Prepared for

:

U.S. Soybean Export Council Inc.
Glycerin Market Analysis

Table of Contents
Section Page Executive Summary...........................................................................................................................................1 Introduction........................................................................................................................................................3 Market Overview ...............................................................................................................................................5 Global Glycerin Market................................................................................................................................5 American Market Volume............................................................................................................................6 American Glycerin Prices.............................................................................................................................7 Glycerin Market Research Overview..........................................................................................................7 Synthetic Glycerin .........................................................................................................................................8 Glycerin and Fatty Acid/Soap Production................................................................................................9 Balance of Trade..........................................................................................................................................10 Imports .........................................................................................................................................................11 Exports .........................................................................................................................................................13 European Market Volume .........................................................................................................................15 European Glycerin Prices ..........................................................................................................................15 Biodiesel Production .......................................................................................................................................16 Domestic Refining Capacity...........................................................................................................................17 Glycerin Use by End Product ...................................................................................................................19 Factors Driving Demand ...........................................................................................................................22 Future Prospects..........................................................................................................................................24 Competing Products ...................................................................................................................................24 Potential New Glycerin Outlets.....................................................................................................................25 Second Generation Biofuels ......................................................................................................................26 Livestock Feed.............................................................................................................................................27 Industrial Chemicals....................................................................................................................................27 Scenario Analysis..............................................................................................................................................29 Glycerin.........................................................................................................................................................29 Fatty Acids and Fatty Alcohols .................................................................................................................31 Biodiesel’s Effect on Soap Manufacturers...............................................................................................31 Key Take-Aways ..............................................................................................................................................32

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Executive Summary
Glycerin, once touted as a co-product capable of adding more value to biodiesel (thus adding value to soybeans), is in a global oversupply crisis. There is just not enough refining capacity or demand to meet current crude production. The demand for biodiesel is not driven by the demand for glycerin. Although glycerin sales provide additional revenues for biodiesel producers, these additional revenues are currently not high enough to drive major production decisions in the biodiesel industry as a whole. The refined glycerin market is relatively small with global production around 2 billion pounds annually and a market value of $1 billion worldwide1 and is expected to grow. Renewable fuel policy (mandates, tax incentives, and subsidies) in developed nations ensures that biodiesel industries will continue to expand well into the future. It is projected that biodiesel production will reach 8.2 billion gallons by 2020. This will contribute 5.9 billion pounds of crude glycerin, meaning that the current production of glycerin will be nearly tripled by biodiesel production alone. The market for glycerin is volatile and pricing is strongly dependent on supply. Since glycerin is naturally produced primarily as a co-product of biodiesel and soap manufacturing, supply is dependent on the demand for these primary products. The recent sharp rise in biodiesel production has driven synthetic refiners out of business and caused crude prices to plunge to pennies a pound. Trade is a critical component of the glycerin industry. Biodiesel production has changed the market dynamics in several countries, while several traditional importers have become net exporters over the last few years. Currently, the United States trades glycerin with three major regions: North America, the European Union, and Southeast Asia. The international market will grow as biodiesel mandates in South America and Southeast Asia make these countries new players in the glycerin market. The glycerin market has undergone many changes in the past 20 years, including the progressive shift of sources of supply, end use, and volume. This shift makes it difficult to develop a model capable of predicting spot prices for the future. There is a strong negative correlation between domestic refined glycerin prices and European glycerin production, leading to the thought that foreign production drives American prices. Moreover, the strong negative relationship between

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“An Unlikely Impact”, Chemical & Engineering News, February 2005

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Middle Eastern oil production and refined glycerin prices leads to the thought that increased petroleum production increases the supply of glycerin substitutes, which would force glycerin prices downward to remain competitive. Soap and fatty acid manufacturers use vegetable oil or animal fat as a feedstock input. These industries have also produced the majority of the natural glycerin in years past. Therefore, biodiesel production has directly impacted the profitability of these industries by competing for inputs and depressing their glycerin prices. This trend will eventually lead some soap and fatty acid manufacturers to move operations overseas. The top end-uses of glycerin are found in the food processing, cosmetics, oral care, and tobacco industries. These markets are mature and demand growth is slow in the U.S. At the same time, the rising standard of living in developing countries, especially in China, provides the greatest opportunity for growth in the traditional uses of glycerin. Some crude glycerin is sold to livestock producers and much of the excess crude is simply burned to heat industrial boilers. High crude oil prices have made glycerin an attractively priced substitute for many petrochemical-derived chemicals. Glycerin can be used as a building block for many chemical compounds used in resins, coatings and adhesives. The industry needs to find new uses for crude glycerin since significant expansion in refining capacity doesn’t seem likely in the short or intermediate term. Initial research results indicate glycerin is a suitable corn replacement in livestock and poultry rations. Consequently, glycerin could potentially be utilized in the livestock industry as high corn prices leave feeders looking for an alternative energy source. In addition, researchers in Texas and Barcelona have developed methods to convert glycerin to renewable fuels (i.e., ethanol and biodiesel). These processes could utilize crude glycerin and add value to biodiesel production – which is the type of innovation needed to resolve the crude glycerin oversupply. The American biodiesel industry is facing an uncertain future, which in turn will impact the supply of glycerin. Furthermore, biodiesel producers have not received the same level of support as the corn ethanol industry. Competition for corn acreage for ethanol as well as competition for the primary use of soybeans, mainly food oil, has raised vegetable oil prices higher than analysts projected. This has caused some plant construction and expansion plans to be scrapped; many producers are facing losses due to high input prices. The industry’s future is dependent on government intervention through increased subsidies, tax incentives, and mandates, making future projections about the supply of glycerin hard to forecast.

