with Donny Winarno, Vice President, Molindo Raya Industrial
The economic feasibility of the biofuel market varies considerably with commodity prices for crude palm oil (CPO), molasses and other feedstock. What is your perspective on the economic conditions for biofuel development in 2012?
Commodity prices are essential in this calculation because 60% of the cost of biofuel comes from the feedstock. Fortunately, Indonesia is a country blessed with a wide variety of feedstock for biofuels and biodiesel is already transitioning towards high volume production with over 350 million liters being produced last year. Unfortunately the same cannot be said of the ethanol for biofuel. The gasoline that is mixed with ethanol and used approximately 95% in the transportation is a sector that is subsidized by the government rendering the price at 50cents per liter. This makes it impossible for bioethanol to compete.
The other factor depressing the bioethanol industry in comparison to the biodiesel is the fact that bioethanol’s feedstock is molasses whilst the feedstock for biodiesel is palm oil. Palm oil producers have a domestic market obligation (DMO) and an export tax. This incentivizes producers to sell palm oil to the domestic market. By contrast there is no policy for molasses and most traders are currently exporting this feedstock outside of Indonesia. This drives the domestic price really high with the price in 2009 going above $150 per metric ton and this was the reason that Molindo Raya had to stop the supply of bioethanol to Pertamina. There was no way of taking on such inflation in feedstock prices whilst maintaining the bioethanol price. Indonesia needs to move towards regulation which can put ethanol production on an equal footing.
What are your expectations from the government in terms of delivering change?
The government is making efforts to deliver a more equitable environment for biofuel development. In 2006 there was a decree on biofuels and last year the government created a specialist division called the EBTKE (Renewable and Conservative Energy Department) for renewable energies, so we see progress in the right direction. There is however a lot of catch up to do particularly in the area of research and Thailand has already had research on biofuel ethanol since the 1980s, making the first laws on biofuels in 2002. By contrast, Indonesia’s research only started in 2004-6 and we still need time to make this sector work.
Sadly, the government is confronting significant issues some of which are specific to Indonesia, whilst others are universal challenges facing biofuel development. In Indonesia, the market for ethanol is depressed because consumers use subsidized fuel in preference to pertamax (RON92) products. Thankfully oil subsidies are an unsustainable prospect for the government, which is trying to deal with the issue this year and biofuel is lying in wait. We acknowledge that the government is trying to establish market prices for gasoline and cut the subsidies, but this is not yet the case and ethanol producers are therefore forced to concentrate more on the industrial sector.
Aside from the subsidy issue, the price of bioethanol when compared with the price of its feedstock does not make for a healthy economic environment for developing this industry in Indonesia. This is something that the government has yet to touch properly. Global crude oil prices are high and volatile at the moment, and crude palm oil has reached a 13-month high and most people expect that ethanol should be following this trend, but this is not the case. Ethanol is far below the expected price due to global trading and considering the high production costs and feedstock prices, every countries have to have their own economics for biofuel. In Asia, the biggest ethanol producer is Thailand which is combining cassava and molasses. Their solution to fluctuating feedstock pricing has been to modulate between these two feedstock options depending in which was cheaper. As for Molindo, the approach over the last 5 years has been to concentrate on securing more land to integrate feedstock production into our operations.
On a global level the food vs. fuel debate is still continuing. Molasses is also used for MSG production in Indonesia and because this product has more value in final product, it has better negotiation power than ethanol. Food pricing is one of the factors driving the volatility in feedstock pricing. Each industry is competing for biomaterials and as a result, Brazil was even accepting ethanol imports from the USA for the first time last year.
Given Molindo Raya’s prominent position in bioethanol development in Indonesia, how do you see your role in shaping the industry here?
