Biofuel Cos Risky For Investors

NUSBizad

Bangkok -- THE WORLD-WIDE alternative-energy boom has driven up the price of sugar, palm oil and other commodities that can be made into liquid biofuels. It also has powered the shares of agricultural companies that produce them.

A category of companies is sprouting to capitalize on the renewable-energy craze, mainly by building refineries to convert those commodities into fuel.

Investors be warned: There are still big risks in the business, and analysts say some of the newer companies will stumble.

Analysts generally agree that biofuels will play a bigger role in the world's energy mix. Biofuels are energy sources made from agricultural crops and vegetable oils. High oil prices have made biofuels more attractive, and many countries, especially in Europe, want to cut their reliance on fossil fuels, which experts say contribute to global warming.

Biofuel production capacity is rising quickly. It isn't clear how sustained the demand will be, especially if oil prices continue to ease. More analysts are starting to question the long-term viability of biofuels, largely because of their potential to cause unintended environmental damage.

For example, growing more palm oil or sugar to make biodiesel will require a lot more land and water -- already in short supply in some places. It could also drive up the cost of growing energy-generating crops, squeezing the margins of companies that refine them into fuels.

At some point, "biofuel growth will hit a barrier -- investors should tread cautiously," analysts at Bank Sarasin & Co., a Swiss private bank, said in a recent report. Sarasin said constraints include shortages of arable land and mounting pressure from environmentalists, who worry that biofuel demand could divert resources needed to produce food for humans or animals.

Such concerns haven't stopped the stampede to build renewable-energy refineries.

This movement includes a number of companies in Australia, such as Australian Biodiesel Group, Mission Biofuels, Sterling Biofuels International, and Australian Renewable Fuels. Perth-based Renewable Fuels is developing two biodiesel plants in Australia. Imperium Renewables of the U.S. is building one of America's biggest biodiesel plants, in Washington state. In Europe, biofuel companies include D1Oils of the U.K. and EOP Biodiesel of Germany.

According to Sarasin, biofuel producers are building or expanding 41 ethanol plants in the U.S. and as many as 25 biodiesel facilities in Europe.

They are also adding lots of biodiesel plants in Asia. Overall, Asia could hold roughly four million metric tons or more of biodiesel-refining capacity in 2010, compared with less than 500,000 tons of production currently.

Uncertainties about long-term demand and financial viability have taken a toll on the sector's share prices. In a recent report, analysts at Australian securities firm BBY cited a dozen biofuel companies world-wide whose share prices had fallen more than 35% from their latest 52-week highs.

These declines were largely due to falling oil prices, which investors fear may make some countries feel less urgency to promote alternative fuels.
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NUSBizad

seems that the replacement of crude oil is not that well-off...