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Introduction
Glycerin (also called glycerol and glycerine) is a colorless, odorless, viscous, water-soluble liquid with slightly sweet taste2. It is a three carbon alcohol which serves as the backbone of the triglyceride molecule. Glycerin is non-toxic and can be used topically in cosmetics or consumed in food products and pharmaceuticals. Glycerin is made synthetically using petroleum as a feedstock. It is derived naturally using two methods: Soap and fatty acid production (hydrolysis) – primary source for last twenty years Biodiesel production (transesterification) Transesterification of fats and oils processing can yield crude glycerin as a byproduct at a rate of 10% per unit of biodiesel (methyl ester). Methanol, which is mixed with fats or oils in the transesterification process, is present in the glycerin residue. When excess methanol is removed from the glycerin, the substance is called “crude glycerin”. The content of crude glycerin varies widely, but it is generally 85% glycerin (range: 40%-90%), 10% water (range 8% to 50%), 4% salt (range 0% to 10%), less than 0.5% methanol, and around 0.5% free fatty acids.

100 lbs. Vegetable Oil or Animal Tallow

100 lbs. Biodiesel (methyl ester)

Transesterification

10 lbs. Methanol 10 lbs. Crude Glycerin

Figure 1: Yields of Transesterification, Source: Liberty Process Technologies
2

Frontier Natural Foods Co-op Glossary

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There are three basic grades of refined glycerin, differentiated by purity and potential end-uses. Glycerin is generally sold as 99.5% pure and 99.7% pure. The three grades of refined glycerin are: Technical grade – used as a building block in chemicals, not used for food or drug formulation United States Pharmacopeia (USP) – glycerin from animal fat or plant oil sources, suitable for food products, pharmaceuticals Kosher – glycerin from plant oil sources, suitable for use in kosher foods The properties of glycerin create a versatile product that can be put towards many end-uses. In fact, there are over 1,500 end-uses for the chemical. In most products, however, it is only used in very small portions. There are only a few end-uses which require a significant amount of glycerin in their formulation.

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Market Overview
Glycerin is a byproduct of biodiesel, soap, and fatty acid production. Therefore, the supply of glycerin is determined by the demand for these primary products. As the soap industry has traditionally provided most of the glycerin for the domestic market, the soap manufacturers also own most of the glycerin refining capacity in the country. Global biodiesel production has significantly increased the amount of glycerin on the market in recent years. This has shifted glycerin production to countries that were not traditionally large producers. Because glycerin refining capacity is limited, depressed prices prevent construction of new refineries leading to a global crude oversupply crisis. The glycerin market is a relatively small market on a worldwide basis. Current global production is about 2 billion pounds and is valued at $1 billion annually3. Since the glycerin market is small on a global basis, there is little market information, making it difficult to establish a world “spot” price for the product. This helps to explain some anomalies in the international market. For example, the United States is an importer and an exporter of both crude and refined glycerin.

Global Glycerin Market
The European Union, United States, and Southeast Asia are the main regions which produce glycerin. Although small, the glycerin market is global and vulnerable to shocks in international production. Development of new renewable fuel policies in India, Canada, and South America ensures crude glycerin supply will increase well into the future4. As global supply increases, research and development for new uses of glycerin will be needed to handle the surplus of crude glycerin.

3 4

“An Unlikely Impact”, Chemical & Engineering News, February 2005 Biodiesel: Prospects & Challenges, Promar International, 2007

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American Market Volume
The American market for refined glycerin fluctuates from year to year, but generally stays within a range of 450 – 500 million pounds annually. Furthermore, the production of refined glycerin is relatively stable over time at just under 400 million pounds annually. Although there doesn’t appear to be any drastic changes in the overall production and consumption of refined glycerin in the United States, there has been a change in the suppliers and refiners of glycerin over the past five years. Dow Chemical, the only manufacturer of synthetic glycerin, shut down its 140 million pound plant when prices dropped to unprofitable levels. Meanwhile, some biodiesel producers have added refineries on their plant site to process the glycerin from their biodiesel operations.

700,000 600,000 500,000 1,000 lbs. 400,000 300,000 200,000 100,000 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Consumption Production

Figure 2: US Production and Consumption of Refined Glycerin, Source: Western Australia Dept. of Agriculture

The United States is dependent on the global glycerin market to meet its refined glycerin demand. Mainly, the U.S. imports refined glycerin from Germany and Malaysia. The trade deficit for refined glycerin has been around 55 million pounds over the past two years. Although global trade is critical for the refined glycerin market, imports of crude glycerin into U.S. ports has slowed to a trickle. In fact, 2007 is predicted to be the first year that the U.S. is a net exporter of crude glycerin. More trade details are available in the Imports and Exports sections.

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American Glycerin Prices
The price of American refined glycerin has taken a sharp downturn in the last few years, following the global trend in glycerin prices. Domestic refined glycerin prices have declined from 80 cents per pound in 2002, to 37 cents per pound in 2006. The price shifted back up to 45 cents per pound by August 2007.

120 100 cents/lb 80 60 40 20 0 Jan-80 Jan-82 Jan-84 Jan-86 Jan-88 Jan-90 Jan-92 Jan-94 Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06

Figure 3: 99.5% Refined Glycerin (USP) Prices (1980-2007), Source: www.purchasing.com

Glycerin Market Research Overview
ABG, Inc., an Adayana company, in conjunction with the United States Soybean Export Council has completed a research study of the glycerin market. The team gathered historical data related to the domestic glycerin market including domestic production and prices, European production and prices, petroleum production and consumption, and fatty acid production. Although some of the data were closely correlated, it is difficult to build a model capable of inferring the data’s explanatory power on American glycerin prices. The glycerin market does not lend itself to modeling due to its small size and lack of information. However, the research team observed a slight correlation in the data, which indicates an explanation for the variations in domestic glycerin value (Table 1). Domestic glycerin prices are negatively correlated with the European glycerin market which indicates the U.S. market is vulnerable to fluctuations in global supply. Another remarkable observation is the small, but positive correlation between American refined glycerin prices and domestic refined glycerin supply. Surprisingly, this correlation does not follow the logic that more supply will lead to lower prices.

