of by-products
is relevant to the
objectives of this report and is therefore discussed briefly. A further brief discussion of the
direct cost of additives and financing costs is also helpful. It should be noted that the various
manufacturing
processes using various feedstocks generally result in different by-products,
yields and related expenses.
Maize, sunflowers,
soybeans and wheat as feedstocks for biofuel manufacturing
have by-
products which can be used as animal feeds and therefore have a market value.
yields were discussed
Product
in Section 3.4. The revenues from the sale of these respective by-
products to final consumers at retail prices are briefly discussed.
Maize is examined first,
followed by sunflowers, soybeans, wheat and jatropha curcas.
One ton of maize yields 330 kilograms of a by-product (see Section 3.4.1.2) that is suitable
for animal feed. Hominy chop or meal is a mixture of the bran coating, the germ and a part of
the starchy portion of the maize kernel. Hominy chop is a well-known substance in cattle, pig
and chicken feed in South Africa. It was sold to final customers for approximately
R1 200 per
ton in September 2006 (Alzu Feeds 2006:n.p.; OTK 2006:n.p.). The by-product from maize
as a feedstock
for bio-ethanol
manufacturing
should
contain
more or less the same
nutritional value per kilogram as hominy chop. Any difference in the nutritional values may
lead to adjustments to the selling price of this biofuel by-product. The biofuel manufacturer
may therefore gain revenue from the sale of animal feed to the amount of R396 per ton of
maize used as feedstock,
or RO.94 per litre of bio-ethanol
manufactured.
This revenue
should be compared to the revenue from sunflower oil cake, which is discussed below.
Sunflower oil cake retailed for R1 600 per ton in September 2006 (Alzu Feeds 2006:n.p.;
aTK 2006:n.p.). ail cake is used as a substance in animal feed by meat and dairy producers.
Biofuel manufacturers
may have revenues from the sale of 620 kilograms of sunflower (see
Section 3.4.2.2) oil cake to the amount of R992 per ton of sunflower feedstock or, stated
differently, R2.83 per litre of biodiesel manufactured.
(Shaval BioDiesel 2006:n.p.). Soybean
oil cake, which is also a by-product of biodiesel manufacturing,
Soybeans as a feedstock in biofuel manufacturing
is considered below.
may yield 800 kilograms of animal feed
per ton of soybeans used (see Section 3.4.3.2). In September 2006, soybean oil cake sold
for roughly R2 300 per ton (Alzu Feeds 2006:n.p.; aTK 2006:n.p.). This amount is relatively
high, since this animal feed has high nutritional values and is sought after by meat and dairy
producers. Biofuel manufacturers
can therefore expect revenue from the sale of soybean oil
cake to the amount of R1 932 per ton of soybeans used in manufacturing
per biodiesellitre
biofuel, or R7.07
manufactured.
Wheat bran is a well-known type of animal feed in South Africa. It sold for R900 per ton in
September
2006 (Alzu Feeds 2006:n.p.;
aTK
2006:n.p.).
It is assumed
that the 330
kilograms of by-product from wheat as feedstock has the same nutritional value per unit as
wheat bran and therefore has the same selling price (see Section 3.4.4.2). Revenue from the
sale of the wheat animal feed by-product is R297 per ton of wheat used in the manufacturing
process, or RO.71 per litre of bio-ethanol manufactured.
Another
valuable
by-product
that results from the biodiesel
glycerine. Glycerine is therefore discussed briefly below.
manufacturing
process
is
Glycerine is a substance found in sunflowers, soybeans and jatropha
therefore
a by-product
applications,
of biodiesel
manufacturing.
Glycerine
curcas seeds and is
can be used
in several
such as an agent in cattle dip, detergents, various pharmaceuticals,
and some foods (ICIS pricing 2006a:n.p.). A biofuel manufacturer
tobacco
that produces relatively
large quantities of glycerine may consider horizontal integration by processing the glycerine
further into marketable products, such as cattle dip or soap. However, this would constitute a
new
business
manufacturers
with
its own
strategies,
markets
and
financial
requirements.
should consider whether or not they have the capabilities
Biofuel
they require to
venture into this new industry. (The biofuel manufacturer under discussion in this report is
only active in the biofuel industry, where it enjoys certain competitive advantages due to its
distinct
competencies.
manufacturer
manufacturers.
The
competitive
advantages
and competencies
of this
biofuel
are discussed in Chapter 6.) Another option is selling the glycerine to other
These manufacturers
then use glycerine as an additive or raw material in
manufacturing or processing their products.
Glycerine in liquid form is sold in drums or in bulk. Drums are used for quantities between 20
and 100 tons. Glycerine in bulk is sold in units of 500 tons. A biofuel manufacturer
would
normally not produce such large quantities of glycerine and would therefore most probably
sell in drums. The intemationalspot
price of glycerine per drum is between €550 (Euros) per
ton and €600 per ton or GBP360 (Great Britain Pound) per ton to GBP390 per ton. In South
African terms, this translates to an average selling price of between R4 860 per ton and
R5 520 per ton at exchange rates of R13.50/GPB1
(Costs associated
and R9.20/€1 (ICIS pricing 2006b:n.p.).
with the selling of glycerine, such as transportation
and customs and
excise, are excluded for purposes of this report.)
Sunflower
seeds contain 18 per cent glycerine (Shaval BioDiesel 2006:n.p.).
manufacturer
that uses sunflower
as feedstock
may have revenues
A biodiesel
from glycerine
of
between R874.80 per ton and R993.6 per ton of sunflowers used. This implies revenues of
between R2.50 per litre and R2.84 per litre (at an average of R2.67 per litre) of biodiesel
manufactured from sunflowers. Glycerine yields from soybeans are also roughly 18 per cent
per ton of feedstock
(Shaval
BioDiesel
2006:n.p.).
The revenue
from
glycerine
from
soybeans is therefore also between R874.80 per ton and R993.6 per ton of soybeans used.
At the lower biodiesel Iitres yield per ton of feedstock, this comes to between R3.36 per litre
and R3.82 per litre (at an average of R3.59 per litre) of biodiesel manufactured.
Jatropha curcas seeds contain seven per cent glycerine (Parsons 2005:n.p.). This translates
to 70 kilograms of glycerine per ton of feedstock or 560 kilograms of glycerine per hectare of
jatropha
curcas cultivated at eight tons per hectare. Such a glycerine yield would generate
revenue of between
R340.20 per ton and R386.4 per ton of jatropha
curcas seeds or
between RO.97 per litre and R1.10 per litre (at an average of R1.04 per litre) of biodiesel
manufactured.
Organic
fertiliser
is also a by-product
from jatropha
manufacturing. This by-product fromjatropha
curcas
seeds
used
in biodiesel
curcas is not suitable as animal feed because it
contains toxic elements. This by-product can therefore only be used as organic fertiliser, as
discussed below.
The by-products of jatropha cur cas seeds in biofuel manufacturing
animals. These by-products
are toxic to humans and
can therefore either be used as an organic fertiliser for the
jatropha cur cas trees, or sold as organic fertiliser. There is currently not a high demand for
jatropha curcas organic fertiliser and a relatively small customer segment should be focused
on. Furthermore, the revenue from the sale of the organic fertiliser and the cost to fertilise the
trees may be equal. Due to a lack of information on the revenue from the sale of jatropha
curcas organic fertilisers, they are not discussed in this report.
In the manufacture of biofuel, biofuel manufacturers
regard, the cost of methanol,
caustic
discussed briefly in the sections below.
soda,
have to incur certain expenses. In this
biofuel additives
and financing
costs are
Methanol, caustic soda and biodiesel additives are the main complementary
products used in
the manufacture of biodiesel. Because only limited information is available on the costs of
yeast and enzymes used in bio-ethanol manufacturing, they are not discussed here.
Methanol (CH30H), in quantities of 180 Iitres per 1 000 litres of biodiesel, is added during the
manufacturing
process. At a cost of approximately
R3 per litre of methanol, the cost of
methanol per litre of biodiesel manufactured is RO.54 per litre (Shaval BiodieseI2006:n.p.).
Caustic soda (NaOH) is added in the manufacturing
process in quantities of 5 kilogram per
1 000 Iitres of biodiesel. Caustic soda costs ±R5 per kilogram. The cost of caustic soda
therefore amounts to RO.03 per litre of biodiesel manufactured (Shaval BioDiesel 2006:n.p.).
Biodiesel can be used without additives or substances
However,
if the biodiesel
that enhance biodiesel attributes.
needs to be stored for periods longer than six months or the
biodiesel is to be used in very cold conditions, at least one additive is required. This biodiesel
additive may be acquired from Shaval BioDiesel (Pty) Ltd, and it costs RO.O? per litre of
biodiesel manufactured.
The financing costs normally consist of the interest a biofuel manufacturer pays on loans to
finance
capital investments.
capacities that use sunflowers
The finance
as feedstock
costs in year one for various
biodiesel
plant
are shown in Table 5.1. Table 5.1 should be
read in conjunction with Section 2.4.4, which gives detailed information on the capital items
and the respective investments required.
Capital investment
(100 per cent loan
1 000 litre per day plant
2 000 litre per day plant
4 000 litre per day plant
Finance
Capital
Finance costs in
Capital
Finance costs in
Capital
Finance costs in
at 15 per cent
period
investment
year one
investment
year one
investment
year one
interest)
Months
Rand
Rand
Percentage
Rand
Rand
Percentage
Rand
Rand
Percentage
2
3
4
5
6
7
8
9
10
11
1
Land and buildings
240
380 000
56782
25.8
380 000
56782
19.8
380 000
56782
14.0
equipment
60
86 000
12487
5.7
156 000
22650
7.9
296 000
42977
10.6
Biofuel equipment
60
560 000
37.0
705 000
98902
34.6
862 000
120 927
29.8
Storage
36
96 000
12569
5.7
192 000
25239
8.8
384 000
50 277
12.4
Vehicles
60
250 000
35 072
16.0
300 000
42 086
14.7
400 000
56115
13.8
126 000
18900
8.6
252 000
37800
13.2
504 000
75600
18.7
20 000
2619
1.2
20 000
2619
0.9
20 000
2619
0.6
219737
100.0
286078
100.0
Feedstock
Working capital
Other
36
Total
1 518000
81 308
2005000
2846000
405297
Total finance cost per litre in
year one with 360
0.61
0.39
0.28
0.23
0.14
0.08
manufacturing days
Biofuel equipment finance cost
per litre in year one with 360
manufacturing days
100.0
Table 5.1 shows the calculated finance costs (Columns 4, 7 and 10) for the various capital
investments
(Column 1) in the first year of their respective financing periods (Column 2).
Columns 3, 6 and 9 show the respective capital investments for each capital investment
category
(Column
1) as discussed
in Section 2.4.4.
It is assumed
that all the capital
investments are financed through 100 per cent loans at 15 per cent interest per annum. The
finance cost is largest at R81 803 (37.0 per cent) for biofuel equipment with a capacity of
1 000 litres per day, R98 902 (34.6 per cent for a 2 000 litres per day plant) and R120 927
(29.8 per cent for a 4 000 litres per day plant). The second highest finance cost for the 1 000
and 2 000 litre per day plants is the interest on the loans to acquire land and buildings, at
R56 782 (25.8 per cent and 19.8 per cent respectively). For the 4 000 litre per day plant, the
second highest finance cost relates to financing working capital, at R75 600 (18.7 per cent).
The total finance cost that a biodiesel manufacturer may expect to pay is R219 737 for the
1 000 litre per day plant, which requires an investment of R1 518 000, or R286 078 (for the
2000
litre per day plant, requiring R2 005 000) or R405 297 (for the 4 000 Iitres per day
plant, requiring
R2 846 000). The total finance costs for the different plant sizes that a
biodiesel manufacturer may expect to pay per litre of biodiesel manufactured increases by 39
per cent from RO.28 per litre (for the 4 000 litre per day plant) to RO.39 per litre (for the 2 000
litre per day plant). A biofuel manufacturing plant with a capacity of 1 000 litres per day have
a finance cost in the first year of RO.61 per litre manufactured. The economy of scale concept
is clearly evident from these figures.
A sunflower
farmer who manufactures
biodiesel
may only need to acquire the biofuel
equipment. That farmer may therefore expect a finance cost of RO.23 per litre of biodiesel for
a 1 000 litre per day plant that operates 360 days per annum; RO.14 per litre of biodiesel (for
the 2 000 litre per day plant); or RO.08 per litre of biodiesel (for the 4 000 litre per day plant).
Opportunity
costs
that
may
result from
biodiesel
manufacture
should
be taken
into
consideration by the sunflower farmer.
Feedstock is one of the most significant aspects of a biofuel manufacturer's
business. The
choice of feedstock directly affects the sales of biofuel and by-products, as well as the cost of
feedstock and other direct expenses. A summary of the sales and costs per litre of biofuel
per feedstock type is given in Table 5.2.
Element of profit
1
Bio-ethanol from
Biodiesel from
Biodiesel from
Bio-ethanol from
Biodiesel from
maize
sunflowers
soybeans
wheat
jatropha curcas
2
3
4
5
6
Rand per litre of biofuel manufactured
Sales: biofuel
2.80
4.28
4.28
2.80
4.28
Sales: animal feed
0.94
2.83
7.07
0.71
0.00
Sales: glycerine
0.00
2.67
3.59
0.00
1.04
Sub-total 1
3.74
9.78
14.94
3.51
5.32
Cost of feedstock
3.00
6.35
7.49
4.28
Not available
0.00
0.00
Cost of enzymes and yeast
Not available
Not available
0.00
Cost of methanol
0.00
0.54
0.54
0.00
0.54
Cost of caustic soda
0.00
0.03
0.03
0.00
0.03
0.07
0.07
3.00
6.99
8.13
4.28
0.64
0.74
2.79
6.81
-0.77
4.68
-2.06
-1.49
+2.53
-3.57
+0.4
Cost of additives
Sub-total 2
Not available
Contribution to gross profit
Not available
0.07
(Sub-total 1 less Sub-total 2)
Net direct cost(-) I income(+)
(Excluding Sales: Biofuel)
Table 5.2 shows the direct sales per litre and costs per litre of biofuel manufactured (Column
1) from the feedstocks
maize (Column 2), sunflowers
(Column 3), soybeans
(Column 4),
wheat (Column 5) and jatropha curcas seeds (Column 6). From Table 5.2 it is evident that,
currently, biodiesel has a 52.8 per cent higher selling price than bio-ethanol.
