China’s biodiesel industry boom could be a boon for investors as the country steps up development of the green fuel to meet its pressing energy needs. But, as with many apparent opportunities in China, prudence is the order of the day as the sector goes through its growing pains. 

The low carbon-gas emitting fuel made from vegetable and animal oil is in the midst of an investment and expansion explosion in China. In December, China Clean Energy Inc (OTCBB: CCGY) announced plans to build a new 100,000-ton-per-year biodiesel facility to be up and running by the end of 2008. The investment is one of the latest in an industry whose production capacity in China grew an estimated 600 percent, to 600,000 tons, between 2005-2006, according to Credit Suisse.
 
This growth is being fueled by China’s surging oil consumption, which Beijing estimated at over 330 million tons last year, and which is conservatively projected to reach 450 million tons by 2020. To meet this demand, the country has become increasingly dependent on foreign oil, currently importing at least 40 percent of its oil supply. The United States, by contrast, imported about 60 percent of its 871 million ton consumption in 2006.

So with its potential to weigh on the country’s foreign oil imports and cut greenhouse gases, a major concern in China’s pollution-ridden skies, the Chinese government has made developing the biodiesel industry, as well as its cousin, bioethanol, a national priority. Beijing wants the green fuels to account for 15 percent of all transportation fuels by 2020, compared with 2 percent currently. That goal puts total biodiesel production on a track to reach 2 million tons by 2010, and 5 million tons by 2020.

To develop biodiesel, Beijing has unleashed a series of subsidies and tax incentives. In December, the State Administration of Taxation announced that biodiesel produced from animal fat or vegetable oil will not be subjected to consumption taxes. The government is also expected to introduce later this year new rules requiring conventional fuel to be blended with 5 percent biodiesel.

More important for investors is that Chinese biodiesel producers are reporting profit margins as high as 40 percent, the result of using waste vegetable oil and recycled cooking oil, both of which are one-third the price of the traditional rapeseed oil and half that of palm oil.

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