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Petroleum production and consumption impacts domestic refined glycerin prices, especially production in the Middle East. High petroleum production in the Middle East has historically led to depressed refined glycerin prices. The interpretation of this correlation is that increased petroleum production increases the supply of substitutes for refined glycerin.
Table 1: Correlation of Domestic Glycerin Prices and Market Factors

Variable Refined Glycerin Production Crude Glycerin Production E.U. Refined Glycerin Prices E.U. Refined Glycerin Production E.U. Crude Glycerin Production Middle Eastern Petroleum Production U.S. Petroleum Consumption E.U. Petroleum Consumption

Correlation (Pearson Coefficient) with U.S. Refined Glycerin Prices (1995-2006) 0.39 0.01 0.44 -0.74 -0.58 -0.66 -0.55 -0.49

Synthetic Glycerin
Producers of synthetic glycerin have been hit very hard by the biodiesel industry. Biodiesel companies produce more glycerin as a waste byproduct than the market can hold; putting a squeeze on synthetic glycerin producers. Dow Chemical, the only synthetic producer in the Americas, closed its 140 million pound facility due to the abundant supply of crude glycerin from biodiesel production. Some synthetic glycerin producers remain in Europe and Southeast Asia, however, this market is not expected to expand. The only market sustaining the synthetic glycerin refiners is the pharmaceuticals industry. Many prescription drugs and over-the-counter medicines received FDA approval when they were formulated with synthetic glycerin. To include natural glycerin in these medicines would require pharmaceutical manufacturers to re-submit the drugs to FDA testing5.

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“Glycerin Overview”, Government of Western Australia Department of Agriculture and Food, 2006

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Glycerin and Fatty Acid/Soap Production
Glycerin is a byproduct of the industrial soap manufacturing process (saponification). Modern soap manufacturers use fatty acids and sodium hydroxide as an input. Fatty acids for soap are manufactured through the process of hydrolysis (fat splitting). The process separates the lipid source, either animal fat or vegetable oil, into water, fatty acids, and glycerin6. The glycerin is then removed from the water and fatty acids (sweet water) and is often processed into refined glycerin. This is why much of the glycerin refining capacity is owned by soap manufacturers such as Dial, Proctor & Gamble, and Lever. The production of fatty acids and biodiesel is a similar process (Figure 4). Both processes can use either animal fat or vegetable oil as an input; both produce glycerin as a byproduct.
Hydrolysis
(Soap and Fatty Acids)

Transesterification Animal Fat Vegetable Oil
(Biodiesel)

Alkali

Methanol

Water

Fatty Acids

Glycerin

Methyl Ester

Glycerin

BYPRODUCTS

BYPRODUCTS

Figure 4: Comparison of Saponification and Tranesterification

Biodiesel production, boosted by subsidies and tax breaks, has squeezed soap and fatty acid producers on input costs and byproduct revenues. The domestic soap industry has remained competitive in the past by using beef tallow as a feedstock. Meanwhile, biodiesel makers with multiple feedstock capability use as much animal fat as possible to combat high vegetable oil prices. This has driven up the price for beef tallow, which has, in turn, led soap manufacturers to begin importing foreign plant-based oils for feedstock.

6

“How Soap is Made”, How Products Are Made –Vol. 2, http://www.madehow.com/Volume-2/Soap.html

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Glycerin has traditionally provided consistent revenues to soap and fatty acid producers. These revenues are now fractions of previous years’ since global biodiesel production has flooded the market with glycerin.

Balance of Trade
The market for glycerin is very sensitive to worldwide production. Southeast Asia and Europe are traditional centers of glycerin production. The recent glut of crude glycerin in the domestic market has slowed crude imports into the U.S. to a trickle. However, imports of refined glycerin have remained relatively stable over the past few years since the refining capacity has not increased significantly over the past few years. The international market for glycerin is not efficient due to scarcity of information. The United States imports and exports both crude and refined glycerin. More market information and a better understanding of the spot prices would theoretically improve the import/export situation. The balance of trade for crude and refined glycerin can be seen in Figure 5. The oversupply of glycerin has affected crude glycerin trade more than refined glycerin trade. Figure 5 shows that the crude trade deficit becomes smaller between 2002 and 2006. However, it is projected that the U.S. will be a net exporter of crude glycerin during 2007. The refined glycerin trade deficit fluctuates over time, but it is expected to remain stable unless domestic refining capacity increases.
10,000,000 0 -10,000,000 Quantity (kg) -20,000,000 -30,000,000 -40,000,000 -50,000,000 -60,000,000 -70,000,000 -80,000,000 Refined Quantity Crude Value Crude Quantity Refined Value 2002 2003 2004 2005 2006 2007 10,000,000 0 -10,000,000 Value ($USD) -20,000,000 -30,000,000 -40,000,000 -50,000,000 -60,000,000 -70,000,000 -80,000,000

Figure 5: Snapshot of Balance of Trade, Source: U.S. Census Bureau Foreign Trade Data Dissemination