Biodiesel is
currently sold as diesel at the basic price of diesel, which is R4.28, according to Table 7.2.
Bio-ethanol is sold as ethanol, and it is therefore not sold at the basic price of petrol. The
basic price of petrol is roughly R3.91, according to Table 7.1, which is R1.11 higher than the
price of ethanol. A bio-ethanol manufacturer who sells bio-ethanol as petrol should conform
to the standards
manufacturer
of petrol, as discussed
in Section 7.3.4.1. This requires that such a
must sell biofuel at the regulated price of petrol. Animal feed is sold at the
retail prices of the various animal feeds sold to final consumers. The cost of feedstock is the
SAFEX price per ton on 26 August 2006.
From Table 5.2 it is evident that soybeans give the highest contribution to gross profit, at
R6.81 profit per litre of biodiesel, and wheat gives the lowest at a RO.77 loss per litre. The
main reason for this is probably the sale of animal feed. Soybeans
yield roughly 800
kilograms of animal feed at a relatively high retail price of R2 300 per ton. Jatropha curcas
seeds are the second most profitable, at R4.68 per litre of biodiesel. However, this amount
excludes the cost of jatropha
curcas seed production.
It can be assumed
that the total
production cost per ton of jatropha curcas seeds is lower than that of the other feedstock
types. This can be assumed since the biofuel yield per ton of feedstock is 350 Iitres, which is
the same as for sunflowers, but the yield per hectare is much higher than that of sunflowers.
Sunflowers yield around 560 Iitres per hectare, while jatropha cur cas yields 3 000 to 6 000
litres per hectare.
A feedstock producer who intends to manufacture his/her own biodiesel should compare the
net direct cost to manufacture
the biodiesel with the cost of petroleum
diesel. (This is
discussed in more detail in Section 5.5.)
5.5
COMPARISON
BETWEEN THE NET DIRECT COST OF BIODIESEL AND THAT OF
PETROLEUM DIESEL
A farmer or group of farmers who intend to manufacture biodiesel for their own consumption
in farming operations should compare the net direct cost to produce biodiesel with the cost of
petroleum diesel. The net direct cost is the total direct cost less the revenue from the sale of
the by-products.
According
to Table 5.2, the net direct cost to manufacture
diesel from
sunflowers is R1.49 per litre. Manufacturing biodiesel from soybeans will result in a net direct
income
of R2.53 per litre, due to the high sales value of the by-products.
manufactured
from jatropha
Biodiesel
curcas seeds results in a net direct income of ROAO per litre.
However, this ROAO per litre excludes the cost to acquire the jatropha curcas seeds.
The
respective amounts should be compared to the cost of petroleum diesel.
A breakdown of the costs of petroleum diesel is presented in Table 7.2. Table 7.2 shows that
the
cost
of
petroleum
diesel
excluding
the
retail
margin
was
R6.34
per
litre
on
6 September 2006. Assuming that the average retail margin is RO.50 per litre, the cost of
petroleum diesel on 6 September 2006 was R6.84 per litre. The retail margin is not regulated
and therefore differs from diesel supplier to diesel supplier. A farmer may claim back the fuel
tax of R1.00 per litre (South African Revenue Services 2006:n.p.) if the diesel was used in
farming operations. The cost of petroleum diesel to the farmer is therefore R5.84 per litre.
This R5.84 per litre is R4.39 per litre or 291.9 per cent higher than the net direct cost of
biodiesel manufactured from sunflowers. It is R8.37 per litre higher than the net direct income
from biodiesel
biodiesel
manufactured
manufactured
from soybeans.
from jatropha
expensive.
It should
investment
and financing
Compared
to the net direct income from
curcas, petroleum
diesel is R6.24 per litre more
be noted that the net direct cost excludes
costs per litre of biodiesel manufactured.
the amortised
capital
These two costs are
relatively fixed for a certain process and the cost per litre therefore varies according to the
actual quantity of biofuel manufactured.
From the preceding sections it is clear that revenue from the sale of the by-products has a
material influence on the decision on which feedstock to use. For example, the income from
the sale of biodiesel
manufactured
from soybeans
is relatively low. This is due to the
relatively low biofuel yield rate of 260 litres compared to that from other feedstocks, such as
sunflowers (350 Iitres per ton) and jatropha curcas (350 litres per ton). (See Table 3.5 for a
breakdown of feedstock properties.) However, the income from the sale of the by-products
from soybeans,
oil cake and glycerine,
products from the other feedstocks.
is substantially
higher than from the sale of by-
Revenues from by-products
is R10.66 per litre of
biodiesel manufactured from soybeans, which is more than the R5.50 per litre of sunflowers'
animal feed and glycerine by-products,
and R1.04 per litre from jatropha
RO.94 per litre of maize's animal feed by-products
curcas's glycerine by-product. This is due to the biofuel
yield ratios and the quantity and nutritional value of the oil cake. All the grains that are used
as feedstock yield a by-product that is, inter alia, suitable for animal feed. Jatropha curcas
seeds contain toxic elements and therefore have no marketable value as animal feed.
The cost of feedstock and process additives, such as methanol, caustic soda and biofuel
additives, and the finance costs per litre of biodiesel manufactured collectively form a
relatively substantial portion of the total cost of biodiesel manufactured. Although the total
cost per litre of biofuel may seem relatively high, a farmer who manufactures hislher own
biodiesel for use in farming operations instead of purchasing petroleum diesel may be
financially better off.
Competition
in the context of this report refers to actions taken by various entities in the
biofuel industry to outperform other role players or to gain a competitive
others. It also refers to the opposition that a biofuel manufacturer
advantage over
may receive from other
entities for following certain business strategies. Biofuel manufacturers operate in an industry
with several
competitive
forces (see Section 6.2) which may have an impact on their
profitability. The relationship and interaction between forces such as strategies, value chain
activities, and the macro-environment
on the one hand, and the competitive forces on the
other, is represented in Figure 1.1.
This chapter focuses on competitive forces in biofuel manufacturers'
external environment
which may exert pressure on their profitability. Biofuel manufacturers
can counteract these
competitive forces by employing a number of competitive strategies. These strategies aim to
gain competitive advantages for biofuel manufacturers. They are discussed in Section 6.3.
The main groups of competitive
manufacturers,
producers
potential new biofuel manufacturers,
and customers.
(2005:50-68).
forces in the biofuel industry are other existing biofuel
alternative energy products, feedstock
Section 6.2 is based mainly on the work by Thompson
et a/.
AlternativElr
energy
products.
;%' ~~_:z
. FeedstocK
producers'
bargaining",.
power
Customers'
~, bargaining
power
Potential new
biofuel
manufacturers
Figure 6.1 indicates the competitive forces in the biofuel industry. The arrows indicate the
pressures that the different entities or groups exert on each other in order to gain competitive
advantages.
potential
The five forces of competition,
new
biofuel
manufacturers,
namely other existing biofuel manufacturers,
alternative
energy
products,
feedstock
producer
bargaining power and customer bargaining power, are discussed below. It should be noted
that there may also be pressures that are exerted between these other entities that do not
directly involve biofuel manufacturers.
For example, fuel customers may also exert pressure
on alternative energy products. This pressure is not indicated by an arrow in Figure 6.1,
because the interactions between those external entities fall beyond the scope of this report
and are therefore not discussed.
The competition for market share amongst competing biofuel manufacturers
strongest
of the five
continuously
forces
employ offensive
market position,
increased
of
competition.
and defensive
Biofuel
strategies.
sales, an increased
manufacturers
is probably the
should
therefore
This is done to obtain a better
market share and a unique competitive
advantage.
Strategies
to outmanoeuvre
better product performance,
strategies
competing
biofuel manufacturers
may include lower prices,
higher quality, and a stronger brand image and appeal. Other
may include bigger or better distribution
networks and better customer service
capabilities. The intensity of competition between existing biofuel manufacturers may indicate
which strategies to employ.
At present, competition
in the biofuel industry of South Africa is relatively weak, for the
following reasons:
•
the demand for biofuel in South Africa has not yet grown because blending ethanol into
petroleum fuel has not yet become compulsory;
•
there are not many biofuel manufacturers in South Africa yet; and
•
the commercial
manufacture
of biofuel only became viable in recent years when the
average price of crude oil increased to more than US$70 per barrel.
It is therefore to be expected that potential new biofuel manufacturers
will enter the biofuel
industry in the foreseeable future.
The relatively uncomplicated
nature of biofuel manufacturing
may result in a large pool of
potentially new entry candidates. Some of these entrants, such as existing oil companies and
Ethanol Africa ltd,
referred to in Section 2.4.3, may have the financial
resources
and
capabilities to be formidable market contenders.
The entry barriers to biofuel manufacturing
in South Africa are relatively low. This is due to
the factors that necessitate the localised manufacturing of biofuel, such as farmers that need
new markets for their crops, and the desire to improve the country's balance of payments by
not importing expensive
biofuel
market
should
oil. If legislation
increase
makes the use of biofuel compulsory,
substantially.
Furthermore,
the current
then the
price of fuel is
relatively high, due to the high oil price of more than US$70 per barrel. Therefore,
entrants to the biofuel manufacturing
industry can most probably
new
expect relatively high
profits.
Large oil companies, such as BP and Sasol, are doing research and profitability studies on
biofuel manufacturing
to ensure their long-term sustainability
(BP 2006b:n.p.;
Van Burick
2006a:n.p.). One of the keys to profitability is the availability and sustainability of feedstock in
sufficient quantities. Furthermore, a biofuel plant should be located as close as possible to
the feedstock producing area in order to minimise the cost of transport. Therefore, the large
oil companies will not be able to dominate the biofuel market easily.
An economic feasibility
reaches
study performed
its manufacturing
optimum
by Ethanol Africa indicated that a biofuel plant
at 180 million Iitres per annum. The manufacturing
optimum refers to the lowest total cost per litre produced (Van Burick: 2005a:n.p.).
relatively
small plant size may be a managerial
burden for large oil companies,
This
which
normally operate a few very large capacity refineries. The economies of scale for a biofuel
plant may not compare well to their relatively large crude oil refineries. Furthermore, biofuel
may be only one of several altemative sources of energy in which large oil companies may
invest for long-term sustainability.
It should be noted that this situation might change in
future, when proven fossil oil reserves become too low for sustainable profitability.
It is, for instance, known that Sasol is considering establishing a manufacturing plant capable
of producing 100 000 tons of biodiesel per annum. One kilogram of biodiesel is more or less
equal to one litre of biodiesel. This biodiesel manufacturing
plant will use 580 000 tons of
soybeans and 11 000 tons of methanol. The required 580 000 tons of soybeans is more than
the total soybean production in South Africa as indicated in Table 3.3. It can be assumed that
the large demand for soybeans may prompt more farmers and emerging farmers to produce
soybeans.
It is to be expected that the price of soybeans will be influenced to a relatively
large extent.
The
required
amounts
manufacturing
plants (Van Burick 2006b:n.p.). Sasol therefore has a competitive advantage
over smaller biofuel manufacturers
of methanol
will be produced
by Sasol's
other
for (at least) two reasons. The first is the availability of
sufficient quantities of methanol at a relatively low total cost per litre. The second is the
benefits from economies of scale due to the large scale of such a production plant. Other
biofuel
manufacturers
Furthermore,
may
not have
ready
a small biofuel manufacturer's
access
to large
quantities
of methanol.
total cost per litre to acquire methanol may be
higher than the total cost per litre at which Sasol produces methanol.
The threat of potential
new biofuel manufacturers
existing biofuel manufacturers.
can therefore
be relatively strong for
If there are too many biofuel manufacturers,
bankruptcies .
may occur and probably biofuel prices will be lower. The crux of the matter is that the fuel
consumption
market would then have to be shared amongst many biofuel manufacturers,
with all the financial consequences of such an oversupply of biofuel.
Biofuel is one of several energy products derived from renewable resources. The availability
of these alternative energy products, such as petroleum petrol and diesel, and wind, hydro,
solar and nuclear power can influence the profitability of an existing biofuel manufacturer.
Petroleum fuels are made from crude oil, coal and natural gas. The competitive pressures
exerted by petroleum fuel on biofuel manufacturers are relatively strong, because these fuels
are still currently sufficiently available. Furthermore, the profit margin on petroleum fuel may
be higher than for biofuel. In other words, oil producing countries and oil companies can sell
petroleum fuel at lower prices than biofuel, and still be profitable. The petrol selling price in
South Africa is regulated by law and the price of petroleum diesel is regulated to a lesser
extent. Should these price regulations be withdrawn, biofuel manufacturers
may struggle to
compete with petroleum fuel.
The commercial manufacture of biofuel in South Africa is relatively new. Fuel consumers are
accustomed to petroleum fuel and they may still need to be convinced also to use biofuel as
a source of energy. The competitive
pressure biofuel manufacturers
may experience from
petroleum fuel as an altemative source of energy is relatively large. Other countries, such as
Australia, Germany and Brazil, have used biofuel for several years now, either in its pure
form or as a blending agent in petroleum fuel. Therefore, the South African market is aware
of biofuel and may not resist its use. Still, extensive
implemented
by biofuel manufacturers
marketing
strategies
should
be
and the government to educate the final consumers
on the benefits of biofuel.
Other alternative energy products to biofuel include wind power, solar power, hydro power
and nuclear power. These energy products may not have comparable or better performance,
storage and safety features compared to biofuel. For example, biofuel may result in more
electricity generated by diesel generators per time interval than electricity generated through
wind
power.
The competitive
pressures
that these
sources
of energy
put on biofuel
manufacturers are therefore lower than those from petroleum fuel.