We believe that the development of biofuels across the industry will take place only after the stakeholders have had a proper conversation on the issue. Other nations are already making concerted efforts to develop their respective biofuel industries. China and the USA are trying to put a mandatory requirement on 2nd generation biofuel development and Asia is following this trend. We now observe lot of movement in the USA, Brazil and Asia in terms of M&A and consolidation of the industry and the development of new technologies. For example, Cellulosic ethanol will be one of the key directions for R&D because the feedstock will no longer be taken from potential food supplies but rather waste material. It is just a matter of developing the technology. In the USA they use a lot of corn straw, kernels, rice husks and other such feedstock. Over the next 5 years more and more countries will move into 2nd generation biofuel development. Molindo Raya therefore sees its role in promoting the dialogue with government to take Indonesia to the forefront of these global initiatives.
On the company level, since the last time you were here in 2007, Molindo Raya has recognized that either in the fuel business or the industrial sector, securing raw materials is the key to our ethanol production. This is why we have concentrated on land acquisition for raw materials and over 3-4 years we have successfully done this. In addition, we believe 2012 will be a big year for the company because we have committed to building another ethanol production facility. The new development will be on Sumatra with a capacity of 50 million liters annual production. This facility will concentrate on a molasses and cassava base. Currently the total capacity of Indonesian producers is around 270 million liters of annual bioethanol production and when our new facility comes on stream, Molindo Raya will be producing around 100 million liters. The new facility will therefore serve to ferment our position as the leading bioethanol producer in Indonesia. Molindo Raya is also doing a lot of R&D on the 2nd generation (cellulosic ethanol). Over the next 5 years we see this potentially contributing a lot to our development.
Molindo Raya has seen itself as a regional player, beginning export to the Philippines in 2006. How do you see this internationalization continuing?
Our first focus is the biofuel development in Indonesia as we are keen to benefit the stakeholders in our own country. Actually in most cases biofuel is more concentrated on the domestic market than on exports.
In terms of regional strategy, if there is an opportunity similar to our exports to the Philippines over the past 5 years then of course we will take it. The Philippines have become one of the largest markets because oil and gas downstream companies have an obligation to blend their fuel with 10% biofuel. There is even a fine in the Philippines if oil and gas companies do not invest in biofuels. Australia is also a very large market even though not all the regulation is yet in place. In exports, a country like Indonesia will be competing against Thailand, Vietnam and even Pakistan is also a major exporter.
What is your outlook on this industry’s development in Indonesia?
Indonesia has just taken the first steps in developing biofuel. The country is taking new directions in energy and I always carry the optimism that this country will soar and I believe that all the stakeholders should consider biofuels in their calculations. Ultimately, the sky is the limit because ethanol is a commodity that has no limit. Ethanol used to only be considered just as liquor or a part of products that we consume everyday from mouth wash to cough medicine. We now need to develop ethanol for the energy sector because this is where ethanol development is heading.
Once ethanol is considered more as energy, like the Brazilians are doing at the moment there is room for a lot of development. Most of the ethanol companies in Indonesia are involved in the industrial sector but their main growth prospects lie in bioethanol production for fuel. It is a relatively small investment and an easy transition for producers of ethanol for industrial purposes to move into the bioethanol for fuel. They already have the main source of fuel ethanol: hydrous ethanol. It is simply a matter of investing in an extra distillation facility to convert this into anhydrous ethanol for fuel usage. In Indonesia, we are still mixing the anhydrous ethanol with gasoline whereas Brazil is moving to 100% ethanol energy in transportation. Ethanol is therefore a proven renewable energy and in Indonesia, Molindo Raya has been one of the main players in developing this commodity. The past 5 years has involved building infrastructure and learning how to make the business work. Over the next 5 years the company should be where we need to be in terms of technology and capacity.
What was it that first attracted you to the biofuel industry and what motivates you every day?
I grew up in a small city called Malang, East Java, where most of the sugar cane companies and mills are based. I see biofuels as creating a cycle in harmony with this agricultural base – essentially giving back to the industry which created the feedstock. An integrated ethanol company will have everything on a continuous cycle. The waste from ethanol production can be used as a fertilizer going back into the field. It is about keeping Indonesia green by using its agricultural heritage and strength to provide renewable energy. Molindo Raya Industrial has an important role to play in this transition and it will work with the efforts of every stakeholder who want the better Indonesia for generations to come.