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Imports
Although imports have fluctuated over the past six years, the quantity and value of crude glycerin imports have trended downward and are approaching zero (see Figure 6). Meanwhile, the quantity of refined glycerin imports has remained relatively steady over the past four years. The value of refined glycerin imports, on the other hand, has fallen slightly relative to refined glycerin quantity due to falling prices. Figures 7 and 8 break down crude and refined glycerin imports by source country. Germany and Malaysia are the two largest suppliers of glycerin in the world. Malaysia’s palm oil industry has historically made the country a major player in the fatty acids market; a boom in biodiesel production from palm oil means the country will produce even more crude glycerin. Therefore, Malaysia will be the biggest exporter of crude glycerin to the United States for some time. Figure 7 shows that imports of crude glycerin from Germany decreased steadily over time and moved to nearly zero by 2007. This is because the market price for crude glycerin does not meet the cost to ship crude glycerin from Europe to the United States. Figure 8 indicates that imports of refined glycerin fluctuate annually but generally stay between 75 million and 90 million kilograms a year. Imports of refined glycerin have trended slightly downward the last three years.
100,000 90,000 80,000 Quantity (1,000 lbs) 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 2002 2003 2004 2005 2006 2007 Crude Quantity Crude Value Refined Quantity Refined Value 0 40,000 20,000 60,000 100,000 Value ($1,000) 80,000 120,000

Figure 6: Snapshot of Glycerin Imports, Source: U.S. Census Bureau Foreign Trade Data Dissemination

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50,000 45,000 40,000 Quantity (1,000 kg) 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 2002 2003 2004 2005 2006 2007

$30,000 $25,000 $20,000 $15,000 $10,000 $5,000 $0 Value ($1,000 USD) Value ($1,000 USD)

Rest of World Total Imports

Germany Germany Value

Malaysia Malaysia Value

Figure 7: Crude Glycerin Imports by Country, Source: U.S. Census Bureau Foreign Trade Data Dissemination
100,000 90,000 80,000 Quantity (1,000 kg) 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 2002 Rest of World Total Imports 2003 2004 2005 2006 2007 Malaysia Malaysia Value $0 $40,000 $20,000 $60,000 $100,000 $80,000 $120,000

Germany Germany Value

Figure 8: Refined Glycerin Imports by Country, Source: U.S. Census Bureau Foreign Trade Data Dissemination

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Exports
Although crude glycerin exports have remained steady for the past six years, the volume of refined glycerin exports has increased steadily over the same time period (see Figure 9). China is responsible for the increase in refined glycerin exports, while the value of U.S. glycerin exports has closely followed the level of glycerin exports. Figures 10 and 11 break the export market down into Canada and the rest of the world. Canada is by far the largest consumer of U.S. glycerin. Crude glycerin exports to Canada have fluctuated annually, but have remained within a 12 million kilogram range from year to year. However, the share of refined glycerin going to Canada has declined noticeably in the last three years, mainly due to the exports to China. The United States exported 14,000 kg of refined glycerin to China in 2005 (China received no U.S. glycerin in previous years). The quantity of 2007 refined glycerin exports to China is projected to be 4.7 million kg.
30,000 25,000 Quantity (1,000 kg) 20,000 15,000 10,000 5,000 0 2002 2003 2004 Crude Quantity Crude Value 2005 2006 2007 Refined Quantity Refined Value $30,000 $25,000 Value ($1,000) $20,000 $15,000 $10,000 $5,000 $0

Figure 9: Snapshot of Glycerin Exports, Source: U.S. Census Bureau Foreign Trade Data Dissemination

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12000 10000 8000 6000

$9,000 $8,000 Value ($1,000 USD)

Quantity (1,000 kg)

$7,000 $6,000 $5,000 $4,000 4000 2000 $1,000 0 2002 2003 2004 2005 2006 2007 Rest of World Rest of World Value Canada Canada Value $0 $3,000 $2,000

Figure 10: Crude Glycerin Exports, Source: U.S. Census Bureau Foreign Trade Data Dissemination

35000 30000 Quantity (1,000 kg) 25000 20000

$30,000 $25,000 $20,000 $15,000 Value ($1,000 USD)

15000 10000 5000 0 2002 2003 Rest of World Total Exports 2004 2005 Canada Canada Value 2006 $10,000 $5,000 $0 2007 China China Value

Figure 11: Refined Glycerin Exports, Source: U.S. Census Bureau Foreign Trade Data Dissemination

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European Market Volume
The European Union is the global leader in biodiesel production. Policymakers have committed themselves to reducing the E.U.’s dependence on foreign oil by providing incentives to use biodiesel made from rapeseed oil. Subsequently, the E.U. glycerin market has been flooded with crude glycerin since biodiesel production became large scale in the early part of this century. Germany is the leading glycerin producer in the European Union (Figure 12). This is mostly due to an aggressive biofuels policy, which has mandated 5.75% of energy will come from renewable sources by 20107.
300,000 250,000 1,000 lbs. 200,000 150,000 100,000 50,000 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Germany Italy Rest of EU

Figure 12: European Refined Glycerin Production, Source: EUROSTAT

European Glycerin Prices
European glycerin prices have suffered greatly from the biodiesel boom of the last few years (Figure 13). Depending on purity and grade, refined prices have declined 40% to 60% since 20028. Many fatty acid producers and glycerin refiners have exited business due to low prices. The reduction in refining capacity has slightly tightened supplies, which in turn, has brought refined prices up in the past year. However, the crude glycerin market in Europe is suffering and prices are approaching zero9.