Energy demand generally
stands in relation to the number of people (consumers)
in a
country, as discussed in Section 4.2.2. Most people are indifferent to which energy product
they use, as long as the energy product is affordable, fulfils a need and does not create longterm negative side effects. For example, the final consumer is usually indifferent to whether
the electricity
in his/her house was generated by hydro power generators,
nuclear power
reactors or diesel engine generators running on biodiesel. Furthermore, the consumer's need
for energy is limited to a certain extent. An effort of biofuel manufacturers to sell quantities of
biofuel, even at discounted prices, may therefore only lead to oversupply and wastage. Thus,
if one energy product totally fulfils a consumer's
specific need, the demand for another
energy product is practically zero.
Profitable
alternative
sources
of energy are also being researched
and developed
by
traditional oil companies. For instance, BP Pic has adopted the slogan "Beyond petroleum",
although
energy
BP originally stood for "British Petroleum".
programme
technologies.
which
focuses
on
solar,
BP has a renewable and alternative
wind,
hydrogen
and
gas-fired
power
BP believes that these technologies have reached a tipping point and that they
can create a profitable, high-growth, global business within the next decade (BP 2006b:n.p.).
All commercially
renewable
manufactured
energy products, whether they are derived from fossil or
resources, need to have one aspect in common to remain viable. That is the
sustainable availability of the primary resource in sufficient quantities at the lowest possible
total cost per unit. This criteria is applicable inter alia to petroleum fuel, wind power, solar
power, hydro power, nuclear
power and biofuel. The competitive
forces that a biofuel
manufacturer can expect to face from each of these altemative energy products are relevant
to this research report. Given the above opening remarks, the main competitive forces faced
by biofuel manufacturers are discussed below.
Biofuel manufacturers
can expect competition
from major oil companies
and other role
players in the oil industry, such as OPEC. The nature and extent of the competitive forces
exercised
by such role players are best illustrated
by their history, as discussed
below.
Actions taken in the past by certain role players in the oil industry may be repeated in future.
Furthermore, the strategies employed by those role players are also indicative of what biofuel
manufacturers
should do to gain a competitive advantage. The history of the Standard Oil
Company, its offspring oil companies, and OPEC are subsequently discussed to confirm this
viewpoint.
Ida Tarbell (1904) gives a comprehensive account of the Standard Oil Company in her book
titled The history of the Standard Oil Company. She was the daughter of an oil man in the Oil
Region in Pennsylvania,
in the United States of America, who, like others, claims to have
gone bankrupt primarily due to the strategies employed by the Standard Oil Company.
The Standard Oil Company was founded by John D. Rockefeller in 1865. His goal was to
dominate the United States of America's and the world's oil supply. Standard Oil was by far
the largest oil refinery and distributor
in the United States of America
and through
its
bargaining power it dictated the volume and price of oil sold. Standard Oil's strategy was
aimed at selling high prices and in low quantities in order to sustain long-term profits. The
price that Standard Oil paid for oil produced by the small oil producers was relatively low and
only limited quantities
of oil were bought. This had a negative
impact on the small oil
producers' profitability, to the extent that many small oil producers went bankrupt.
The Sherman Antitrust Act, previously known as Act of July 2, 1890, ch.647, 26 Stat. 209, as
amended,
was the first government
action
in the United States
of America
to limit
monopolies, starting with the Standard Oil Trust. Standard Oil Trust was forced to dissolve
the trust in 1892 after it was sued by the state of Ohio. However, only Standard Oil of Ohio
was separated from the group of enterprises. The state of New Jersey changed its company
laws allowing a company to hold shares in other companies in any state. The Standard Oil
Trust was reborn in 1899 as a holding company known as the Standard Oil Company of New
Jersey. The United States Justice Department sued Standard Oil of New Jersey successfully
in 1911 under the federal anti-trust
companies,
management
companies
law. Standard
Oil was forced to separate
into 34
each with its own distinct board of directors. John D. Rockefeller retired from
and became a prominent shareholder
formed
the core
of today's
in each of the new companies.
oil industry
(Wikipedia
2006a:n.p.;
These
Wikipedia
2006b:n.p.).
The successor companies to the Standard Oil include:
•
Standard Oil of Ohio (Sohio), now part of BP;
•
Standard Oil of Indiana (Standolind), renamed Amoco (American Oil Co), now part of BP;
•
Standard Oil of New York (Socony), merged with Vacuum, renamed Mobil, now part of
Exxon Mobil;
•
Standard Oil of New Jersey (Esso) (Eastern States Standard Oil), renamed Exxon, now
part of ExxonMobil. (Carter Oil, Imperial Oil and Standard Oil of Louisiana were kept part
of Standard Oil of New Jersey after the break-up);
•
Standard Oil of Califomia (Socal), renamed Chevron;
•
Standard's Atlantic and Richfield, merged to form Arco (Atlantic Richfield Co.), now part
ofBP;
•
Standard Oil of Kentucky (Kyso), acquired by Standard Oil of California (now Chevron);
•
Continental Oil Company (Conoco), now part of ConocoPhillips;
•
Ohio Oil Company, now known as Marathon Oil Company, a rival of Sohio.
and
Three of these Standard Oil companies, together with four others, became known as the
Seven Sisters. Their history is described by Richard Cowen (2000:2-10). The history of the
Seven Sisters is reviewed below.
The strategic value of oil became evident after World War I. This prompted the United States
of America's government to put political and economical pressure on American companies to
penetrate the European-dominated
syndicates in the Middle East.
BP, Shell and Exxon negotiated the Achnacarry
principles
designed
to prevent competition
Agreement
in oil marketing.
in 1928, setting out several
The American
market was
excluded because of its strong anti-trust legislation. Mobil, Gulf, Chevron and Texaco later
joined these founder companies. The results of this agreement were very rewarding to the oil
producers. Oil prices were stable and new oil producers were quickly dealt with using various
strategies. One of the strategies employed by these major oil companies was the promotion
of "conservation" policies that would limit "wasteful" production. Pumping oil too rapidly from
an oil field could damage the sustainable long-term production of oil. Consequently, in Texas,
legislation was approved that prohibited oil production which was in excess of the market
demand. The major oil companies dropped their offering for oil to US$0.25 per barrel in
January 1933 and soon afterwards dropped their offering, further, to US$0.10 per barrel. For
obvious reasons, this cut in the price of oil resulted in a cut in production
by small oil
producers. This was the "drop in market demand" that the major oil companies had planned.
The major oil companies bought tens of millions of oil barrels at these very low prices, forcing
the independent
oil companies
out of business.
In September
1933, the oil price was
increased to $1 per barrel, with the major oil companies back in control and the small oil
producers out of business.
The major oil companies agreed that their Middle East oil would be marketed without much
competition. A report in 1952 by the US government mentioned that the seven international
oil companies that operated in the Middle East were controlling oil prices collectively. This
report gave rise to the expression of liThe Seven Sisters". The Seven Sisters dominated the
oil industry at that time and manipulated
the oil production
in OPEC member countries.
OPEC was later formed as a defence strategy against the Seven Sisters multinational
companies.
OPEC was formally established on 14 September 1960 by the members representing
Iran,
Iraq, Kuwait, Saudi Arabia and Venezuela. The 1960s were OPEC's formative years. OPEC
set out its objectives
headquarters
in
and engaged only in low profile activities. The Secretariat,
Vienna
(Austria)
was
negotiations with companies commenced.
Socialist
People's
established;
resolutions
were
with its
adopted;
and
OPEC was later joined by Qatar, Indonesia, the
Libyan Arab Jamahiriya,
the United Arab Emirates,
Algeria,
Nigeria,
Ecuador (until 1992) and Gabon (until 1994) (OPEC 2006:n.p.).
OPEC's main objectives were to
•
co-ordinate
and unify petroleum
policies
among member
states in order to secure
reasonable and stable oil prices for petroleum producers;
•
supply petroleum to consuming nations efficiently, economically and regularly; and
•
secure a reasonable return on investment for those investing in the industry.
Both OPEC and the major oil companies wanted a large volume of oil to be sold at high
prices. This would result in large amounts of revenues to OPEC members. Furthermore, the
oil companies were then assured of a supply of crude oil from satisfied OPEC members to
their global markets (Cowen 2000:10).
Egypt and Syria invaded
Israel in October
1973 without
warning,
starting
a war that
humiliated the Arab nations. OPEC, with a new realisation of its power, simply announced a
70 per cent increase in the price of Middle East oil from $3 to $5.11 per barrel. A further
increase of 128 per cent to $11.65 per barrel was achieved in January
1974 through a
mutual agreement to cut production by 10 per cent. The oil companies had built up stocks
based on hints received of an impending war. Thus, there was no short supply of oil, but only
an increase in price (Cowen 2000:9). (See Section 4.2.1.3 regarding OPEC, world events
and the price of oil.)
The major oil companies, such as BP, Shell, and Exxon, were able to enforce their strategies
because they dominated the oil industry. The remaining companies of the original Seven
Sisters are ExxonMobil, Chevron, Shell and BP, who operate under well-known brand names
in South Africa today.
Biofuel
manufacturers
assumptions.
may base their economic
feasibility
studies
on certain
oil price
However, from the history it is evident that the price of oil can be manipulated
by major oil companies and role players such as OPEC. The price of oil is currently high,
relative to the oil price history as described in Section 4.2. Although the oil companies and oil
exporting countries prefer relatively high oil prices, it cannot be assumed that oil prices will
remain high in the long term. OPEC, in agreement with oil companies, may decide to employ
low selling price strategies to outmanoeuvre
other fuel companies.
Another reason for a
potential future decrease in the oil price may be a drop in the demand for oil as a result of a
cooling off period in global economic growth.
Oil companies and role players such as OPEC have at least two possible strategies if the
demand for biofuel were to increase considerably above that for petroleum fuel. One strategy
may be to enter the biofuel industry. Oil companies already have technologically
refineries,
well-developed
research
facilities
and
established
accomplish this strategy. Small biofuel manufacturers
distribution
advanced
channels
to
may not have the financial resources
and/or skills to prevent the oil companies from entering and dominating the biofuel industry.
Another strategy that OPEC, in agreement with the major oil companies, may employ, is to
decrease
the selling
price of their oil. This strategy would force a number
of biofuel
manufacturers, who depend on high fuel prices to be profitable, out of the biofuel market.
Regulation may compel oil companies to blend biofuel into their petroleum fuel. However, the
oil companies
will make an effort to keep their biofuel
manufacturers
should therefore consider the long-term viability of their businesses
depend on oil companies
as their primary customers.
costs to a minimum.
(Oil companies
Biofuel
if they
as customers
for
biofuel manufacturers were discussed in Section 5.2.5.)
Sasol uses coal to liquid (CTL) and natural gas to liquid (GTL) technologies to manufacture
petrol and diesel, amongst other products and by-products. The process involves gasification
and the use of a Fischer-Tropsch
reactor. The same process can be used to manufacture
biodiesel, as discussed in Section 2.3.2.2. The fuels produced are largely the same, except
for the difference
in the feedstock
used. Sasol uses fossilised
coal or natural gas as
feedstock, while a renewable resource, such as grain, can be used for manufacturing biofue!.
The cost of coal or natural gas as a feedstock for manufacturing fuel may be lower, but the
source of this feedstock is limited. In the short run, petroleum fuel manufactured from coal or
natural gas may therefore exert some competitive
pressure on biofuel, but should not be
regarded as a major threat to biofuel manufacturers' profitability in the long run.
As with biofuel manufacturing,
geographic
projects,
considered
normally
the usable resources for wind power are limited to certain
areas. In the Republic of South Africa there are currently two pilot wind power
managed
by Eskom,
in the Western
Cape. The Western
Cape's
winds are
perfect for wind energy. The prevailing winds come from two directions
blow during peak electricity
consumption
resources on South Africa's coast are approximately
periods.
Eskom estimates
and
that wind
1 000 megawatts. One wind farm with a
capacity of 100 megawatts can be built in a relatively short period of time. However, the cost
of electricity generated from wind power is relatively high (Eskom 2006a:n.p.).
power may be an alternative
Thus, wind
source of energy to biofuel for electricity generation
in the
Western Cape, but, generally speaking, the competitive pressure from wind power on biofuel
manufacturing
is negligible.
The Republic of South Africa has one of the highest solar irradiation levels in the world. This
solar energy can be used to generate heat and electricity. Certain limiting factors that need to
be considered are the initial cost of the solar power system, the cost of energy storage, the
quantity of sunshine available at the site, and the quantity of the collected solar heat that is
actually used (National Research Council 1980:349; Eskom 2006c:n.p.).
possible and inexpensive
alternative
Solar power is a
source of energy in electricity and heat generation.
However, solar power does not exert much competitive
pressure on biofuel, due to the
limitations on the use of solar power.
The usable resources for hydro power are limited to certain geographic areas. South Africa is
a relatively dry country and only few rivers, such as the Vaal River, are suitable for major
hydro electric schemes. Eskom has concluded that although micro hydro power is an option
in remote areas, it is not an economically feasible option for South African circumstances
(Eskom 2006b:n.p.). Hydro power therefore seems not to pose a major competitive threat to
biofuel manufacturing.
The uncertain availability of natural uranium (U30a), the primary resource for nuclear power,
creates some concern about reliance on nuclear power. Radioactivity
environment
accidents
at all stages of the nuclear cycle. Furthermore,
makes nuclear power more controversial
the possibility
of reactor
than any other energy source.
therefore evident that the generation of nuclear power is unacceptable
uncontrolled
is released into the
It is
if it is done by many
companies or individuals (National Research Council 1980:214). Only a small
number of controlled institutions, such as Eskom, may use nuclear power. The competitive
pressure
that biofuel
manufacturers
may experience
from
nuclear
power
is therefore
relatively low.
Biofuel manufacturing
is receiving attention worldwide. Surpluses in the production of crops
such as maize, sunflowers,
soybeans
and wheat in the Republic
of South Africa may
decrease, or have already been eliminated, possibly due to the increasing demand for these
crops for biofuel manufacturing.
Imported crops may become more expensive in the Republic
of South Africa due to a possible increase in the demand for biofuel in exporting countries.
