CAROTECH’s current debt woes are a far departure from its heydays. At 7.5 sen, its current share price is down over 90% from a peak of 99.5 sen in May 2006.
Soon after it listed in 2005, Carotech was a favourite with analysts. The company was touted as an exciting biodiesel play. Over the next few years, especially up to mid-2008, soaring crude oil and renewed concerns over the environmental impact and sustainability of fossil fuels made biodiesel the next big “green” thing.
Thus, investing in biodiesel ventures was not only seen as financially viable, but also environmentally responsible as well. Unfortunately, that has not been the case for Carotech, or the biodiesel industry in Malaysia in general.
In total, 91 biofuel production licences had been given out as at June 2009, according to government data. Not all took the plunge. Carotech did, and it paid dearly. Carotech had invested more than RM300 million over the past 3½ years to increase its capacity from 18,000 to 120,000 metric tonnes a year.
How did things go wrong?
Biodiesel had been touted as the cure to the problem of high crude oil prices, which rose to a peak of over US$140 per barrel in mid-2008.
In the early days of the biodiesel fever, crude oil prices were rising but the price of feedstock, namely palm oil, did not rise as much. For a very long time, palm oil prices were trading below the RM1,500 per tonne. Biodiesel projects were seen as viable then.
As crude oil prices rose, so did palm oil, which surged to as high as over RM4,000 per tonne in mid-2008. The promotion of palm oil and other edible oils as biodiesel alternatives for fuel meant that they now tracked each other more closely.
The lack of local government support is also a factor. While the Malaysian government was quick to introduce the National Biofuel Policy in 2005, it has not been fully implemented. The government is still keeping its plan to mandate a 5% biodiesel blend for diesel, but the exact date when this will be carried out is still uncertain.
The blending of 5% palm methyl ester with diesel was supposed to be implemented in stages, starting with government vehicles from Feb 1, 2009 — but they have since been deferred.
One of the major markets for biodiesel is Europe, where renewable energy is big business and government support is strong. Europe has dominated the biodiesel industry with an estimated 90% of global production, supported by tax exemptions and national usage targets.
The European Union (EU) Biofuels Directive requires 2% of the energy for transport to come from renewable sources, including both biodiesel and bioethanol, rising to 5.75% by the end of 2010, and 20% by 2020. Most of the biofuel produced in Europe utilises rapeseed oil.
One EU guideline states that the land used to grow the biofuel, which in this case is palm oil, must not be from cleared rainforest.
Disappointing demand from Europe was one of the reasons given by Carotech a few years ago as to why the optimism surrounding the sector never quite took off.
Carotech is not alone in being burned by biodiesel. Kulim (M) Bhd spent RM155 million on two biodiesel plants, one in Johor and the other in Singapore, formed through a partnership with German company Peter Cremer (S) GmbH. Its Malaysian operations registered a loss of RM2.25 million in 2008.
Subsequently, while Kulim’s Malaysian biodiesel operations managed to secure a contract to supply 42,000 metric tonnes to a major oil company from February to July 2010, its Singapore operations have not fared as well. According to Kulim’s FY2009 annual report, Kulim sold out of the Singapore biodiesel plant, which it said was making severe losses.
This article appeared in The Edge Financial Daily, September 27, 2010.
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