Parsing Deloitte’s analysis of the sugar beet boom and its relevance for the European bioeconomy
In September 2014 Deloitte released the report “Opportunities for the Fermentation-based Chemical Industry,” a look at the potential to develop the European value chain based on sugar feedstocks. The focus is on Northwest Europe but relevant global market conditions are considered. The report provides some analysis of price dynamics and non-financial investment considerations (sustainability, regulations), with the purpose of making the case for the prospective industry. But given the tone of advocacy, the underlying story is not always clear. It’s worth considering several critical questions:
- What is the fundamental driver of the proposed new bio-based fermentation industry?
- How likely is this new chemical production to emerge?
- What would be the industrial structure of a fermentation-based chemicals boom?
- What implications might it have for the lingo-cellulosic bioeconomy?
Critical question 1: What is driving this story?
While the Deloitte report does not begin there, the reason that the potential development described is relevant is the impending change in European quotas for sugar production and export. The report projects approximately 5MT of new production from 2017 – a 38% increase from 2014 levels. Feedstock requirements would be met by farmers switching to beets from wheat and other grains, and by continuing yield improvements. Some of this sugar would displace the costliest imports for food uses, and the remainder would be available for export (the current quota of 1.15MT will be removed) and for other domestic uses.
Essentially we have a supply-driven change to consider: The EU is likely to produce more of a valuable good, and that is likely to lead to new business of some kind. But what business?
Critical question 2: Where is this excess sugar likely to end up? Are chemicals the likely destination?
New sugar production could generate new value through four basic channels:
- Domestic food uses
- Commodity export
- Ethanol production
- Functional molecules
The report makes no projections as to how much of this new sugar will be exported, but rather focuses on the possibilities for added-value uses in the EU, particularly fermentation-based functional molecules. The opportunities for developing this industry are examined in depth, and the economics of production from EU sugar beets contra global sugar-based alternatives were analyzed (though the financial details are not revealed).
But what of the allocation of new sugar to various uses? What factors might steer producers and investors in one direction or another? One simple set of considerations might be:
- Economics: What are the margins associated with a given use of sugar, and how competitive are the costs?
- Capital requirements: Will a given use require significant new investment downstream of sugar production?
- Market potential: How established and deep are markets for the products?
- Risk and Uncertainty: What is the nature of the risks and uncertainties faced by companies and investors if they choose this direction?
These qualitative judgments are based largely on the information provided in the report and a common-sense assessment of different market fundamentals. More thorough research should be done about different specific business cases. But at a high level, this kind of logic can help us understand the basic appeal of different options. Domestic sugar sales are a no-brainer but they will not absorb the kind of volumes described in the Deloitte report. Export markets will be an obvious port of call for those seeking a quicker outlet and happiest with commodity risk. Ethanol is uneconomic and untrusted … but the market is there today. Chemicals offer greater upside but the kind of uncertainty that requires entrepreneurial risk taking: production and value chain configurations are poorly understood, and volume producers may need to believe that they can create new demand by displacing fossil-based alternatives.
Critical question 3: If functional molecules are going to be produced, what will the value chain look like?
Assuming that the economics of functional molecules from fermentation are attractive, what would be the likely configuration of the production process and thus the value chain?
The Deloitte report focuses on the generic trade-off between the purity of the sugar feedstock and the costs of fermentation.
The curve above is indicative and for incumbents existing capacities will affect their preferences. Nonetheless, Deloitte’s own financial modelling indicates that “In most cases, starting fermentation from an intermediate product is more attractive and makes the process economically viable.”
This is an important judgment, because it implies a certain logic to integration between sugar production and fermentation for chemicals. This is especially the case given Suiker Unie’s claim that raw and thin juice can only be fermented from within the harvesting and processing ‘campaign’ due to decay. Thus more options to execute purity/price tradeoffs will be available to companies that integrate sugar production and fermentation.
There is also an indication in the Deloitte report that the attractive economics of bio-based fermentation is based on the ability to valorize side-streams. Indeed the processing chain illustration below considers integrated biorefining from sliced off beet tails to be one of these valorization options.
Critical question 4: What impact would an emerging sugar-based fermentation industry have on lingo-cellulosic biorefinery concepts?
The issue of process/value chain integration increases the potential relevance of bio-based fermentation to lingo-cellulosic biorefinery concepts. What are the issues that could be important to consider?
Sugar market: New demand or new competition? A growing bio-based chemicals market should, all things equal, generate demand for sugars, including (potentially) C6 sugars from lingo-cellulosic feedstocks. However, if process chain integration is pursued, fermenters may have a captive supply of cheaper low-purity sugars and (potentially) be able to capture some of the same value from side-streams available to L-C refineries.
Chemicals market: Depending on the interest and willingness to invest in process chain integration, sugar producers/refiners may become direct competitors with L-C based refiners, producing specialty chemicals, fuels, etc. based on similar concept.
Equipment/process/technology market: Process integration could create demand for the equipment and technology. While the overall volumes of sugar beets might be limited in relation to ligno-cellulosic material, the integrated economics of sugar production and fermentation could serve as a ‘lead market’ for lingo-cellulosic biorefining technologies.