In the South African free market system, feedstock producers try to maximise their profit by
selling to the highest bidder. Feedstock producers in a certain area may also collectively
demand
higher prices for their crops. Biofuel manufacturers
buyers of the relevant feedstock.
are, however,
not the only
If the demand for the specific feedstock would increase,
biofuel manufacturers will probably have to pay more for their feedstock. Such an increase in
the demand for feedstock may be driven by human and/or animal consumption,
biofuel manufacturers.
or by other
(Refer to Table 3.5 for an indication of the relatively limited availability
of feedstock in South Africa.)
Biofuel
manufacturers
manufacturing
are largely
limited to a certain
crop as feedstock
due to the
process chosen and consequently to a certain regional location. The relatively
small size of biofuel manufacturers
in general makes it difficult for biofuel manufacturers
to
withstand opposition from or to exert much influence over feedstock producers. Furthermore,
feedstock producers may integrate forward in the biofuel industry value chain and can thus
become powerful competitors to independent biofuel manufacturers.
can market their crops through other non-traditional
Some grain producers
channels. For example, if the prevailing
price of maize is low and the foreseeable price of beef is high, it will probably be worthwhile
for maize producers to market their maize through cattle. This is done by feeding the maize
to cattle for meat production. The same principle applies to the manufacture of bio-ethanol
from maize. Ethanol Africa (Pty) Ltd is an example of maize farmers who ventured
into
biofuel manufacturing. One of the main reasons for this shift may be the relatively low prices
received when marketing maize through traditional channels.
Alternatively,
the increased demand for crops as feedstock for biofuel manufacturing
may
encourage a number of farmers and emerging farmers to produce feedstock. South Africa
has unused arable land available for more feedstock
production,
especially
for maize,
sunflowers and soybeans. The selling price per ton of the feedstock involved may thus not
necessarily
increase
due to the increased
supply.
In such
circumstances,
feedstock
producers will benefit financially from an increase in the quantity sold rather than from a
selling price increase. Biofuel manufacturers could benefit from this scenario, provided there
are not too many biofuel manufacturers, causing a considerable increase in demand.
From the above it is evident that the competitive pressures biofuel manufacturers
may face
from feedstock producers can therefore be relatively substantial.
Biofuel
manufacturers'
customers
may
include
other
manufacturers,
wholesalers
and
retailers and final consumers. (See Figure 1.3 for a depiction of the customers in the biofuel
industry value chain.)
South African bio-ethanol manufacturers'
forced
by
government
manufacturers
to
blend
primary customers may be oil companies who are
bio-ethanol
into
their
petroleum
fuel.
Bio-ethanol
may find that there are limitations on the price and of the quantities of bio-
ethanol they sell. This may be due to the bargaining power of oil companies. Oil companies
may exercise their bargaining power, since bio-ethanol is the most suitable blending fuel and
it is not recommended
that it be used as a fuel in a pure form. Oil companies
may also
decide to manufacture their own bio-ethanol if they cannot buy it at a suitable price from bioethanol manufacturers.
As discussed
before, bio-ethanol
manufacturers'
plant sizes are
bound to be relatively small, due to the limited availability of feedstock at acceptable prices.
Due to price levels and available
feedstock
quantities,
bio-ethanol
manufacturers
may
experience strong competitive pressures from oil companies as buyers of bio-ethanol.
Wholesalers
and retailers in the biofuel industry sell biofuel to final consumers.
The final
consumers of fuel consist of the entire economically active population. Due to their lifestyle,
there is normally a strong demand for fuel. It is unlikely that final consumers will integrate
backward into the biofuel value chain. Furthermore,
transportation
switching to other forms of energy for
may not be a viable option for final consumers. The competitive pressure that
a biofuel manufacturer may experience from biofuel wholesalers and retailers as well as the
final consumers as buyers of biofuel may therefore be weak. This would be the case when
the fuel meets the customers' quantitative and qualitative requirements. These requirements
may include fuel efficiency, no smog and pollution, effective engine performance
and low
enough prices.
As explained above, biofuel manufacturers
there
are
not
many
biofuel
face a number of competitive forces. Although
manufacturers
in South
Africa
yet,
many
new
biofuel
manufacturers
may enter the biofuel industry in the foreseeable future. These new biofuel
manufacturers
may include feedstock
suppliers that integrate forward in the biofuel value
chain, as well as existing oil companies that may decide to diversify and also become biofuel
manufacturers.
Nuclear, coal, wind, solar and hydro energy are suitable for electricity generation. The largest
use of biofuel is most likely to be energy for internal combustion engines in motor vehicles,
trucks and tractors. It is clear that the main alternative or substitute energy product for biofuel
is petroleum fuel, made from crude oil, coal or natural gas. Competitive pressures on biofuel
manufacturers
organisations
may,
moreover,
be exerted
by major
oil companies
and international
such as OPEC, because these companies and producers can also enter the
field of biofuel manufacturing and/or manipulate the price of petroleum fuel.
In view of the existing and potential competitive forces, biofuel manufacturers
should develop
competitive strategies to gain competitive advantages and to minimise the pressures of these
competitive forces on the biofuel industry.
As discussed in Section 6.2, biofuel manufacturers may face pressure from various entities in
the biofuel industry value chain and also from substitute products. Biofuel manufacturers
should therefore
counter these pressures
and gain a competitive
advantage
over their
competitors. A competitive advantage refers to any aspect of the business that is managed
better by a particular biofuel manufacturer than by its competitors and that results in higher
profits. The outcome
of a competitive
advantage
should be an increase in profitability.
Certain key factors that result in lower unit costs and/or higher sales and consequently
an
increase in profitability should be addressed. These factors may include biofuel attributes,
resource management,
marketing and other competencies
that a biofuel manufacturer
may
or should possess.
Furthermore,
for optimal
strengths, weaknesses,
competitiveness,
opportunities
a biofuel manufacturer
needs to analyse
its
and threats, as well as those of its competitors. This
so-called SWOT analysis is a powerful tool that can be used to develop strategies which
build on a biofuel manufacturer's
biofuel manufacturer
competencies and address its weaknesses.
can have a distinct disadvantage
regarding
For example, a
the cost of feedstock,
compared with the substitute product, petroleum fuel. Feedstock such as grain may have a
relatively high value due to its other markets. Petroleum fuel producers have to invest in
property, plant and equipment to extract crude oil. However, the direct cost of the crude oil as
a feedstock
is practically
zero. Biofuel manufacturers
thus have to compensate
for this
weakness by employing strategies to minimise the cost of their feedstock or to increase their
biofuel sales.
Biofuel manufacturers
should use the information from the key success factors and SWOT
analysis to develop their strategies. Firstly, the so-called generic competitive strategies can
be
developed.
There
are
five
generic
competitive
strategie's
manufacturers
could choose. These generic strategies
differentiation,
a focused low selling price, focused differentiation
Secondly, complementary
from
which
biofuel
include a low selling price, broad
and the best selling price.
strategies may be considered. Complementary
strategies include
strategic alliances, mergers and acquisitions, value chain integration, outsourcing, offensive
and defensive
moves.
Thirdly,
biofuel
manufacturers
strategies that support their generic and complementary
the biofuel manufacturing
business
have to develop
functional
area
strategies. The functional areas in
may include research
and development,
production,
sales and marketing, human resources and finances. A timing strategy is the fourth choice
biofuel manufacturers
strategy
produces
have to make when implementing
the required
the chosen strategies.
results when the timing
A good
is right. Biofuel manufacturers
therefore have to decide between being fast movers, fast followers and late movers for each
of their chosen strategies. Each timing choice has certain benefits and drawbacks.
Selected key success factors, the SWOT analysis and competitive strategies are discussed
briefly in this report. This discussion is based mainly on the work done by Thompson et al.
(2005:81-203).
its management
Detailed strategies depend on a particular biofuel manufacturer's
style and the competitive
pressures it experiences.
objectives,
This research report
therefore does not aim to suggest all the detailed strategies a biofuel manufacturer
employ. Biofuel manufacturers'
should
menu of strategic choices is set out in Figure 6.2.
The four sets of strategic choices a biofuel manufacturer should make are indicated by the
rectangular
blocks
complementary
in
Figure
strategies,
6.2.
functional
These
strategic
choices
area support strategies
are
generic
strategies,
and timing strategies.
The
arrows in Figure 6.2 show the support or input that is given to a particular set of strategic
choices. This information from the SWOT analysis, knowledge of key success factors, and
functional area strategies, supports the generic and complementary strategies.
The key success factors, the SWOT analysis, generic competitive strategies, complementary
strategies, functional area support strategies and timing strategies are discussed below.
The main difference
between competitively
strong and weak biofuel manufacturers
is their
ability to address the key factors required to be profitable. These factors may include the
manufacturer's
biofuel attributes,
resource management
and marketing (Thompson
et al.
2005:81-82).
A biofuel manufacturer should be an expert in biofuel technology. Better quality, performance
and other attributes may result in an increase in the demand for its biofuel. An increase in the
demand may result in higher sales. A biofuel manufacturer
attention to research and development.
should therefore give a lot of
This is necessary to optimise the quality of the
biofuel produced and to establish a technically viable plant for the production of biofuel.
Generic competitive strategies
First set of strat~~~!~j£]~~~l';;hh;'~"
Complementary
(Second
strategies
of~trat~~i? cDoices)
Strategic ;lIi~~;ces;and:;;
Uaborative parlnerships,;t-
Outso'drcing some
alue chain activities
~
~.
~--
"Initiating offensive
strategic moves
Functional area support strategies
Sales and
marketing
Human
Resources
(Third set of strategic choices)'
Timing strategic moves
Fast followers
(Fourth set of strategic choices)
A biofuel manufacturer
should invest in improving its manufacturing
processes for higher
efficiency and lower costs. Low production costs can be achieved through economies
scale
and by capturing
equipment
benefits
is necessary
to optimise
most financially
regarding feedstock
achieved
learning-curve
production
from a relatively
availability
as far as possible
manufacturers'
advantages.
customers.
High utilisation
of the plant
costs. A biofuel manufacturer
large capital
investment.
of
and
therefore
(See Section
2.4,
versus plant size and cost.). Overall low cost should be
in order to meet the low price expectations
These customers
include other manufacturers,
of biofuel
wholesale
and
retail distributors and final consumers.
A biofuel manufacturer
should have access to a strong network of customers and avoid
becoming dependent on a single large customer. This caveat applies whether the biofuel
manufacturer's
customers are other manufacturers, wholesale and retail distributors, or final
biofuel consumers.
communication
a favourable
Guarantees
Furthermore, a biofuel manufacturer should have an effective marketing
strategy, based on a well-known and well-valued brand name. For example,
display
of the biofuel
and warranties
brand
name at fuel stations
by the biofuel manufacturer
should
be secured.
may contribute to the customers'
perceived value of the brand. Biofuel orders should be filled quickly and accurately with polite
and personalised
customer service. This will enhance the customers'
buying experience,
which may in turn secure future sales.
A biofuel manufacturer
should be able to distribute biofuel to its customers in a fairly short
time. Lost sales should be avoided as far as possible, since a biofuel manufacturer may not
only lose a current
order,
but may lose future orders
as well. Thus,
proper
logistic
management is essential for a successful biofuel manufacturer. Biofuel manufacturers should
also be strong in e-commerce, product innovation, and quality control. They must be capable
of managing their supply chains effectively. This can largely be achieved with a skilled and
committed workforce.
To ensure that proper attention is given to the key success factors, a biofuel manufacturer
should perform a SWOT analysis.
A SWOT analysis is a powerful tool which biofuel manufacturers
resource
and
opportunities
value
management
strengths
and
that biofuel manufacturers
of a SWOT
manufacturer's
analysis
weaknesses.
can use to identify their
It also
identifies
possible
should pursue or threats they should avoid. The
lies in the conclusions
situation. The conclusions
that
are
made
about
a biofuel
from the SWOT analysis should assist biofuel
manufacturers with their strategy development and improvement. A short discussion of each
of the four elements of the SWOT analysis is relevant to the objectives of this report.
Competencies
are the required capabilities a biofuel manufacturer should possess in order to
conduct its business. Distinctive competencies
possesses
strengths
and which its competitors
or
competitive
competencies
in order
manufacturer
bio-ethanol
capabilities
to gain
are capabilities which a biofuel manufacturer
cannot match.
should
A biofuel manufacturer's
therefore
competitive
be
advantages
developed
over
resource
into
distinctive
competitors.
A
biofuel
may, for example, be able to secure an exclusive long-term contract to sell its
as a blending
fuel to an oil company.
competency may be a biofuel manufacturer's
Another
example
of a distinctive
knowledge of how to manufacture more biofuel
per ton of feedstock than the accepted norm (Thompson et al. 2005:91-97).
A
biofuel
manufacturer's
disadvantages
resource
should be addressed
and
management
weaknesses
and
competitive
as soon as possible. These weaknesses
may, for
example, be a lack of, or deficiency in, the required manufacturing or marketing skills or fixed
assets.
Weaknesses
manufacturer's
in the
biofuel
industry
are
generally
described
as the
inability to meet key success factors, such as manufacturing
biofuel
biofuel with
customers' preferred attributes.
A biofuel
manufacturer's
value
chain activities
have associated
costs. The costs are
measured according to the type of activity or input and the accountant's
preferences.
For
example, feedstock may be measured in purchase price per ton delivered or direct cost per
litre of biofuel
manufacturer's
2005:98-99).
produced.
The
higher these
costs
competitors, the more competitively
are above
vulnerable
the costs
of a biofuel
it becomes (Thomson et al.
A biofuel manufacturer's
benchmarking.
cost competitiveness can be revealed by a value chain analysis and
There are three main areas in the value chain where cost differences
between a biofuel manufacturer
biofuel
supply
distribution
chain,
channel.
the
activities
a biofuel
The costs of performing
compared against competitors'
also
and its competitors
be benchmarked
against
can occur. These areas include the
manufacturer
performs
each activity should
and the
biofuel
be bench marked or
costs, if these are available. Furthermore, the costs should
non-competitors'
costs
if they
perform
those
activities
efficiently and effectively (Thompson et al. 2005:103-107).
