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Thread: ADM to benifit from new biodiesel regulations

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    Default ADM to benefit from new biodiesel regulations

    Another good reason to consider investing in ADM :

    Last year, fellow fool Brian Gorman noted that ADM was placing a large bet on biodiesel. Specifically, he pointed out that the company was planning to build a large production facility that would have the capacity to produce 50 million gallons of biodiesel -- more than double the estimated amount sold in the United States in 2005.

    Well, it now appears that bet is about to be rewarded. On Sunday, a new Environmental Protection Agency (EPA) regulation mandating ultra-low-sulfur diesel fuel took effect. The rule immediately lowers by 97% the amount of sulfur content permitted in diesel fuel. Biodiesel, which is nearly sulfur-free, is well-positioned to meet the requirements of the new diesel regulations.

    Furthermore, the new regulations will dramatically reduce soot emissions, which should help us all breathe a little easier.


    (snip)


    In fact, DaimlerChrysler (NYSE: DCX) is introducing a new Mercedes diesel vehicle next week, and a Jeep Grand Cherokee next year. After that, Honda (NYSE: HMC) is expected to have a diesel Accord on the U.S. market by 2009, while GM (NYSE: GM) has announced that it will have a diesel-powered light truck by 2010.

    As a result of this increased production, diesel vehicles are expected to represent 10% of all the vehicles sold in the U.S. by 2015. This is great news for ADM; thanks to its new plant, it will be one the leading suppliers of the biodiesel fueling these vehicles.
    Last edited by Fan_Dancer; 10-16-2006 at 05:49 PM. Reason: spelling in title

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    Default Re: ADM to benifit from new biodiesel regulations

    It's true that the EPA 15ppm sulfur Diesel requirements have gone into effect in California on October 15th, and will go into effect in other states by the end of the year. It's also true that in order to meet the 15ppm max sulfur content, existing refineries must use crude oil with a lower inherent sulfur content, plus run a more intensive refining process to strip out as much sulfur as possible. This effectively 'reduces' the available market of crude oil to low sulfur types, and also effectively 'reduces' the capacity of existing refineries since low sulfur diesel requires more 'time in the cooker' for an equal number of refined gallons of output. So yes, because this market is 'regulated', some energy companies stand to profit while other stand to lose. For example,

    - because of a relative shortage of 'low sulfur' crude oil sources, and the instability which seems to go along with 'low sulfur' crude oil sources like Nigeria, some industry voices are projecting a 12% supply shortfall of the now mandatory low-sulfur diesel fuel when the new regulations take effect across the country. Thus any company that is in a position to bring alternative source low sulfur diesel fuel to market is going to have 12% of the US diesel fuel market set at their feet. ADM and others will indeed benefit from bio-diesel if they can keep production costs under control. EMEX Corp. is also likely to benefit from its synthetic diesel fuel produced from natural gas conversion ( ). Chevron-Sasol and Rentech are also likely to benefit from the Fischer-Tropsch synthetic diesel fuel produced from coal ( )

    Any companies that can come up with a cost effective refining process for high sulfur crude oil which yields low sulfur diesel fuel without incredibly high refining costs stands to have a major production cost advantage versus competitors using higher cost feedstocks. Conoco-Phillips, in conjunction with Flour Corp, have been intensively working on a totally different refining process for several years called S Zorb ( ), which has the theoretical potential of 'burying' all other alternatives as non cost-effective when compared to being able to use high sulfur heavy crude oil (whose price will drop precipitously as fewer and fewer 'legal' products can be refined from it using conventional refining processes).

    At this point, the only 'sure things' are that the cost of 'road' diesel fuel in the USA is going to go up by some 12 cents / gal in the short term as existing refineries must use 'more time in the cooker' to produce lower sulfur content diesel fuels, and that the cost of 'light sweet' crude oil is going to go up relative to heavy crude as the refineries try to find sufficient supplies of 'light sweet' crude to use as feedstock. It is likely that the cost of gasoline and other refined products will also go up proportionally, as more refining capacity must be diverted away from producing gasoline and towards producing an equal amount of low sulfur diesel which now requires 'more time in the cooker'.

    In the longer term, it will come down to an equation of the various capital investment requirements for the various different synthetic diesel fuel technologies versus the actual costs of operating the various different synthetic diesel fuel processes, as well as the long term market price of diesel vs 'light sweet' crude oil vs natural gas vs coal vs biomass. On paper, biomass looks attractive because much of the feedstock supply can be had at low cost since it is considered a 'waste product'. However, with massive increases in volume involved (i.e. 12% of current US diesel fuel consumption), it's probable that low cost 'waste product' sources for biodiesel feedstock would be quickly over-run, forcing biodiesel producers to then purchase 'virgin' feedstock in direct competition with ethanol refiners etc.

    I would also add that these new EPA low sulfur regulations don't actually become 100% into play until 2010. I would also speculate that Rentech is likely to be the outstanding performer, since its business is to license its Fischer-Tropsch technology to others rather than to make huge capital investments in high tech process facilities and actually operate / compete in the low sulfur diesel market. But, exactly like the EPA regulations targeting Ethanol to replace MBTE, the EPA regulations targeting low sulfur diesel fuel have been known about for some time. As such, the price of essentially all company stocks that are involved in this sector have already been bid up (with the real money already having been made by investors who bought in early soon after the proposed new EPA regs were announced).



    However, based on projections of ethanol plus biodiesel feedstock requirements, there is one seemingly sure bet in the biofuels area ... CORN itself. However, the rapidly rising price of corn is rumoured to be putting a damper on profits for companies whose products are dependent on corn i.e. cereal companies, fast food (beef is corn fed), beer, and a host of others. Of course as food is a 'staple', they will undoubtedly be able to raise prices to recoup the higher component cost of corn which they must now pay. ADM will obviously benefit from higher corn prices as well, since it is involved in several non-energy related aspects of corn from seeds to transport to storage.



    The one big risk factor to corn and by implication to biofuels in general is the possibility of public outcry and gov't action regarding higher food prices / short supplies of US produced food for export which is already building momentum since some 50% of the coming year's US corn crop has been redirected away from foods and towards biofuels instead. ( ). As the biofuels market is heavily dependent on gov't subsidies to 'break even' at all levels, any change in gov't policy towards subsidies affecting corn and other foodstuffs to head off rapidly increasing food prices could theoretically devastate the biofuels industry. Another example of gov't regulations causing unintended consequences - in this case forcing US taxpayers to subsidize their own higher food prices !

    Another low risk possibility for profiting from the new EPA requirements is to invest in oil companies who have leases in place for 'light sweet' crude oil with low sulfur content i.e. Shell and Mobil control a huge percentage of Nigeria's low sulfur crude oil fields. Until some sort of new refining capacity or alternative energy / energy conversion processes come on line to reduce the need by existing refineries, Shell and Mobil will be able to charge a premium price for their low sulfur crude oil which will significantly improve their profit margin.
    ~
    Last edited by Melonie; 10-17-2006 at 06:18 AM.

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    Default Re: ADM to benifit from new biodiesel regulations

    ^ None of that changes the fact that ADM will benifit from new biodiesel regulations.

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