7

“Biofuels and the European Union: Bi-Weekly Bulletin”, Market Analysis Division, Agriculture and Agri-Food Canada, July 2007 8 HB International 9 “Glycerin Overview”, Government of Western Australia Department of Agriculture and Food, 2006

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3000 2500 Euro per metric ton 2000 1500 1000 500 0
19 81 19 91 1 3 5 20 0 19 83 19 85 19 87 19 89 19 93 19 95 19 97 19 99 20 0 20 0 20 0 7

Figure 13: 99.7% Refined Kosher Glycerin Prices (Europe), Source: HB International

Biodiesel Production
Global biodiesel production will determine the future of the glycerin industry. Demand for biodiesel is projected to be 8 billion gallons by 2020. This would result in 5.8 billion pounds of glycerin entering the market from biodiesel production alone. It is uncertain whether future biodiesel production will meet projections. Policymakers have set optimistic renewable fuel goals and mandates which may not become a reality. Feedstocks for biodiesel companies have become so expensive that generous subsidies still do not enable biodiesel to be competitive with petroleum-based diesel. Biodiesel production may be lower than projected in the future; therefore, there will be less glycerin than expected. Although biodiesel production may not meet future projections, it is expected to increase well into the future and further exacerbate the crude glycerin glut. It will be in the best interest of biodiesel producers across the world to find a solution for crude glycerin prices which can add more value and profitability to their biodiesel operations.

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Figure 14: Projected Biodiesel Production, Source: Promar International

Domestic Refining Capacity
The domestic glycerin refinery capacity is slightly below 500 million pounds of refined glycerin annually. However, this is not large enough to refine all of the crude glycerin produced in the United States because the demand for refined glycerin has not kept pace with the recent surge in crude supply. Glycerin is refined in the United States by only a few companies. The largest producers include Proctor & Gamble, Dial, and Cognis, which are all major players in the global chemical market. All domestic refiners currently refine natural glycerin only. Proctor & Gamble owns the largest refining plant with a capacity of 150 million pounds annual capacity, which accounts for over 30% of the domestic glycerin refining capacity. Table 2 contains information pertaining to the owners and the capacity of glycerin refineries in the United States. The most recent major entrant into the refined glycerin market is Cargill. The agribusiness giant built a 30 million pound capacity plant on the same site of its 37.5 million gallon biodiesel plant. This is the second glycerin refinery to be constructed on the site of a biodiesel refinery. The other company is Purada Processing, LLC, which is a subsidiary of World Energy Corp. Other firms have cancelled plans to build or expand glycerin refining operations due to the crude glycerin glut.

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Company and Location Proctor & Gamble, Ivorydale, OH Cognis, Cincinnati, OH Uniqema, Chicago, IL Cargill, Iowa Falls, IA* Crompton, Memphis, TN Dial, Montgomery, IL Lever, Hammond, IN Colgate-Palmolive, Jeffersonville, IN Crompton, Mapleton, IL Lonza, Painesville, OH Starchem, Fostoria, TX Purada, Lakeland, FL* Marietta American, Olive Branch, MS Total

Capacity (Million Pounds) 150 65 35 30 30 30 25 20 20 20 20 15 2 462

Table 2 Glycerin Refineries, Source: The Innovation Group Chemical Profile – Glycerin

As can be seen on Figure 15, most glycerin refineries are located in areas traditionally involved in chemical refining. The largest capacity for glycerin refining lies in the eastern Corn Belt states.

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Figure 15: Glycerin Refinery Locations Source: The Innovation Group Chemical Profile - Glycerin

Glycerin Use by End Product
According to the Soap and Detergent Association, there are over 1,500 uses for glycerin10. The uses range from energy bars to cough syrups to protective boat coatings. With 1,500 uses, the market is expected to be fragmented. While this traditionally meant that refiners commanded more market power, much of this power has been undermined with the recent glut of crude glycerin in the domestic market. The top three uses for refined glycerin are food products, personal care products, and oral care products. These three uses account for 64% of refined glycerin consumption. Figure 16 contains a complete breakdown of glycerin consumption by end use.

10

“Why Glycerin USP?”, The Soap and Detergent Association, 2000

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Miscellaneous 10% Pharmaceuticals 7% Food Products 24%

Polyether Polyols for Urethanes 8%

Tobacco Humectant 11% Personal Care Products 23% Oral Care Products 17%

Figure 16: End Use of Refined Glycerin, Source: The Innovation Group Chemical Profile : Glycerin

Food Products
Glycerin has unique properties which make it a useful component of food products – mostly as humectants in food products11. As a humectant, glycerin absorbs water molecules from the air, helping keep food moist and prevent crumbling. This property of glycerin helps preserve food and keep it fresh for longer periods of time. Glycerin is also making inroads into the sporting world as a unique carbohydrate source. Its chemical properties give it a sweet taste, but unlike other carbohydrates, glycerin does not cause an insulin surge during the digestion process. This means excess energy from glycerin is not stored in the body as fat, making glycerin ideal for body-builders as it provides short-term energy but does not increase body fat. Moreover, glycerin has water-retention properties which make it ideal for sports drinks. Glycerin can be used as a lubricant in food manufacturing facilities because it is non-toxic and has many lubricant properties.

11

“Glycerin Overview”, Government of Western Australia Department of Agriculture and Food, 2006

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Personal Care Products
Personal care products account for 23% of the usage of refined glycerin. The properties of glycerin are ideal ingredients in many personal care products, mostly helping to prevent moisture loss. Thus, glycerin is used as an emollient in skin creams, lotions, shaving creams, makeup and deodorant.

Oral Care Products
Oral care product usage accounts for 17% of refined glycerin demand. Glycerin is commonly found in toothpastes, mouthwashes and sugar-free gum, giving these products a sweet taste without contributing to tooth decay12. Gel toothpastes generally contain more glycerin than traditional toothpastes because glycerin helps to provide a smooth appearance.