Cost disadvantages
within biofuel manufacturers'
through the implementation
competitors
and other
of best practices. Best practices are the techniques employed by
companies
who
perform
effectively than a given biofuel manufacturer.
outsource
low-value
value chain activities should be rectified
activities
Biofuel manufacturers
adding and cost-producing
services, in order to reduce expenses.
certain
activities,
more efficiently
and
should also eliminate or
such as cleaning
or security
Further cost reductions can also be achieved by
relocating activities with high fixed costs to less expensive areas. For example, a biofuel
manufacturing
plant and offices should be located near the feedstock producers in the rural
areas. This will result in a smaller investment in property or less rent and levies per month.
(Refer to Section 3.3 for a discussion
Furthermore,
biofuel manufacturers
of the location of biofuel manufacturing
should invest in productivity
improvement
plants.)
and cost-
saving technology, as discussed in Section 6.3.2.2.
One of the competitive
weaknesses
a biofuel manufacturer
may experience
in its supply
chain is the cost of feedstock compared to the cost of extracted crude oil to oil companies.
Grain is also consumed by humans and animals and the relatively high demand for this use
may increase the price of grain. Biofuel manufacturers should therefore negotiate favourable
prices with feedstock
producers by offering long-term contracts, production finance and/or
biofuel at discounted prices in return. Furthermore, biofuel manufacturers
seed companies
and feedstock
should work with
producers to develop and produce feedstock
that offers
higher biofuel yields. For instance, crops with higher digestible starch content yield higher
quantities of biofuel in the fermentation process. (Refer to Section 3.4 for a discussion of the
various biofuel manufacturing processes.)
The main costs in the distribution channel may be the government
manufacturers'
mark-ups. Biofuel manufacturers
levies on fuel and rival
may enjoy an advantage over petroleum
fuel if the government levy on biofuel is less than that on petroleum fuel. Both these costs are
set and may prove difficult for a biofuel manufacturer to change.
The opportunities available to a biofuel manufacturer should match its resource strengths. In
other words, a biofuel manufacturer should be confident that it has the required capabilities
to take full advantage of its opportunities.
offer sustainable
profits and growth,
Furthermore, opportunities worth exploring should
and give the biofuel
manufacturer
a competitive
advantage over its rivals. For example, a biofuel manufacturer may identify an opportunity to
research and develop a particular feedstock that yields more biofuel per ton of feedstock
than the norm. The biofuel manufacturer
should
have the financial
resources,
skilled
researchers and time available to engage in such an endeavour. Another example may be
an opportunity
attempted
to integrate forward or backward in the value chain. This should only be
if a biofuel
manufacturer
has the specialised
business
know-how,
sufficient
financial resources and staff capacity.
A biofuel manufacturer should be prepared for external threats that may emerge and impact
negatively on its profitability. For example, new regulations, emerging competitors, accidents,
an increase in the cost of feedstock, or a decrease in the price of oil, should be planned for
as far as possible. A proper risk management
periodically.
A risk management
plan should be implemented
plan generally consists of a description
probability of its occurrence, and the impact on the biofuel manufacturer's
and revised
of the risk, the
profitability if the
risk materialises. Strategic actions should be taken by a biofuel manufacturer to mini mise the
probability of the occurrence of those threats; and disaster recovery plans should be in place
to minimise the impact of those threats if they do occur.
In conclusion,
a biofuel manufacturer's
objectives and circumstances,
strategic
approach
should be tailored
to fit its
according to the key success factors and information obtained
from the SWOT analysis.
Basically, a biofuel manufacturer's
strategic approach will target either a broad or a narrow
market, and focus on either a low selling price or product differentiation;
manufacturer
The
five
may decide to take a middle-of-the-road
generic
competitive
strategic
approaches
or a biofuel
approach, namely best selling price.
that
are
available
manufacturer are represented in Figure 6.3 (Thompson et al. 2005:116).
to
a biofuel
Figure 6.3 - The five generic competitive
strategies
Types of competitive
advantage
Broad
cross-section
of buyers
Narrow
buyer segment
- Focused marker
low selling price _
Focused market
differentiation
A biofuel manufacturer should stake out one of the five positions in the marketplace indicated
in Figure 6.3. The market target can be broad or narrow. The type of competitive advantage
pursued
can be a low biofuel selling price or biofuel differentiation.
Best selling price
strategies aim at a larger market, although the number of competitors
is higher. Each of
these approaches is briefly discussed below.
When a biofuel manufacturer
volumes
decides on a low selling price strategy, it aims to sell high
of biofuel to a broad cross-section
of customers.
However,
the high cost of
feedstock compared to the cost to petroleum fuel producers of crude oil can put pressure on
a biofuel manufacturer's
sustainable profitability. The limited availability of feedstock locally
also has negative impact on the profitability of this option.
Broad differentiation
is a strategy followed by businesses that sell a large variety of products
to the general public. Broad differentiation
is difficult to achieve for a biofuel manufacturer,
since it only produces biofuel and its by-products, glycerine or animal feed.
The focused market, low selling price strategy aims to sell high volumes of a product at a
relatively low price to a specific market. A biofuel manufacturer may opt for this approach if it
manufactures
bio-ethanol as a blend for an oil company. Quality requirements
by the oil
company and the availability of sufficient quantities of local feedstock may affect the biofuel
manufacturer's
profitability negatively when this strategy is pursued.
A focused market with strategy product differentiation aims to sell a few highly differentiated
products to a target market. Biofuel is a generic consumable
product and customers
are
generally not prepared to pay excessive amounts for it, even if the biofuel has differentiating
attributes.
Best selling price strategies give a biofuel manufacturer's
customers more value for money.
The goal is to deliver superior value to customers by fulfilling their expectations
quality, features and performance.
on biofuel
The selling price of biofuel should be lower than the
customer is expecting to pay. The downside associated with best selling price strategies is
that a biofuel
manufacturer
may experience
competitive
pressures
from all other fuel
providers. Prices below the going market rates could also reflect negatively on the perceived
quality of the biofuel.
Biofuel
manufacturers
expectations
should
know
who
their
main
customers
are
and
what
their
are regarding the attributes and price of biofuel. These factors will determine
which strategic approach will fit a particular biofuel manufacturer
best, bearing in mind that
each strategic approach has certain benefits and disadvantages.
This report therefore does
not attempt to prescribe
which strategic
approach
biofuel manufacturers
should adopt.
However, if a proper SWOT analysis has been done, the competitive strategy or strategies a
biofuel manufacturer should follow will become clearer.
A biofuel manufacturer
should also develop and improve a second set of strategies
complement its chosen generic strategic approach.
to
A biofuel manufacturer
should develop complementary
strategies
that enhance
strategic approach to increase its profitability. These complementary
strategic alliances, mergers and acquisitions,
its basic
strategies may include
backward or forward integration, outsourcing,
offensive moves and defensive moves (Thompson et a/. 2005: 141-160).
Biofuel manufacturers
technological
should realise that the quest for current
advances
for future
resources and technological
market
leadership
market leadership
sometimes
expertise than one manufacturer
requires
more
and
skills,
can or wants to manage. A
biofuel manufacturer should therefore form strategic alliances or collaborative partnerships to
achieve
mutually
profitable
business transactions,
biofuel
manufacturer
producers.
outcomes.
These alliances
go beyond
normal
but fall short of formal mergers and acquisitions.
may form
a collaborative
partnership
business-to-
For example,
with a group
a
of feedstock
It can also form an alliance with a seed company or research institution that
focuses on improving the efficiency of biofuel manufacturing processes.
A merger refers to the grouping of two or more biofuel manufacturers
as equals. The merger
often takes on a new name. An acquisition is one biofuel manufacturer that purchases and
absorbs the operations
of another enterprise.
The biofuel manufacturer
may aim to gain
more market share in a geographical area and benefit from other synergies by merging with
or acquiring other biofuel manufacturers.
Mergers or acquisitions are also an option when a
biofuel manufacturer aims to gain quick access to new technologies,
own time-consuming
as opposed to doing its
research and development.
A biofuel manufacturer should integrate vertically if its competitiveness
could be improved by
such a move. Backward integration may result in a reliable supply of feedstock at lower costs
that may not fluctuate as feedstock
biofuel manufacturer's
prices tend to do. Forward integration may expand a
customer base and therefore increase its profitability. However, both
backward and forward integration require special knowledge, skills and resources. Another
drawback
of vertical
integration
is the
increase
in business
risk, since
the
biofuel
manufacturer
is then exposed to more risks in the same industry. For example, should the
demand for biofuel decrease considerably,
then the demand for grain as feedstock
may
decrease as well, which can result in lower profits.
A biofuel manufacturer
should outsource
non-crucial value chain activities if they can be
performed better by outside specialists or can be bought at a lower cost from outside the
enterprise
than performing
these activities
in-house. Furthermore,
a biofuel manufacturer
should concentrate and spend its resources on its core competencies,
and inevitable activities which are inherent in biofuel manufacturing.
manufacturer
that is, the required
For example, if a biofuel
does not regard its marketing activities as a core activity that can give it a
competitive advantage, marketing should preferably be outsourced to a marketing specialist.
Another example is to outsource support services such as security and cleaning, if these
services
can be rendered
more effectively
and at a lower cost than
by the biofuel
manufacturer.
A biofuel manufacturer
obtain
cost,
manufacturer
differentiation
or resource
advantages
advantages.
by initiating offensive moves to
Offensive
moves
that
a biofuel
may initiate generally aim to counter its competitors' strengths or benefit from
its competitors'
manufacturer
may gain competitive
weaknesses,
as identified
and on its main competitors.
in SWOT analyses
performed
on the biofuel
For example, a biofuel manufacturer
may offer
low priced or high quality biofuel in order to take away market share from its competitors.
This can be done if the biofuel manufacturer can manufacture biofuel at a lower total cost per
litre than its competitors.
A biofuel manufacturer may expect offensive attacks from its rivals and should be prepared
to defend its market share. A biofuel manufacturer
may block challengers by continuously
improving its biofuel attributes and giving guarantees to its customers. Furthermore, a biofuel
manufacturer may commit itself to match any rival's selling terms or prices.
A biofuel manufacturer should decide how the functional segments of areas of the business
will support its strategic approach and competitive moves. These functional areas include
research and development,
production management,
human resources management,
sales
and marketing management and financial management (Thompson et a/. 2005:166).
For example,
if the biofuel manufacturer
decides
on a low selling price strategy,
then
production management will focus inter alia on economies of scale, high labour productivity,
efficient feedstock supply management
manufacturer
decides
and automated biofuel manufacturing.
on a differentiating
research and the development
Superior marketing management
If the biofuel
strategy, the focus will most probably
be on
of biofuel attributes and the production of quality biofuel.
would emphasise the differentiating
biofuel features and
advertise a valued brand name.
The fourth strategic
choice biofuel
manufacturers
have is when to launch the various
strategies concemed.
Timing is an important variable when one is making strategic moves. A biofuel manufacturer
may choose to be a first mover, a fast follower or a late mover. A biofuel manufacturer that is
a first mover may strengthen its market position and competitiveness.
This may be beneficial
to a biofuel manufacturer that is still in the process of establishing its business. Moving first
will help build the biofuel manufacturer's
the biofuel manufacturer
resources,
competitive
benefits. Furthermore,
image and reputation in the market place. However,
that aims to be a first mover should have adequate
capabilities
and high quality
the biofuel manufacturer
in order to reap the
should decide whether the customers are
ready for new moves (Thompson et a/. 2005:167).
manufacturer
management
financial
For example, a new, pioneering biofuel
should know whether its target customers' motor vehicles are able to run on
biofuel and whether the customers are informed of the advantages of using biofuel.
Being a fast follower or late mover may be financially beneficial to a biofuel manufacturer,
especially if the first mover's strategies can easily be copied at lower costs. Furthermore, the
fast followers and late movers can learn from mistakes made by first movers. For example, a
first mover biofuel manufacturer
may develop special biofuel attributes at considerable cost
and over a long time. The fast followers and late movers may copy these special biofuel
attributes at a fraction of the cost and in a relatively short period of time. The fast followers
and late movers may be financially better off in such circumstances.
It is evident that there are several external competitive forces that can exert pressure on a
biofuel manufacturer's
profitability.
Potential new biofuel manufacturers
and petroleum fuel
producers are the most significant of these competitive forces. A biofuel manufacturer has to
counter these pressures by employing competitive strategies.
There are several key success factors which a biofuel manufacturer
should bear in mind
when developing its strategies. Information on the biofuel manufacturer's
position should be
obtained from detailed SWOT analyses of the biofuel manufacturer and its competitors. This
information will assist the biofuel manufacturer when it decides between the strategic choices
open
to it. A biofuel
complementary
enhance
manufacturer's
strategies,
functional
its competitiveness.
These
strategies
include
area support
strategies
its basic
strategies
strategic
and timing
aim to give the biofuel
competitive advantages over its rivals and to increase its profitability.
approach,
strategies
to
manufacturer
ELEMENTS OF THE MACRO-ENVIRONMENT
OF BIOFUEL
MANUFACTURERS
CHAPTER 7: GOVERNMENTAL
MANUFACTURERS
FORCES THAT INFLUENCE BIOFUEL
GOVERNMENTAL
FORCES THAT INFLUENCE BIOFUEL
MANUFACTURERS
The macro-environmental
the economy,
society,
forces faced by a biofuel manufacturer are government
technology,
ecology,
demography,
institutional
(politics),
and international
forces, as depicted in Figure 1.1. Global and South African economic conditions
definite influence on biofuel manufacturers'
have a
profitability, for example, interest rates on the
amount of finance costs play a role and economic growth influences the demand for fuel.
Political forces, for example, political risk in the Middle East, affect the availability and selling
price of oil, which is the substitute
product for biofuel.
Other forces, such as society's
pressure on biofuel manufacturers to be socially responsible, the ecology's influence on the
availability and cost of feedstock, and technological advances in biofuel manufacturing, affect
biofuel manufacturers'
profitability.
However, the exact impact of these forces in the macro-
environment on a biofuel manufacturer's
profitability cannot be determined because too little
is known about these influences at present. For the purposes of this report, a discussion of
South African legislation and regulations as governmental forces will suffice.
