Taxation Takes its Toll on the German Biodiesel Industry

19 July 2009 (Last Updated July 19th, 2009 18:30)

Germany remains Europe's largest producer of biodiesel but that pole position is starting to look vulnerable. A report by Global Data examines the market's risks following a period of heavy taxation on the industry.

Taxation Takes its Toll on the German Biodiesel Industry

Following a significant taxation hike by the German Government in the second half of 2006 and then again in early 2008, the country's biodiesel producers are approaching a state of crisis. Demand for pure biodiesel is dwindling, which has meant the only source of revenue for biodiesel firms is the mandatory blending of 5% biodiesel with conventional fuels.

These factors have left the biodiesel industry vulnerable and threatened its future growth. A recent report by market analysts Global Data (http://www.global-market-research-data.com) has revealed why it is vital to reduce taxation in
order to encourage the production of biodiesel.

The rise and fall of the German biodiesel industry

During 1990 and 1995, the first biodiesel production process was developed in Germany and tested on captive fleets. The biodiesel industry expanded rapidly over the following seven years and a stable German market emerged. By 2001, the country had recorded a total of 406 million litres of biodiesel production.

Spurred on by its rapid growth, many new players entered the market, including Biopetrol Industries and Bio-Olwerk Magdeburg. Meanwhile, established players such as Archer Daniels Midland and Cargill were rapidly expanding their operations.

This growth in the biodiesel industry, however, resulted in the fall of the conventional fuels market. As conventional fuels produce more funds for the nation than biofuels, the German Government started taxing biodiesel from August 2006. Later that year, biodiesel producers started paying ecological taxes which quickly led to the shrinking of their profit margins. At the time, the ecological tax stood at €0.09 per litre.

"In January 2008, the fuel tax on biodiesel was raised to €0.15 per litre from €0.09 by the German Government."

The first to suffer from the ecological tax were the new market players, but the overall effect on the industry was steep – its growth rate fell by 48% during 2007 when compared to figures in 2006. Furthermore, in January 2008, the fuel tax on biodiesel was raised to €0.15 per litre from €0.09 by the German Government.

Consequently, many companies began narrowing down their operations during 2008 and again the overall growth rate of the industry fell down to 25% on a year-on-year basis.

In need of an incentive

While biodiesel is not in direct competition with petrodiesel, the latter's tax exemption made it inadvertently so. Biodiesel is more expensive to produce from fossil fuels than diesel, so its production requires the encouragement of tax breaks or a legal requirement to blend it with fossil fuels at oil refineries. If there is no legislative support on taxation or binding targets, there is effectively no real market for biodiesel.

Producing biodiesel in Germany costs around US$673.10 per 1,000l, while petrodiesel costs about $285.75 per 1,000l. Furthermore, German mineral oil and ecological taxes amount to $558.80 per 1,000l, which results in a total cost after taxes of $844.55 per 1,000l for petrodiesel before distribution and marketing.

Before 2006, biodiesel was exempted from these taxes. Taking the differences between the retail price and the total cost of petrodiesel gives a return of $34.29 per 1,000l before distribution and marketing, compared to $129.54 for biodiesel. This low level of tax exemption given to the biodiesel producers prevented many new players from entering the biofuels market.

A tentative future

Germany's biodiesel industry now lies in a tentative position with sales at gas pumps down by about 40% during 2008 in comparison to 2007. The unique selling point for biodiesel used to be its cost effectiveness, but the global meltdown has forced many small market players into extinction. The only source of revenue for biodiesel firms remains the mandatory blending of biodiesel with conventional fuels.

"In 2009, the German Government's proposal of reducing biofuel blending percentage with conventional fuels is certain to hit demand for biodiesel hard."

In 2009, the German Government's proposal of reducing biofuel blending percentage with conventional fuels is certain to hit demand for biodiesel hard. The fall in crude oil prices has forced customers to revert back to the use of conventional fuels. If crude oil prices continue to trade at around $55 per barrel then the biodiesel market will shrivel further and biodiesel manufacturers will ultimately struggle to sustain operations.

The hike in taxes has increased the total cost of production, which in turn has squeezed the profit margins of the biodiesel manufacturers. The smaller market players are unable to cover these costs and have terminated their operations, while the key market players are witnessing shrinking profit margins and are exploring other market opportunities. They are, for example, seeking to export their products to the EU and various eastern European countries to cover their expenses.

The cost of production together with the increase in taxes has raised questions for the sustainability of biodiesel manufacturers in not just the German market but the global one as well.

The report is available to purchase via GlobalData's Report Store (http://www.global-market-research-data.com/).