Tobacco Humectant
Glycerin is used as a humectant and sweetener in the manufacture of tobacco13, accounting for 11% of refined glycerin consumption. Glycerin is often sprayed on leaves before processing to prevent crumbling and dehydration. It is used as a plasticizer in cigarette papers as well as a sweetener in chewing tobacco.

Polyether Polyols for Urethanes
Glycerin provides one of the basic chemical building blocks for the construction of rigid polyurethane foams. The usage in this category accounts for 8% of glycerin consumption.

Pharmaceuticals
Glycerin is used in many medicinal formulations, accounting for 7% of refined glycerin consumption. Glycerin provides lubrication and smoothness to many cough syrups and elixirs. It can be used as a plasticizer in gel caps and is an active ingredient in the emergency heart medicine, nitroglycerine.

Miscellaneous
Miscellaneous uses of glycerin account for 10% of refined glycerin consumption. About 3% of refined glycerin is used for the formulation of alkyd resins. Alkyd resins are used as protective surface coatings, components of plastics, and paints. Glycerin is also a component of nitroglycerine explosives.
12 13

Bluffton University Department of Chemistry Acme-Hardesty Glycerin Product Catalog

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Energy Source
The most common uses of crude glycerin today are for incineration. Glycerin burns well at high temperatures (it is toxic at 392-572º F) and is useful for heating industrial boilers14. This is one use of glycerin that consumes large amounts and does not require refining. However, this is considered the lowest valued use of glycerin, as it adds little value to biodiesel producers when the glycerin is sold for waste byproduct prices.

Factors Driving Demand
Glycerin is produced in the manufacturing or refining of several chemicals from petroleum to soap to biodiesel. Therefore, glycerin supply is not related to glycerin demand, however, prices are. Glycerin prices adjust to deal with the global supply. Like any normal good, the price of substitutes determines glycerin demand. Many substitutes for glycerin are petroleum-based. Although these products are not up to the quality standards of refined glycerin, they are generally less expensive than refined glycerin. The recent rise in crude oil prices has made petroleum-derived chemicals more expensive than they have been in the past15. This has helped to increase the demand for glycerin from natural sources as more manufacturers start to look to glycerin for their oleochemical needs. One of the primary drivers of increased demand for glycerin has been the rising standard of living in Asia. As the Asian population becomes more affluent, the demand for personal care products will increase as many of the cosmetics, soaps, and other hygiene products contain glycerin. China is a rapidly developing market for personal care products, which will provide further opportunities for glycerin. The historical data analysis determined that petroleum production has traditionally impacted glycerin prices. Figures 17 and 18 explain the mid 80’s shock in European and American glycerin prices as a result of reduced oil production in the Middle East.

14 15

“Glycerin Overview”, Government of Western Australia Department of Agriculture and Food, 2006 “Global Market Outlook: Glycerin” Flexnews Food News, 2006

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The overarching restraint on the glycerin market is oversupply. There is just simply more crude glycerin than the market can handle. The worldwide increase in biodiesel production will further contribute to this situation in the future. Europe’s production of crude glycerin exceeded 1.1 billion in 2006. The entrance of Asian palm oil producers into the market will further exacerbate the supply glut. Also, high transportation costs limit glycerin demand. It costs between $0.04 and $0.05 per pound to ship glycerin from European ports to the American market16. At times the freighting cost is higher than the value of domestic crude glycerin.
30,000 Thousand barrels per day 25,000 20,000 15,000 10,000 5,000 0 3,000 2,500 2,000 1,500 1,000 500 0

Figure 17: Middle Eastern Oil Production and European Refined Glycerin Prices, Source: HB Int'l, BP Shell
30,000 Thousand barrels per day 25,000 20,000 15,000 10,000 5,000 0
19 8 19 0 81 19 8 19 2 8 19 3 84 19 8 19 5 86 19 8 19 7 8 19 8 8 19 9 90 19 9 19 1 92 19 1993 9 19 4 95 19 9 19 6 97 19 9 19 8 99 20 0 20 0 01 20 0 20 2 03 20 0 20 4 0 20 5 06

19 8 19 0 8 19 1 8 19 2 8 19 3 8 19 4 8 19 5 8 19 6 8 19 7 8 19 8 8 19 9 9 19 0 91 19 9 19 2 9 19 3 9 19 4 95 19 9 19 6 9 19 7 98 19 9 20 9 0 20 0 0 20 1 02 20 0 20 3 0 20 4 0 20 5 06

Middle Eastern Petroleum Production

European Glycerin Prices

120 100 80 60 40 20 0 Cents per pound

Middle Eastern Petroleum Production

American Glycerin Prices

Figure 18: Middle Eastern Oil Production and US Refined Glycerin Prices, Source: Purchasing.com, BP Shell

16

“Global Market Outlook: Glycerin” Flexnews Food News, 2006

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Euro PMT

Future Prospects
The increase in the Asian standard of living and substitution for petroleum-derived chemicals will lead to slight growth in the demand for glycerin; however, the increase in demand will not be enough to keep up with the supply of crude glycerin from biodiesel production. Japan and the United States, two historically large consumers of glycerin, only have an annual growth rate of two percent for glycerin consumption17. Research and development into future uses of glycerin provides the only hope for dealing with the crude glycerin glut brought on by biodiesel production. University researchers, chemical giants Dow and DuPont, and agribusiness powerhouse Cargill are all investing time and money to find better ways to utilize glycerin. The short-term effect of the current research will be minimal; however, there is some promising research which could make glycerin less of a waste product and more of a valuable byproduct. This is discussed in section on potential new glycerin outlets.

Competing Products
There are several substitutes for glycerin depending on the end-use industry. These substitutes are often used when they are priced cheaper than glycerin. The chronic oversupply of glycerin has cut inroads into the markets of glycerin competitors, including sorbitol, propylene glycol, and bentonite.