The Department of Minerals and Energy of the Republic of South Africa published a white
paper on renewable energy in November 2003. Government recognises that energy derived
from renewable resources has significant potential in the medium and long term. The drive
for energy security is a key objective, since a relatively large portion of the Republic of South
Africa's energy expenditure
heavy
burden
environmental
consumption
on
the
response
is on US dollar-dominated
imported fuels, which imposes a
economy.
Furthermore,
developed
measures,
which
put coal production,
would
countries
may
implement
processing
and
at risk. South Africa currently relies heavily on coal as a source for energy.
Sasol's fuel manufacture and Eskom's electricity generation from coal are examples in this
regard.
The
Republic
of South Africa's
government
is therefore
targeting
an energy
contribution of 10 000 Giga-watt-hours of energy to final consumers by 2013 from renewable
resources. These renewable resources should mainly be biomass, wind, solar and small
scale hydro power. For instance, the objective is to generate four per cent of the projected
electricity demand for 2013 from renewable resources (Department of Minerals and Energy
2003:viii, ix).
The Petroleum Products Act, Act 120 of 1977 as amended (South Africa 1977) provides a
basis for the integration
petroleum
industry.
of biodiesel and bio-ethanol
These
regulations
have a direct
into the framework
regulating
the
impact on biofuel
manufacturers'
profitability and are therefore discussed briefly.
Recent amendments
to the Petroleum Products Act, Act 120 of 1977 as amended, were
published in the Government Gazette, number 28958, of 23 June 2006 (Government Gazette
2006). This Act and the amended regulations according to this Government Gazette form the
main frame of reference for Sections 7.3.1 to 7.3.7 below.
Biofuel
manufacturers
manufacturers,
manufacturers.
are
category
categorised
into three
one commercial
The non-commercial
categories
manufacturers,
manufacturers
namely
non-commercial
and category
two commercial
have to register as manufacturers but do
not need to license their premises if they do not manufacture
annum. Furthermore, non-commercial
more than 300 000 litres per
manufacturers are exempt from payment of all duties.
Category one commercial manufacturers
manufacture
more than 300 000 litres per annum
but only supply to final consumers in the Republic of South Africa. Registration and licensing
of their premises is required. Category two commercial
300 000 litres per annum for consumption
manufacturers
produce more than
within the Republic of South Africa, and in
Botswana, Lesotho, Namibia and Swaziland, or for export elsewhere. Stringent requirements
are applicable
for these
commercial
manufacturers
(South African
Revenue
Services
2006:n.p.).
A biofuel manufacturer should comply with the grading standards discussed in section 7.3.4.
It should be noted that these standards do not make any provision whatsoever for additives
containing lead in fuel. Furthermore, a biofuel manufacturer may not sell or provide any blend
of different petroleum products or other substances that result in the non-payment of any tax,
levy or duty.
The selling price of petrol and diesel is, to a large extent, regulated by legislation in South
Africa. The pump price of petrol and diesel are reviewed and adjusted on a monthly basis.
The elements of the Gauteng pump price of 93 octane petrol on 6 September 2006 are given
in Figure 7.1.
Table 7.1 -
The elements of the Gauteng pump price of 93 octane petrol,
6 September 2006
Cent per litre
Percentage
390.632
59.5
Retail margin
43.900
6.7
Wholesale margin
39.268
6.0
Zone differentials
13.700
2.1
7.000
1.1
116.000
17.7
Road accident fund levy
36.500
5.6
Customs and excise levy
4.000
0.6
Slate levy
5.000
0.8
Equalisation fund
0.000
0.0
656.000
100.0
Cost element
Basic fuel price
Service and cost recovery
Fuel tax
Total pump price
Percentage
75.3
24.7
100.0
Table 7.1 indicates the various elements that added up to the pump price of 93 octane petrol
in Gauteng on 6 September 2006. The main cost elements are the basic fuel price (59.5 per
cent) and the fuel tax (17.7 per cent). The elements that relate to the cost of fuel and value
added services amounts to 75.3 per cent of the pump price. Government taxes and levies
collectively
make up 24.7 per cent of the pump price. (See the discussion of the various
elements in Section 4.2.5.) All these cost elements are set and adjusted through regulation.
A seller of fuel has no control over these policies and prices. On 6 September 2006, for
example, a bio-ethanol manufacturer who sold its bio-ethanol as petrol directly to the final
consumer would have had to charge the pump price of R6.56 per litre and pay the various
levies and taxes to the relevant authorities.
The elements of the pump price of low-sulphur diesel on 6 September 2006 are indicated in
Table 7.2.
Cost element
Cent per litre
Percentage
428.030
67.6
39.260
6.2
7.000
1.1
13.700
2.2
100.000
15.8
Road accident fund levy
36.500
5.8
Customs and excise levy
4.000
0.6
Slate levy
5.000
0.8
Equalisation fund
0.000
0.0
IP marker
0.010
0.0
633.500
100.0
Basic fuel price
Wholesale margin
Delivery cost
Transportation
cost
Fuel tax
Total
pump
price
excluding
retail margin
Percentage
77.0
23.0
100.0
Table 7.2 reveals the cost elements that made up the pump price of low-sulphur diesel,
excluding the retailer's margin on 6 September 2006. Again, the basic fuel price is the largest
cost element at 67.6 per cent. Fuel tax is the second largest cost, at 15.8 per cent. The cost
of fuel and value added services amounts to 77 per cent of the total pump price, excluding
the retail margin, while taxes and levies make up the balance of 23 per cent. The retail
margin is not regulated by government and is determined by the individual fuel station.
It should be noted that the fuel tax for biodiesel is equal to the fuel tax of petroleum diesel
less 40 per cent. The fuel tax is, therefore, 60.0 cents per litre for biodiesel, compared to
petroleum diesel's 100.0 cents per litre, as shown in Table 7.2. The selling price of biodiesel
is therefore 593.500 cents per litre (633.5 cents per litre less 40.0 cents per litre), excluding
the retail margin.
The intended compulsory
use of biofuels will have an impact on various aspects of the
profitability of biofuel manufacturers.
It should, for example, have a major influence on the
market size and ways of distribution of biofuel. Some remarks on the intended compulsory
use of biofuel are therefore necessary.
Although the compulsory use of bio-ethanol
is not regulated yet, it is expected that petrol
may in the foreseeable future contain 10 per cent bio-ethanol (graded as E10 petrol). The
use of E10 or E85 (85 per cent ethanol in petrol) is practised by some developed countries
where research has proven that these two percentages provide optimum performance
(US
Department of Energy 2006). The compulsory use of biodiesel in its pure form or as a blend
in petroleum diesel is also not regulated yet; however, regulation regarding the grading of
biodiesel is already in place. This grading and the specifications
for petrol and diesel are
discussed in Section 7.3.4, below.
Licensed wholesalers may only sell permitted grades of petrol and diesel to final consumers.
Biofuel manufacturers who sell directly to final consumers should be aware of the prevailing
specifications
and standards for their fuel. A brief discussion
specifications)
for petrol and diesel seems appropriate,
manufacturing
process of biofuel and ultimately the profitability
of standards
(grading and
since they directly influence the
of enterprises
producing
biofuel.
Petrol (or bio-ethanol sold to final fuel consumers in its pure form as petrol) should comply
with the South African National Standard, Unleaded petrol, SANS 1598. Petrol's grading can
be divided mainly between metal-free and metal containing unleaded petrol, with a research
octane number (RON) of 91, 93 or 95. This RON is a measure that indicates the capacity of
the petrol to prevent engine knocking at low speeds, combined with low engine revolutions
and a high gear operation.
According
to these standards for metal-free petrol, the maximum permitted traces of lead
contamination
may not exceed 13 milligrams per litre. Furthermore, the maximum permitted
content of aromatics (a group of hydrocarbons that contain benzene rings in their molecular
structure) and benzene are 50 per cent per litre and five per cent pre litre respectively. As for
metal-containing
petrol, the same specifications
only one additive
-
manganese-based
milligrams per litre) or phosphorus-based
containing petrol.
apply as for metal-free petrol. Furthermore,
(36 milligrams
per litre),
potassium-based
(10
(14 milligrams per litre) - may be added to metal-
Petroleum diesel must conform to the South African National Standard, Automotive
diesel
fuel, SANS 342. Diesel can be divided into standard grade diesel and low-sulphur
grade
diesel. Standard grade diesel may not have a sulphur content of more than 500 milligrams
per litre of diesel. Low-sulphur
grade diesel may not contain more than 50 milligrams of
sulphur per litre of diesel. Furthermore, there is the grading of diesel as "8x" (where the "x"
indicates the minimum quantity of biodiesel the diesel contains). For example, 810 indicates
a minimum content of 10 per cent biodiesel; 850 contains at least 50 per cent biodiesel.
8100 is 100 per cent biodiesel and contains no petroleum diesel.
A biofuel manufacturer who sells to the final consumer should be aware that its fuel should
be labelled according to the specifications set out in the Petroleum Products Act. The label
should indicate the fuel and its grading and should be in a standard solid Arial type font size
of 55 or larger. This label should be placed next to the nozzle of the fuel pump and on the
same side of the pump as the information
indicating the price of the fuel. A label that
indicates metal-free unleaded petrol must be lettered in white on a green background and
state "95, 93 or 91 Metal-free", as the case may be. Metal-containing
unleaded petrol must
be lettered in white on a red background stating "95, 93 or 91 Metal-containing",
may be. Metal-containing
unleaded petrol that is sold as a replacement
as the case
for leaded petrol
should have the additional indication "LRP" or "AVSR additive".
Diesel should be indicated by white letters on a black background and state "Standard diesel
500ppm" for standard grade diesel; "Low-Sulphur diesel 50ppm" for low-sulphur grade diesel;
or "8iodiesel 8100" for 100 per cent biodiesel, as the case may be. Furthermore, diesel that
contains biodiesel should be indicated with an additional "8x", where the "x" indicates the
percentage of biodiesel it contains. For example, 810 is indicative of 10 per cent biodiesel,
830 means 30 per cent biodiesel, or 850 implies a content of 50 per cent biodiesel.
Any biofuel manufacturer that does not comply with these labelling requirements
may face
penalties. This can put its profitability under pressure. Under the Act, inspectors may inspect
a biofuel manufacturer's products and operations.
Under the Petroleum Products Act, inspectors may enter and search any premises, vehicle
or container without warrant and seize a whole batch or sample of any petroleum prodUct if
transgression
of the Act is suspected. Furthermore, inspection is done in order to monitor or
verify compliance
with the provisions
of the Act, the South African National Standards,
Unleaded petrol, SANS 1598, and the South African National Standards, Automotive diesel
fuel, SANS 342 regulation. An inspector may also demand any relevant documentation
respect of such petroleum products. These are records that a biofuel manufacturer
keep and they are important
for the undisturbed
manufacturing
of biofuel.
in
has to
They are
discussed briefly below.
A licensed biofuel manufacturer
should keep records of the grades and quantities of fuel
sold. It should also have records on the results of tests performed on any batch of fuel
manufactured,
including
details
of the batch
and the
date
of every
test.
Additional
documentation
is required if the biofuel manufacturer imports or purchases other petroleum
products for use in a blending process. These records should be retained for a period of five
years and must be available for inspection at its registered address. The cost of testing fuel
and administration
expenses increase a biofuel manufacturer's
total cost per litre of biofuel
and consequently its profitability.
Taxation has a large influence on a biofuel manufacturer's
profitability. A discussion of fuel
taxes and levies, income tax and value added tax is therefore relevant to this report.
Biofuel manufacturers
are subject to the payment of income tax on their taxable income in
accordance with the Income Tax Act, Act 58 of 1962, as amended (South Africa 1962). It is
not the purpose of this report to discuss the details of the Income Tax Act in respect of
income recognition
products
is taxable
and deductions.
and expenses
In general, income from the sale of biofuel and bythat were incurred to generate
these sales may be
deducted. Capital investments may only be deducted according to certain provisions in the
Act. However, it should be noted that according to section 12B of the Income Tax Act, a
biofuel manufacturer who manufactures biofuel to generate electricity may deduct the cost of
the manufacturing
by farmers.
equipment, excluding VAT, on a 50/30/20 basis. A similar practice is used
This means that 50 per cent of the cost of the biofuel equipment
may be
deducted from income in the first year of operation, 30 per cent in the second year and 20
per cent in the third. This is a special concession to biofuel manufacturers.
Should a biofuel manufacturer qualify as a small business corporation under section 12E of
the Income Tax Act, the cost of manufacturing equipment can be deducted in total in the first
year of operation and the costs of its other assets on the 50/30/20 basis. A small business
corporation is defined as a close corporation, registered under the Close Corporation Act, Act
69 of 1984, as amended (South Africa 1984) or a private company, registered under the
Companies Act, Act 61 of 1973, as amended (South Africa 1973). Its shareholders should at
all times be natural persons who do not hold shares in other close corporations or private
companies.
Furthermore, such a small business corporation's gross annual sales should not
exceed R6 million, of which not more than 20 per cent is derived from investment income
and personal services rendered. According to section 13 of the Income Tax Act, the cost of
buildings used in manufacturing can also be deducted at two per cent per annum.
It should be emphasised that biofuel manufacturers should consult qualified accountants for
tax planning and tax calculations,
since the impact of income tax on a biofuel manufacturer
may be substantial.
Fuel and animal feed are subject to value added tax at the zero rate, according to the Value
Added Tax Act, Act 89 of 1991, as amended (South Africa 1991) section 11(h). This means
that a biofuel manufacturer does not pay VAT to the South African Revenue Service (SARS)
on the sale of biofuel or animal feed. Moreover, input VAT paid on capital and operational
costs can be claimed back according
following: the biofuel manufacturer
to certain provisions.
must be registered
The provisions
include the
as a VAT vendor; and VAT input
claims must be made from valid tax invoices. Furthermore, enterprises such as farmers may
claim a refund on a portion of the fuel taxes paid if diesel is consumed
in their farming
operations. This refund can be claimed by the registered farmer on its periodic VAT retums.