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It has been refreshing to read a critical analysis of a market study. Most market studies today have a limited scope and sometimes fail to respond important questions, at least for research goals. What is clear that in the coming years liberalization, technological advances and a general stimulation of the bioeconomy due to major drivers as climate change, European dependence on petroleum and a desired rural development will completely transform the both the sugar as the paper & pulp industry and that it is worth studying the matter in depth. These industries have most existing and profitable biorefineries, and while other more generic byproduct value adding biorefineries are still in the pilot plant phase, and do not yet have a convincing business case, these do, meaning that their leverage for promoting the bioeconomy is essential. Thanks for the review!
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Thank you for reviewing this interesting report.
The aspect regarding the potential competition between the direct sugar production and sugars issued from biomass is highly relevant. As one of the aspect of the bio-refinery concept is to be able to valorize the different produced fractions, a carreful economic analysis between the two routes will be needed.
I have two additional questions regarding this report:
1) Is there any clear insight provided on the eventual market/industrial drive to support this developpement?
2) There is an obvious potential to increase the sugar production, but is this supported by the national policies regarding land use?
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Good comments and questions Marjorie! On question 2) above the Deloitte report makes the assumption that the extra production will come in large part from farmers switching to sugar beets from less profitable grains. Thus I suppose that no particular policy support will be required. This seems credible to me but let’s see if the market bears it out!
Question 1 you ask is the same question I am asking myself, really. Not wanting to be too critical I didn’t ask it directly, but it seems me that the economics would have to be very very strong to justify fermentation over simply exporting sugar — strong enough to pay off a much higher capital risk. The fact that the authors bring complex side stream valorization into the picture suggests to me that the economics are not that strong. Thus I expect that strong subsidies/quotas would be necessary to motivate such investment. That seems doubtful for a ‘first generation’ technology, but who knows?
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ad 1: You mention the increasing supply of sugar as a main driver. In the report, I see especially the international demand for sugar as a driver. The EU sugar suppliers are currently limited in serving international demand, as they are ‘frustrated’ / ‘protected’ by quota, import tarrifs and a variety of other policy measures. When these are abandoned, agricultural land use will shift to sugar beet cultivation as prices are higher than for wheat / grains, and production costs are higly competitive.
ad 2: I wonder why the ‘new market equilibrium’ would automatically result in a surplus of EU sugar production. Why would sugar producers flood the market with volumes that will not be bought, either by domestic or foreign food / ethanol companies? How will this become an allocation problem? Doesn’t it work the other wat around: Given sufficient incentives for production of sugar-based chemicals (economics, capital, market potential), the EU sugarbeet industry will provide the feedstock, (which is marginally important in terms of volume anyway). By te way, the analysis of considerations provides a very interesting perspective on the incentives to innovate. Thanks for a very clear overview!
ad 3: Most interesting here, in my view, is the idea that IF biobased chemical plants are to be developed, they will profit from advanced value chain integration since it allows a.o. for the use of cheap byproducts rather than pure sugars. Whether the EU will be the most likely location for this integration is somewhat unclear. Deloitte is rather optimisic here but close reading suggests that this hinges on a lot of uncertain factors. See also TNO’s study on this topic.
In any case, the differences in feedstock production costs between EU, USA, Brazil, SEA seems to be only marginal. What strikes me, though, is the enormous difference in production volumes. Is this completely irrelevant when considering international competition? Deloitte does not mention this anywhere.
ad 4: Here I see, as you say, a more than likely competition between L-C refineries and forward-integrated fermenters.
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I think we are probably saying the same thing about supply/demand; I agree that it’s demand that matters, but what’s changing (i.e. the purpose of the report) is the EU capacity to supply is changing. I do think this been a driver of a lot of bioeconomic thinking, i.e., the search for productive uses for ‘excess’ supply, so maybe not too much new there.
I can understand the logic as to why supply would increase when the quotas lift. In part it’s because the import mandates for LDCs go away and the reports assume that EU producers will capture that; in part it’s because the EU production is far enough down the supply curve to take some global market share as well.
The big question is why producers would use this production for chemicals — I think that’s what the report is about, but I agree with you that the case isn’t always compelling and there is a bit of sleight of hand going on that probably has to do with hidden assumptions about subsidies and the ability to efficiently valorize side streams.
The De Jong IEA report makes a more interesting hypothesis, I think — that sugar producers and fermenters will diversify to new feedstocks and products in part because sugar prices are volatile and in part because they see L-C feedstocks as ‘the future’ and they will want to hedge their bets. That report suggests quite reasonably that this will happen via clip-ons to additional capacity rather than through greenfield production. I am not well versed enough in the technologies to know what is reasonable to ‘clip on’ and what isn’t.
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Regarding volumes, an uneducated guess would be that this is important, but maybe not from a pure market liquidity/feedstock access perspective. I guess that the huge volumes are correlated with much larger agribusinesses, as well, and these companies with their captive feedstocks and big balance sheets are surely best positioned to invest in forward integration into chemicals. And given the smaller volumes of some of the high-value chemicals, one has to wonder whether these advantages won’t turn out to be prohibitive.
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