Sorbitol
Sorbitol has several end-uses similar to glycerin and often they are included together in the same formulations. By category, the uses of sorbitol are: Toothpaste and cosmetics – 35% Processed food – 30% Pharmaceuticals – 7% This is a highly concentrated market with three producers accounting for 93% of the 820 million pound production capacity18. Sorbitol is produced with sugar from corn starch or invert sugar as a feedstock. The three largest producers are SPI, Roquette America, and ADM and account for ninety-three percent of the sorbitol market.

17 18

The Innovation Group Chemical Profile: Glycerin The Innovation Group Chemical Profile: Sorbitol

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With demand at 606 million pounds and a growth rate of 1.5 percent, the United States is a net exporter of sorbitol. Sorbitol prices range between $0.27 and $0.40 per pound for pharmaceutical grades.

Propylene Glycol
Propylene glycol (PG) has industrial uses similar to glycerin. These compounds can often be seen as ingredients in the same formula19. By category, the uses of PG are: Unsaturated polyester resins – 27% Functional fluids (anti-freeze, de-icers) – 20% Cosmetics and food industry – 20% Miscellaneous (paints, coatings, tobacco processing) – 33% The PG market is highly concentrated. The top two producers account for 85% of the 1,280 million pounds production capacity. With demand at 943 million pounds and a growth rate of two percent, the U.S. is a net exporter of Propylene Glycol. Prices range between $0.60 and $0.68 per pound.

Potential New Glycerin Outlets
In order to add value to glycerin from biodiesel, new outlets need to be found for the byproduct. The supply of crude glycerin has reached crisis levels. Many view glycerin as a waste product instead of a versatile byproduct. Prices for crude glycerin have bottomed out in both the US and European markets. The best means to improve the glycerin glut will be innovations that add value and create new, strong demand for glycerin. Most new outlets for glycerin are in the development phase. Therefore it is difficult to estimate their future impact on glycerin demand and prices.

19

The Innovation Group Chemical Profile : Propylene Glycol

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Second Generation Biofuels
One of the most exciting developments on the horizon is research related to converting glycerin into renewable fuels – known as second generation biofuels. These fuels improve the yield of the biodiesel process, add value to the bottom line and result in less glycerin to either market or dispose of. These second generation fuels do not require refined glycerin as an input; therefore, biodiesel plants across the world can use the process without building refining capacity. Researchers in Barcelona (IUCT) have developed a technique which converts glycerin into biodiesel. The process, known as IUCT-S50, is meant to be used alongside a traditional biodiesel plant. The IUCT-S50 process allows biodiesel plants to convert 100% of their biomass to biodiesel. In addition to automatically boosting plant production by ten percent, the process eliminates the need to market or dispose of crude glycerin20. IUCT has been in talks with several biodiesel companies in Europe and the United States to license their technology. IUCT-S50 technology should be commercialized between mid 2008 and early 200921. If the process is cost-efficient, it can be expected that this technology will be very popular among biodiesel producers. Dr. Ramon Gonzalez, a Chemical and Biomolecular Engineering professor at Rice University, has identified a strain of E. coli which can convert glycerin to ethanol in an anaerobic environment22. The process yields ½ pound of ethanol for every pound of refined glycerin. The other ½ pound can be used as a feedstock for other industrial chemicals, thus adding even more value to the glycerin. Dr. Gonzalez’s process is very cost-effective. He estimates the cost of production for his process is 40% of the cost of corn ethanol production. One of the most promising aspects of Dr. Gonzalez’s process is that unprocessed and crude glycerin can be used as feedstock. Dr. Gonzalez has formed a company to commercialize and license the technology. The company expects to have a pilot “glycerin to ethanol” plant operational in the summer of 2008. Depending on industry acceptance, this technology has room to grow and could consume a considerable amount of glycerin in the future.

20 21

Press Release – Mollet, September 25th, 2007 – Institut Univ. de Ciencia i Tecnologia, S.A. E-mail correspondence – Josep Boliart – CEO and General Manager, IUCT 22 Personal conversation – Sept. 14, 2007

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Livestock Feed
Another potential use of glycerin is corn replacement in cattle feed. Several universities in the U.S. are researching the effectiveness of feeding crude glycerin in beef feedlot and dairy cow operations23. Other animal scientists are investigating crude glycerin’s suitability as a corn substitute in swine and poultry rations. The research has yielded very positive results so far, showing that glycerin can be substituted for corn as an energy source with a 1:1 ratio. The research indicates there is no sacrifice to milk, meat, or egg production when crude glycerin is substituted for corn in livestock diets. This is great news for the livestock and poultry industry which has been dealing with high corn prices due to ethanol demand. One concern with feeding glycerin to livestock is methanol content. High methanol producers will not have access to the livestock feeding market. Another practical concern is the “stickiness” of the feed. Swine and poultry researchers noted that glycerin levels above ten percent of the ration were not practical to feed with modern feeding equipment24.

Industrial Chemicals
There are opportunities to use glycerin as building blocks of industrial and organic compounds. Glycerin can be used in many types of chemicals; their uses ranging from paints to dyes to fuel cells.

Epichlorohydrin
Epichlorohydrin has traditionally been a building block in the manufacture of synthetic glycerin. However, with the flood of crude glycerin on the market, the demand for epichlorohydrin has fallen drastically. Solvay Chemicals has patented a process which converts glycerin from biodiesel into epichlorohydrin25. This compound is then used to as a component of UV coatings, resins, and paper reinforcement.