It is evident that the South African govemment promotes the manufacture of biofuel to satisfy
the demand for energy. There are several advantages that biofuel manufacturers enjoy over
petroleum fuel producers, such as lower fuel tax and some income tax deductions. A
commercial biofuel manufacturer is, however, involved in the fuel industry and as such is
regulated strictly by govemment. Biofuel manufacturers have to comply with all the relevant
laws and regulations and these are very stringent when a biofuel manufacturer sells biofuel
to final consumers. These regulations can have a substantial impact on a biofuel
manufacturer's profitability. A farmer who manufactures his/her own biodiesel faces fewer
legal requirements, provided he/she produces less than 300 000 Iitres of biodiesel per
annum. This biodiesel is to be consumed in the farming operations by the farmer
himself/herself.
Govemment's impact on biofuel manufacturers can be both beneficial and detrimental. It is
therefore a force in biofuel manufacturers' macro-environment which has to be reckoned
with, since it has a direct and significant influence on a manufacturer's profitability.
RELATED MATTERS THAT INFLUENCE THE PROFITABILITY
BIOFUEL MANUFACTURERS
CHAPTER 8: FINANCIAL RISK MANAGEMENT
MANUFACTURERS
BY BIOFUEL
OF
CHAPTERS
FINANCIAL RISK MANAGEMENT BY BIOFUEL MANUFACTURERS
Commercial
biofuel
manufacturers
have a number of profitability
objectives.
The most
important objective is to obtain a required return on investment. To achieve this objective
manufacturers develop operational and financial plans based on certain strategies. However,
there are elements of risk that could affect a biofuel manufacturer's
risk refers to a biofuel manufacturer's
Biofuel manufacturers
profitability. In this report,
exposure to a chance of suffering a financial loss.
therefore have to manage their risk effectively and efficiently. A brief
discussion on risk management is therefore relevant to this study.
A comprehensive
risk management
plan should be developed, implemented
and reviewed
periodically by every biofuel manufacturer. This risk management plan sets out a description
of all the risks the biofuel manufacturer
faces. In a certain sense, this plan describes
everything that can go wrong in the business. For example, a biofuel manufacturer may face
a risk of an explosion of biofuel in the manufacturing
process. This explosion may cause
injuries and even death to employees and an interruption in biofuel manufacture.
management
The risk
plan should contain information on every stated risk, giving details of at least
four aspects. Firstly, management should know what the probability is of the threat posed by
the particular risk. Secondly, what would the financial and operational impact on the business
be if that eventuality
occurs? Thirdly, management
should know what must be done to
prevent risks, if possible. Fourthly, the action to be taken should be very clear if the event
does occur.
Disaster
prevention
and recovery
plans should
receive
high priority from
management
and they should be reviewed and updated regularly. This will ensure that
financial losses that result from disasters are kept to a minimum.
Not all events can be classified as disasters. However, risks may put pressure on a biofuel
manufacturer's
profitability and their impact should therefore be minimised as far as possible.
For example, the selling price of fuel might decrease or the cost of feedstock might increase
more than was anticipated. In these circumstances, a biofuel manufacturer can hedge its risk
of undesirable
movements in the market to a relatively large extent. Hedging of sales, the
cost of feedstock and foreign exchange transactions therefore require further discussion.
Hedging refers to management's efforts to eliminate the risk component or uncertainty that is
associated with a certain type of transaction. For example, the availability and cost per ton of
feedstock
may change unfavourably
futures, forwards,
due to drought. Some financial instruments,
options and swaps may be used by biofuel manufacturers
such as
to manage
certain risks. (It is not the objective of this report to describe the mechanisms of financial risk
management instruments in detail.) Depending on the scope and intensity of risks in the risk
environment, futures contracts and forward contracts as hedging alternatives can contribute
to the profitability of biofuel manufacturers.
Thus a brief discussion of futures and forward
contracts seems appropriate.
A futures contract can be described as an agreement by one party to either buy or sell an
item at a certain price at a certain future date (Hull 2005: 1). For example,
manufacturer's
financial
risk that the cost of sunflowers
as a feedstock
a biodiesel
may increase
considerably in the foreseeable future may be eliminated by entering into a futures contract.
According to this futures contract, the biofuel manufacturer will purchase a certain quantity of
feedstock and pay a certain price per ton at a specific date in future. A futures contract, such
as JUL07 SUNS that was offered on SAFEX at R2 082 on 14 September 2006 may be a
suitable
hedge for the cost of sunflower
feedstock
(SAFEX
2006).
Should
a biofuel
manufacturer be in a position to buy sunflower feedstock from another feedstock producer at
a lower cost in July 2007, the biofuel manufacturer will be financially worse off. On the other
hand, the uncertainty
with regard to the cost of sunflower
feedstock
until July 2007 is
eliminated. The actual spot price in July 2007 may also be higher than the current futures
price. In that case, the biofuel manufacturer will be financially better off.
A biofuel
manufacturer
may also enter into private
producers in his neighbourhood
contracts
with particular
feedstock
to supply a specific quantity of feedstock at a certain price
per ton at a specific future date. Biofuel and by-product sales can also be hedged by entering
into agreements with customers to buy certain quantities of biofuel at certain prices at certain
future dates. Currently,
no fuel futures
contracts
are traded on SAFEX. These private
agreements have basically the same objective as futures contracts on the buying side. The
main differences are that these agreements
are made with known feedstock producers or
customers, and these agreements are not tradable financial instruments.
Forward contracts as financial instruments for hedging are discussed briefly in the following
paragraph.
Forward contracts function in a similar way to futures contracts. They are also contracts to
sell or buy assets at certain prices at certain future dates. Forwards, however, are not traded
on exchange
markets
(Hull 2005:5).
Forwards
contracts
are generally
used to hedge
transactions where foreign currencies are involved. For example, a biofuel manufacturer may
order biofuel manufacturing
States of America
equipment valued at $100 000 from an enterprise in the United
and be obliged to pay for it within one month. The Rand/US
Dollar
exchange rate may be expected to increase (more Rand per US dollar) during this period,
the value of the Rand thereby decreasing. The biofuel manufacturer may therefore decide to
hedge this risk by entering into a forward rate contract with a bank to buy $100 000 at a fixed
rate at the particular future date when payment to the supplier is due. Should the actual
exchange rate at payment date be lower than the forward rate, the biofuel manufacturer will
be financially worse off. On the other hand, the risk element was removed to a large extent.
The biofuel manufacturer may also gain profit when the actual exchange rate is higher than
the forward rate.
There are however,
other risks which cannot be managed through futures and forward
contracts. Events (risks) may occur which can jeopardise a biofuel manufacturer's
viability.
Biofuel manufacturers
income-generating
can protect themselves
assets are lost. Short-term
insurance
financially
especially
financial
when their
as a risk management
tool is
therefore discussed briefly.
Preventative
risk management
is of the utmost importance,
insurance can be relatively high. Furthermore,
since the cost of short-term
claims sometimes
lead to the loss of a no
claim bonus. The insurance premium of a biofuel manufacturer may therefore increase after
a claim for the theft of a vehicle, for example.
The assets of a biofuel manufacturer,
such as vehicles,
equipment
and feedstock,
can
generally be insured against losses due to accidents or theft. The Republic of South Africa
faces a food security threat. This food security threat increases the risk of theft of edible
feedstocks, such as maize and soybeans. (It should be noted that jatropha curcas seeds are
toxic to humans and animals and therefore pose a relatively small risk of theft.)
A biofuel manufacturer
can insure its gross profit capability in case some or all its income-
generating assets are lost. For example, should an explosion or fire destroy all the biofuel
manufacturing equipment, it may take five months to rebuild the plant. The equipment should
be insured with the intention that the biofuel manufacturer
will not suffer financially when
replacing the equipment. Furthermore, the biofuel manufacturer will not be able to generate
income during the five month period needed to rebuild the biofuel plant. The loss in income
(sales less cost of sales) should therefore be insured in order to pay for all fixed expenses
during that period.
A farmer or groups of farmers that market their produce by manufacturing
expect unfavourable
suspend
biodiesel
economic
conditions
manufacture
in the foreseeable
biodiesel may
future. They may decide to
for some time, since their capital investment
may only
consist of biodiesel manufacturing equipment. This option is only available to farmers and not
to independent biofuel manufacturers and therefore requires a brief discussion.
Certain economic conditions can cause biodiesel manufacturing
farmer who manufactures
not to be profitable for a
his/her own biodiesel. These conditions
may include low fuel
prices and high feedstock prices. These risks cannot be managed effectively and efficiently
in the long run. A farmer
who expects
these economic
conditions
to prevail for the
foreseeable future may decide to suspend biodiesel manufacturing temporarily. It should be
noted
that
manufacturing
in this
scenario
the farmer's
main
business
is farming,
while
biodiesel
is an additional value adding activity.
It is clear that unforeseeable
have an negative
changes in a biofuel manufacturer's
impact on profitability.
business environment can
The risks related to the occurrence
of these
unwanted events should be managed effectively and efficiently as far as possible. This can
be done through a comprehensive
risk management plan, hedging sales, cost of sales, and
foreign exchange transactions through financial instruments, contracts, short-term insurance
of assets and insurance against a loss of income. In short, a comprehensive risk
management plan should be designed in order to prevent loss or to limit the impact of
potential and real risks on the profitability of a biofuel manufacturer.
CHAPTER 9
SUMMARY AND RECOMMENDATIONS
In this research report, several issues regarding the profitability
of biofuel manufacturers
were discussed. In conclusion, a summary of the research report, a summary of the research
findings, recommendations
and areas for further research are given.
In this study it became evident that, although the biofuel industry is still in its infancy in the
Republic of South Africa, it will become a meaningful and significant role player in the broad
fuel and energy industries in the foreseeable future. The profitability of biofuel manufacturers
will undoubtedly be one of the pivotal points in the establishment,
maintenance and growth of
these manufacturers in the long term.
This study endeavoured to identify and describe qualitatively and quantitatively
main factors and aspects that affect the profitability of biofuel manufacturers.
some of the
In this regard
emphasis was placed on the following:
•
biofuel manufacturing in South Africa;
•
biofuel manufacturer value chain activities;
•
competition in the biofuel industry;
•
governmental forces in biofuel manufacturers'
•
related matters that influence the profitability of biofuel manufacturers.
macro-environment;
Specific aspects that received attention included biofuel manufacturing
investment, feedstock for biofuel manufacturing,
and
processes and capital
biofuel sales, other revenues from biofuel
by-products and related expenses. The main research results are summarised
in the next
section.
In Section 1.4, the objectives of the study were identified. Sections 9.3.1 to 9.3.5 show to
what extent these objectives have been achieved. These objectives are grouped under the
following headings: introduction to biofuel in South Africa, biofuel manufacturer value chain
activities, competition
manufacturers,
in the biofuel industry, macro-environmental
forces faced by biofuel
and related matters that influence biofuel manufacturer profitability.
Biofuel possesses properties similar to petroleum fuel and is manufactured from renewable
biological
resources.
manufacturing
The type of biological
resource
or feedstock
process and the type of biofuel manufactured.
generally be used as feedstock for bio-ethanol manufacturing
Biodiesel is manufactured
through the esterification
used determines
the
Maize, wheat and sugar can
using a fermentation
process.
of oil seeds from a feedstock such as
sunflowers, soybeans and jatropha curcas. The type of manufacturing process choice has a
direct impact on the total capital investment. A relatively small biodiesel manufacturer
can
expect to invest R1 518 000 for a 1 000 litre per day plant (or R1 518 investment per litre
capacity) and on a sliding scale up to R2 846 000 for a biodiesel plant with a capacity of
4 000 litres per day (or R712 investment per litre capacity). Economies of scale are clearly
illustrated by these figures.
The Republic of South Africa should focus on the local manufacture of biofuel in the interest
of national economic and social objectives for three main reasons. Firstly, expensive fuel
imports put pressure on the balance of payments. Secondly, global warming poses a threat
to the long-term existence of mankind. Although the buming of fuel contributes to global
warming through carbon dioxide emissions, the production of the feedstock utilises carbon
dioxide. Thus, the net effect of biofuel burning does not contribute significantly
warming.
Thirdly, the agricultural
industry in South Africa plays an important
to global
role in the
national economy. Agriculture in South Africa is performed on roughly 14 million hectares of
commercial
arable
land, and almost
one million
people
are employed
in agriculture.
Agriculture can benefit substantially from an additional market for farmers' produce created
by biofuel manufacture.
The importance of biofuel manufacture
in South Africa has been established.
The cost of
feedstock, biofuel sales, the sale of by-products and related expenses are incurred through
the biofuel manufacturer's
discussed.
value chain activities. Findings on these aspects are subsequently
The choice of feedstock is one of the most important decisions a biofuel manufacturer has to
make. The type and availability of feedstock detennines, inter alia, the cost of feedstock, the
location of the biofuel plant, the manufacturing
process, the final product (biodiesel or bio-
ethanol), the quantity of biofuel per ton of feedstock
biofuel manufacturer
sufficient
and the marketable
by-products.
is generally located in a province where the feedstock
and sustainable
quantities.
For example,
maize and sunflowers
A
is available in
are primarily
produced in the Free State and the North-West province. Soybeans are mainly produced in
Mpumalanga, while wheat is produced primarily in the Free State and in the Western Cape.
The cost of feedstock per litre of biofuel produced is influenced by the SAFEX price of the
grain used per ton, the import parity price, and the biofuel conversion
yield per ton of
feedstock. According to SAFEX's June 2006 prices and conversion yields, the cost of maize
as feedstock was R2.97 per litre of bio-ethanol manufactured,
per litre of biodiesel manufactured,
manufactured,
for sunflowers it was R3.91
for soybeans the cost was R6.72 per litre of biodiesel
and for wheat is was R3.73 per litre of bio-ethanol manufactured. The cost of
jatropha curcas seeds per ton was not available at the time of investigation.
Biofuel selling prices are affected by the international
price of crude oil and the Rand/US
Dollar exchange rate. It was found that OPEC production changes and major world events
such as wars and new oil field discoveries
international
can have a negative or positive effect on the
price of oil. Currently, global economic growth contributes to a relatively high
demand for fuel. This inevitably leads to higher oil prices. The future supply of crude oil is
uncertain. This phenomenon further improves the case for biofuel. To a large extent reliable
information on the demand for biofuel in South Africa was not available when the research
was done.
