Chinese Bio-Fuels Poised For Growth
14 August 2006 China’s bio-fuel policies aim to increase production of ethanol to 4 million metric tons (MT) by 2010, and to meet 15% of its transportation needs by 2020.
The aggressive strategy promoted by the Chinese government includes research and development, legislation, and a phased introduction of biofuels to the industry and consumers through subsidies and other financial incentives. With a population that is growing in terms of both size and economic clout, the efforts to ramp up production of both biodiesel and ethanol could have dramatic effects on the world market.
China’s policy objectives are produce 12 million MT of biofuels, including ethanol and biodiesel, annually by 2020, pushing it up to 15% of the nation’s transportation fuel use.
Biodiesel A Natural Fit
The increased development of biodiesel is a result of the already entrenched diesel market in China being twice that of gasoline. Yet the biodiesel strategies in the country are lagging behind the program to promote ethanol, reports the US Department of Agriculture’s Foreign Agriculture Service (USDA-FAS).
While the development of ethanol has been a subject of government planning for 20 years, biodiesel only became a matter of serious consideration in 2006. As a result, the strict fuel ethanol production standards have not yet been developed for biodiesel.
China now is moving forward with a two-pronged approach to the biofuels. While biodiesel will need to catch up with ethanol in terms of government policy, it has as much promise for the country as does ethanol. However, in terms of fuel for export, ethanol may be the stronger cash generator, and China plans to ensure that both programs continue to develop. Currently, China produces between 100,000 and 200,000 MT of biodiesel annually.
Ethanol Accelerating
Already, approximately 920,000 MT, with a production capacity of 1,020,00 MT. Under the current structure, this number should reach or exceed 4 million MT by 2010.
China exports a small amount of fuel ethanol, but a growing domestic demand is expected to cut into the export numbers in the next few years. What remains to be seen is how the sources of ethanol establish themselves in the country. Maize, sugar, oilseeds, sorghum, wheat, and cassava are likely to become feedstock sources for ethanol. Efficiency will determine which sources will dominate the country’s future biofuel industry, though plants will probably be built to support multiple sources depending on the crops available in each region. However, to what extent Chinese farm policy changes is yet to be seen. It is possible that some of the feedstock sources will greatly expand in certain regions where biofuels provide high returns, and that other crops will be sacrificed to make room.
A Rolling Market
In addition to the change in crop areas and crops grown, biofuels are seen as one key to the health of China as a whole. The government sees several benefits to biofuel production, not the least of which are cleaner emissions and less dependence on oil for the country’s increasing number of vehicles.
As disposable income in China continues to increase, privately owned vehicles are becoming more and more common. According to data from the national Bureau of Statistics of China, the number of automobiles owned nationwide reached 26.94 million in 2004 (passenger cars: 17.36 million; trucks: 8.93 million; others: 0.65 million). The average growth rate between 1986 and 2004 was 11.8%. To understand these numbers more clearly, consider that in Beijing alone, authorities report 1,000 new cars are added each day to the city’s roads.
The government has taken notice of Brazil as an example, where 80% of passenger vehicles are flex-fuel. The capital city of Henan, Nanyang, is set to pilot a flex-fuel transportation program in China. The city will experiment with 100 flex-fuel vehicles and 3-5 flex-fuel public transportation buses from the EU. Future research and development will be based on this initial pilot program which make shape the country’s national policy.
Beyond automobiles, biofuels may provide even broader benefits to China as a whole.
Rural Returns
The historic boom in China over the past few decades has largely been confined to coastal cities. While wealth is spreading across the country and improvements are being made in rural areas in central China, this interior area has grown at a far slower rate than cities on the country’s coast. With biofuel production becoming a major industry, the greatest winners are expected to be these rural areas as prices reach higher levels and demand for crops grows.
In fact, many (including FCI) predict that growing biofuel industries will improve prices for nearly all crops, do to simple rules of supply and demand. If demand suddenly surges for crops such as maize and sugarcane, more producers will switch to these crops in order to meet the demand. Subsequently, the after-effect would be a tightening in supply of the crops that were abandoned to make room for additional maize and sugarcane (and other biofuel source material). A smaller supply for these non-biofuel crops also bodes well for their prices in international markets.
USDA-FAS reports that China’s attmepts to use biofuels to mitigate rural poverty will several different regional effects. Most plants are currently located in the northeast, where ethanol production consumes 10% of the maize production of the northeastern provinces of Jilin, Liaoning, Heilongjian, Hebei, and Henan. This area could add crops for biofuel production on otherwise marginal land.
With additional plants, the northwestern provinces of Xinjiang, Tibet, Qinghai, Inner Mongolia, and Gansu could increase their agricultural market by growing sorghum and Jatropha. With additional plants in southern China, the sugarcane and cassava crops could be expanded to meet increased ethanol production objectives.
Some of the answers to the questions about China’s bio-fuels industry may be answered very soon. In late 2006, China will release implementation plans of the biofuels component of the 11th Five-Year Period (2006-2010). This may include national production targets and the implementation of new programs to support biofuels as part of China’s energy policy.
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