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Philippines bioethanol producers and oil sector in pricing debate

By Michelle Ho in Singapore

March 9, 2011 - Participants from the Philippines bioethanol and gasoline industry are locked in an impasse as to how bioethanol prices should be formulated.

Given stiff competition from sugar producers, local bioethanol producers are lobbying for a feedstock-based, tariff-based or margin-linked pricing formula.

Local producers are seeking a 20-30% import tariff on bioethanol or a cost plus 15% profit margin pricing formula, sources from the Sugar Regulatory Administration and Ethanol Producers Association said.

Ex-refinery bioethanol prices, exclusive of value-added tax, are currently pegged at around Pesos 44-45/liter ($1.01-1.04/liter), inclusive of feedstock costs and conversion costs of around Pesos 15/liter. (Related price chart: Platts Ethanol CIF Philippines (mean $/cu m): March 7-9, 2011).

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Imported material however, is now trading at around Pesos 35-40/liter, 11-22% cheaper than local product despite freight costs from the long voyage from Brazil or the US, plus a call at Singapore to break bulk, because farmers in other parts of the world are either more efficient or subsidized.

"The biofuels industry in the Philippines is still in its infancy," said Jose Maria T. Zabaleta, Chairman of San Carlos Bioenergy. "How can our farmers compete with farmers in the US or Brazil who have economies of scale, more efficient technology and government aid and subsidies?"

Zabaleta said the protection of the local ethanol producers is imperative in making it work, or there is a slim chance domestic capacities will ever meet the requirements of the mandate because there is no return on investment.

"Right now, one metric ton of molasses in the Philippines yields 260 liters of ethanol, but in Brazil it yields 270-275 liters," said a separate industry source. "Brazilians also have a huge flexibility to swing to either sugar or fuel."

Oil companies on the other hand, are lobbying for a gasoline-linked pricing formula, based on the Mean of Platts Singapore gasoline assessments. (See related price chart: Platts Ethanol FOB Singapore (mean $/cu m): March 7-9, 2011).

Concerns on bioethanol mandate sparked by biodiesel case study

Some gasoline retailers in the Philippines are not for the implementation of the E10 mandate, in part due to the country's shortages, but more importantly because the current pricing mechanism -- as seen in the example of the biodiesel industry -- is seen inadequate and infringes on their ability to respond to changes in the international markets.

In accordance with the Biofuels Act of 2006, a law enacted for the purpose of developing and utilizing indigenous renewable and sustainably-sourced clean energy sources to reduce dependence on imported oil and to increase rural employment and income, a mandate is currently in place for 2% of the total amount of diesel sold in the Philippines to be blended with biodiesel, also known as coconut methyl ester or coco-biodiesel.

The main feedstock for biodiesel in the Philippines is coconut oil.

Local coconut prices track the prices of palm oil in the international markets, and local CME producers also reference a pricing index based on coconut or palm oil.

Since February this year, the prices of CME have risen sharply to around Pesos 118/liter, while diesel prices remain at Pesos 36-38/liter.

Platts Ethanol CIF Philippines (mean $/cu m): March 7-9, 2011

Unlike ethanol, the mandate for biodiesel also stipulates that oil majors only purchase local product because the Philippines has excess production of methyl esters.

Oil majors are prohibited from importing CME in an effort to support the local agriculture industry and to achieve self-sufficiency.

Yet in order to encourage higher consumption of biodiesel, or bioethanol, by consumers, oil companies are also prohibited from raising the prices of these blends higher than pure gasoline grades.

"When ethanol prices are higher than gasoline, no one will [use it to] blend, but if there is a mandate, you have to," said a source. "Now the price of coconut oil is three times the price of biodiesel and we have had to absorb all the costs."

Therefore, if the same situation were to be extrapolated to ethanol and import prices rise with international market trends, oil companies in the Philippines would be caught in the same conundrum.

"Likewise, bioethanol prices should be lower than the price of gasoline and be competitive to gasoline. That would result in lower pump prices and benefit the consumer," said an oil major.

"While those formulas ensure the viability of bioethanol producers, it does not guarantee the producers will produce," pointed out a separate independent oil retailer. "And if they do, they will pass on higher costs to the consumers."

Local oil companies added that not only does the current mandate and pricing system intervene and curb the ability of oil companies to adjust to market conditions and optimize.

More importantly, it does not incentivize local farmers to be more efficient or competitive.

"It is free market versus a regulated market debate," said a source. "The oil market is not regulated but biodiesel and bioethanol are, because they are agricultural products."

Provision for flexibility in Department of Energy circular

The Department of Energy is mulling a safety net provision in the department circular, in light of the concerns of the oil companies, DOE Undersecretary Jose M. Layug told Platts.

The safety net provision would allow the mandate to be suspended, if it contributes to an increase in pump prices, Layug said, without elaborating.

"We do not want to regulate prices, we want a deregulated industry," said Layug. "We are not in support of import tariffs, and we cannot afford subsidies, but neither do we want bioethanol to contribute to the pump prices."

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