Gennany
However,
the biofuel consumption
trends
in the United States of America,
and Australia are expected to prevail in South Africa. In South Africa, biodiesel
sells at the same price as petroleum diesel, which was R4.28 per litre, excluding taxes and
levies, on 6 September 2006. Bio-ethanol sold at around R2.80 per litre.
An important source of additional income for biofuel manufacturers is the sale of by-products.
The various feedstocks
yield different quantities of marketable glycerine and animal feeds
per ton. Again, the various animal feeds from the different feedstocks have different selling
prices. According to September 2006 retail prices, the income from the sale of animal feed
from maize was RO.94 per litre of bio-ethanol manufactured; for sunflowers it was R2.83 per
litre of biodiesel manufactured;
for soybeans
the figure was R7.07 per litre of biodiesel
manufactured;
and for wheat it amounted to RO.71 per litre of bio-ethanol
manufactured.
Revenue from the sale of glycerine was R2.67 per litre for glycerine derived from sunflowers,
R7.07 per litre for that from soybeans and R1.04 per litre for that fromjatropha
In the biodiesel manufacturing
curcas.
process, methanol (RO.54 per litre), caustic soda (RO.03 per
litre) and biodiesel additives (RO.07 per litre) are required. These costs are applicable when
sunflowers, soybeans and jatropha cur cas are used as feedstock.
The net contribution
to the gross profit of the biofuel manufacturer
at September
2006's
prices for the various feedstocks were the following: maize RO.74 per litre, sunflowers R2.79
per litre, soybeans R6.81 per litre, wheat R-0.77 per litre and jatropha cur cas, excluding the
cost of jatropha curcas seeds, R4.68. From a by-product perspective, it is evident that certain
feedstocks
are more profitable
consequently
than others.
However,
the cost of the feedstock
and
the selling price of the animal feed by-product per ton may vary considerably
overtime.
With the value chain activities in place, biofuel manufacturers
in the
biofuel
manufacturer's
industry.
This
competition
can
have to deal with competition
put significant
pressure
on a biofuel
profitability. The findings regarding competition are discussed in the following
section.
It was found that the main competitive forces faced by South African biofuel manufacturers
are the threat of potential new biofuel manufacturers,
and petroleum petrol and diesel as
alternative energy products. The entry barriers to the biofuel industry are relatively low, since
there are at present relatively few biofuel manufacturers
in a potentially profitable industry
with fairly high selling prices. Feedstock producers have considerable
since the biofuel
Furthermore,
companies
governmental
industry
feedstock
may
enter
is but one of several
marketing
bargaining
powers,
channels for their produce.
producers may integrate forward in the biofuel value chain and oil
the
biofuel
industry
in order
to comply
with
the
anticipated
requirement of compulsory blending of biofuel into their petroleum fuel. Other
alternative energy products, especially for electricity generation, include nuclear, hydro, wind
and solar power. These products are, however, not regarded as serious competitive threats
to biofuel manufacturing.
Biofuel manufacturers should have a sound knowledge of the key success factors required to
counter these competitive forces effectively. It was found that biofuel manufacturers
inter alia, be experts
continuously.
in biofuel
technology.
Biofuel
attributes
should
be
improved
Furthermore, biofuel manufacturers should manage their resources in such a
way that their productivity and efficiency are optimised. A biofuel manufacturer
viable
should,
marketing
channels
and significant
capabilities
to deliver
biofuel
should have
according
to
customers' needs. A SWOT analysis is highly recommended. This will determine, inter alia, a
biofuel
manufacturer's
resource
strengths
and
weaknesses,
and
also
the
possible
opportunities and threats that may exist in its business environment.
In view of the required key success factors and the results of a SWOT analysis, a biofuel
manufacturer
could exercise four sets of strategic choices to improve its competitiveness.
Firstly, the biofuel manufacturer should decide which generic competitive strategy to follow.
The five generic choices are a low selling price, a focused market low selling price, broad
differentiation,
of these
generic
manufacturer
should
a focused market broad differentiation and best selling price strategies. Each
strategies
has
its own
benefits
and
disadvantages.
Each
has to decide which strategy suits it best. Secondly, a biofuel manufacturer
employ
complementary
strategies
that enhance
its basic
or generic
approach. These strategies include strategic alliances, mergers and acquisitions,
or forward
biofuel
integration,
outsourcing,
offensive
moves and defensive
particular biofuel manufacturer has to decide which complementary
and manageable,
in view of its objectives.
Thirdly, functional
strategic
backward
moves. Again,
the
strategies are available
area strategies,
such as
research and development,
should be implemented
to support the biofuel manufacturer's
generic and complementary
strategies. Fourthly, the timing of when to implement a specific
strategy is as important as the strategy itself. Being a first mover, fast follower or late mover
has unique benefits and disadvantages.
Furthermore, these strategies should be tailored to
each biofuel manufacturer's specific characteristics and circumstances.
As an element of the macro-environment
of such manufacturers,
the government of the day
can have a direct influence on the profitability of biofuel manufacturers.
the government as a macro-environmental
The manufacture,
force are discussed below.
standards and sale of fuel are regulated by the Petroleum Products Act,
Act 120 of 1977 as amended.
manufacturers,
Findings regarding
different
Although
reporting
and
all biofuel manufacturers
fuel
taxation
rules
apply
have to register as
for
different
sized
manufacturers. A biofuel manufacturer that produces less than 300 000 litres per annum and
uses the fuel in other operations, such as farming, is exempt from most report duties and the
payment of fuel taxes and levies. The sale of biofuel or consumption of more than 300 000
Iitres of biofuel per annum impose stringent reporting and record keeping duties. Biodiesel is
subject to 40 per cent less fuel tax than petroleum
diesel. These incentives for biofuel
manufacturers prove government's desire to stimulate the local production of biofuel.
Another
according
impact
govemment
to the
manufacturers
Income
has on biofuel
manufacturers'
profitability
Tax Act, Act 58 of 1962 as amended.
may benefit from certain wear and tear allowances.
is income
Qualifying
tax
biofuel
Biofuel manufacturers
also benefit from certain value added tax (VAT) provisions, according to the Value Added
Tax Act, Act 89 of 1991. Fuel and animal feed are subject to VAT at the zero rate. Biofuel
manufacturers
can therefore claim input VAT on qualifying purchases, but should not charge
VAT on the sale of biofuel or animal feed by-products.
Other macro-environment
advances,
ecological
manufacturers'
forces such as economic conditions, political risks, technological
forces
and societal
demands
have a definite
impact on biofuel
profitability. (Quantifying the impact from these forces on the profitability of
biofuel manufacturers falls beyond the scope of this study.)
In an attempt to limit various
variable
costs and risks, biofuel
manufacturers
should
endeavour to manage their financial risks. Findings on related matters are discussed in the
section below.
Biofuel manufacturers
should develop and implement a comprehensive
risk management
plan detailing all the possible risks, the probability of occurrence, their financial impact if they
do occur, and what preventative and recovery actions can be taken.
Hedging, by means of financial instruments such as futures and forward contracts can be
used to minimise
uncertainty
resulting from the financial
impact of future transactions.
SAFEX futures contracts can be used effectively as a hedge for unforeseen changes in the
future price and quantity of grain feedstocks.
Short-term
insurance
is a mechanism
assets against accidents
available to biofuel manufacturers
and theft. Furthermore,
biofuel manufacturers
to insure their
can insure their
expected gross profit for a certain period, should all or most of their income-generating
assets be lost.
Suspension
of biofuel manufacturing
as a strategy
is also an option for farmers
who
manufacture their own biofuel. This can, for instance, be considered when the farmer can
market his/her produce more profitably through other channels.
This study has found that there are a large number of potential new biofuel manufacturers
South Africa. As a matter of fact, a number of biofuel manufacturers
commencing
in
are in the process of
business already. The question is how a potential biofuel manufacturer should
enter the biofuel industry.
Naturally, there are many options in this regard. Due to the
numerous variables and forces involved, and based on the findings of this study, a two-step
strategy is recommended for a biofuel manufacturer (a new entrant and/or an existing one):
first, design, develop, implement
and maintain a comprehensive
business plan. Second,
implement a comprehensive business audit on the execution of the business plan. Aspects of
a business plan for a biofuel manufacturer and of an applicable business audit are discussed
below.
The importance of a well-developed
is the primary
document
business plan cannot be overstated. This business plan
used to obtain finance
for all the required fixed assets, the
intellectual property assets and working capital. Furthermore, the business plan sets out the
initial strategies and actions the potential new biofuel manufacturer should take, as well as
the budgeted financial statements for the first financial period. Some important aspects of the
business plan, namely a description of the proposed business, the target market, and the
financial planning deserve attention.
Kipling, quoted by Reynders (1975), once said: "I had six stalwart men. They told me all I
know. Their names are what, where, why, when, who, and how." A comprehensive
plan should answer these questions.
The questions
asked by financiers
business
(and what the
managers of the enterprise will be held accountable for), include the following: What does the
proposed enterprise intend to do and what is required to achieve this objective? Where does
it intend to be located and where will it acquire its feedstock and other supplies from? When
does it intend to recruit people, build a plant, acquire supplies, operate, sell products and
receive
cash? Who will manage,
distribute?
supply feedstock,
How will every aspect be managed
perform value chain activities,
to achieve the objectives?
and
The overall
question that must be answered for every aspect is: why? It should be stated why every
strategy or action is chosen above other options. These detailed descriptions of the proposed
business are incomplete unless the enterprise's market is described in detail.
Sales of biofuel and by-products
manufacturer's
business.
perform a well-developed
organisations
such
manufacturer
are among the most important
It is recommended
that a potential
aspects of a biofuel
new biofuel manufacturer
market survey with the assistance of qualified business research
as Business
Enterprises
at University
of Pretoria
(pty)
Ltd. The
should know the answers to the questions of what, where, why, when, who,
and how, about its target market. A new biofuel manufacturer should have answers for the
following questions: Who is the target market? Where do the customers want to acquire or
use the biofuel? How much biofuel will they buy? When will they buy biofuel? How much are
the customers
prepared to pay? What other requirements
do customers
have? A proper
marketing strategy should be developed based on this information.
A potential new biofuel manufacturer should use the information from the market survey, its
production capacity, total capital investment, and expected operating expenses in order to
compile a financial plan.
The financial plan is an important tool to manage the generally limited funds of an enterprise.
The amounts reflected in the projected income, expenses and cash flow should be used as a
guideline by managers on how much money to spend on what and when. These projected
figures should be used as comparative figures for actual financial results. Managers are held
accountable
by shareholders
should be explained.
and must achieve the projected figures. Any discrepancies
After the business plan has been implemented,
periodic
business
audits.
They are a powerful
the biofuel manufacturer
tool to determine
should conduct
whether
the biofuel
manufacturer is still on course towards achieving its objectives.
A business audit is a comprehensive and structured re-evaluation of a biofuel manufacturer's
total business. The business audit is directly linked to the biofuel manufacturer's
areas, field of business and macro-environment.
should
be made of the current
management's
performance.
and macro-environment
described
situation
During the business audit, an assessment
the biofuel
manufacturer
finds
itself in and
The biofuel manufacturer should examine its internal, market
to identify possible opportunities and threats. A SWOT analysis, as
in Section 6.3.2, is useful to determine the enterprise's
opportunities
functional
and threats.
Checklists
provide systematic
strengths, weaknesses,
and step-by-step
answers
to a
series of questions. This information may lead to adjustments to the biofuel manufacturer's
current strategies, as discussed in Section 6.3.
In conclusion it may be stated that in this study a number of obstacles and areas for further
research were identified. These obstacles and areas are discussed below.
During the course of the study areas were identified where no information is available, areas
where
limited
information
is available
and aspects
which
were
unclear
or doubtful.
Enterprises intending to venture into biofuel manufacturing are unwilling to disclose detailed
information
on their capital investments,
their profitability.
It is recommended
markets and certain other aspects that influence
that these and other aspects should be researched.
Three of these areas, namely a biofuel market survey, the cost of jatropha
curcas as
feedstock, and the total capital investment in a biofuel plant, require further attention.
Currently the selling price of biodiesel is equal to that of petroleum diesel. Bio-ethanol is sold
at the prevailing market price of ethanol, a substance that can be chemically processed into
various products. However, the benefits society gains from the use of biofuel (biodiesel and
bio-ethanol),
as opposed
to generally
imported
petroleum
fuel, are significant.
It can
therefore be argued that the final consumer should pay a premium for biofuel. This premium
can be compared to social responsibility
consumers'
awareness
and perception
investments in the community at large. The final
of biofuel, including the expected
should therefore be determined through a comprehensive
price per litre,
market survey.
Jatropha curcas possesses attractive properties as a feedstock in biodiesel manufacturing.
However,
there is currently
manufacturers
not an open market for jatropha
have to produce jatropha cur cas seeds themselves.
cur cas seeds.
Biodiesel
No detailed information
on the production costs of jatropha curcas seeds is available, at present. Further research
should be done to determine the total production cost per ton of jatropha
produced.
curcas seeds
This should be done in order to determine the gross contribution
of biodiesel
manufactured from jatropha curcas, compared with the other feedstocks such as sunflowers
or soybeans.
The capital investment in the manufacturing equipment can be determined if a tum key plant
is bought from an engineering enterprise. However, this capital investment in equipment may
be only a relatively small portion of the total capital investment a biofuel manufacturer has to
make. The cost of other assets such as land, buildings,
working
storage facilities,
capital vary from one location to another and from one enterprise's
preferences
to another. Research should be done to determine
investment for a biofuel manufacturing
vehicles and
managerial
an average total capital
plant with a certain capacity. This information can be
of assistance to potential new biofuel manufacturers conducting economic feasibility studies.
This research
profitability
project was undertaken
of biofuel manufacturers,
to investigate
some aspects
that influence
the
to a lesser or greater extent. It is obvious that this
industry is still very young in South Africa, but it is very dynamic.
In conclusion,
biofuel manufacturers
should perhaps take note of the words of Daniel
Burnham: "Make no little plans; they have no magic to stir men's blood!"
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