1,3 –Propanediol
Researchers have identified several strains of bacteria which are capable of converting glycerin into 1,3 – Propanediol. This compound, much like epichlorohydrin, is useful in UV curings, adhesives, polyesters, and laminates.
23 24

University of Minnesota Extension Service, Dr. Jim Linn “Biodiesel Byproduct Effective in Swine and Poultry Feed”, Feed Management, May/June 2007 25 Solvay Chemical Press Release – January 2006

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Hydrogen
Although hydrogen fuel cells are very much in their developmental stage, glycerin processing often yields fuel-grade hydrogen as a co-product. This will add more value to glycerin in the future, but it will not have any short-term or intermediate effects on the value of glycerin.

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Scenario Analysis
The team’s research has led to a few conclusions about the future markets for biodiesel byproducts. Even though there is much uncertainty and often little market information available, making firm conclusions about the future difficult to predict, the team’s interpretation of the data leads to a few potential scenarios for the future of glycerin, fatty acids, fatty alcohols, and bar soap. All of these are dependent on the volume of biodiesel produced on a global basis.

Glycerin
The future of the U.S. glycerin market is dependent on three major factors: the volume of biodiesel produced globally, domestic soap production, and development of new uses for glycerin. The team’s interpretation of the future market for glycerin is an extension of current trends. Barring any new innovations which significantly increase the demand for glycerin, then the price of glycerin will continue to plummet and crude glycerin will sell for waste byproduct prices.

Biodiesel Production
The most realistic scenario to consider is the volume of biodiesel being produced globally increasing well into the future. Growth in the industry is buoyed by government subsidies, tax incentives, and usage mandates. Europe and the United States are leaders in biodiesel production, but nearly every developed country in the world has included biodiesel as part of their renewable energy policy initiatives. The reality of high feedstock prices in relation to petroleum may stifle biodiesel growth in some countries, but countries with abundant sources of fats and oils will build up biodiesel capacity, thus putting more glycerin out into the market and driving prices lower. Another biodiesel production scenario to consider is little or no growth in biodiesel production. This does not seem feasible in the long-run given all of the political goodwill currently directed to “green energy”. However, in the short term, high vegetable oil prices make U.S. biodiesel production unprofitable despite $1/gallon subsidies and tax incentives. This has already put biodiesel volume at lower levels than expected; thus the volume of crude glycerin hitting the market is not as high as expected. There is already a surplus of glycerin; however, a slow down in biodiesel growth will make the glut of glycerin less severe.

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Soap Manufacturing
The soap manufacturing industry is very much tied to the biodiesel and glycerin industry. Soap manufacturers are competing with biodiesel companies for input feedstocks and compete with biodiesel companies to sell their byproduct, glycerin. This has squeezed margins on both ends for soap manufacturers. The scenario that the team sees emerging is soap production moving to Southeast Asia. The area already has lower labor and input costs than the United States. Consumption from multifeedstock biodiesel plants has driven up the price of animal fat - the saving grace of American soap makers in the past. Soap makers can import cheap raw oil as a fatty acid input for the shortterm, but if the U.S. continues to need more fatty acids than it can produce then soap production will shift to Southeast Asia. If soap production shifts to Southeast Asia, two things will happen: (1) the volume of glycerin on the U.S. market will decrease; (2) the glycerin refining capacity will shrink, thus increasing glycerin imports. The team projects that the shift of soap production to Southeast Asia would have an ambiguous effect on prices for glycerin from biodiesel. Although the shift of soap manufacturers to foreign countries would reduce the amount of crude glycerin that biodiesel companies have to compete with, there will be less refining capacity since most glycerin refineries are owned by soap manufacturers. Decreases in the domestic refining capacity will depress the price of crude glycerin since the top use for refined glycerin is as an input for refined glycerin. The extra crude glycerin will be used for lower value uses.

New Uses for Glycerin
Research and development of new uses for glycerin, especially crude glycerin, is the only realistic hope the industry has to increase glycerin prices. There are several developments in various stages of the research pipeline which may add value and provide an outlet for glycerin. These include second generation biofuels, industrial chemical usage, and livestock feed. If the new outlets for glycerin come to fruition, then the price of crude glycerin can be expected to increase. The level of that increase depends on how much the new uses utilize crude glycerin.

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Second generation biofuels plants, which can be located on the site of an existing biodiesel plant, can be an efficient use of glycerin and can add value to the bottom line. They will keep crude glycerin off of the market which will increase the value of glycerin. If new outlets for glycerin, especially crude, do not pan out, then glycerin prices will continue to lag. Excess crude will be sold as a waste product and will be used incinerated to heat industrial boilers.

Fatty Acids and Fatty Alcohols
Biodiesel production has created a feedstock shortage in both fatty acids and fatty alcohols. Fats and oils traditionally used to produce fatty acids and fatty alcohols are being diverted to biodiesel production. Prices have risen for both fatty acids and fatty alcohols which have led domestic consumers to import Malaysian (the world leader in fatty acid production) palm oil for feedstock. The future of the U.S. fatty acids and fatty alcohols producers will be impacted by trends in the biodiesel industry. If demand for biodiesel increases as projected, the price of inputs for domestic fatty acid and fatty alcohol manufacturers will be prohibitive. The manufacturers will be able to import oil from overseas; however, lower input costs will eventually move even more fatty acid and alcohol production to Southeast Asia. If biodiesel production remains steady and new construction and expansion plans are put on hold, then domestic fatty acid and fatty alcohol producers will still face a difficult time. The market equilibrium is still adjusting to the current level of biodiesel production, and raw imports are necessary to sustain the domestic fatty acid and fatty alcohol industry. Southeast Asian fatty acid and fatty alcohol producers will take advantage of this situation and export more of their lower cost fatty acids and fatty alcohols to the American market.

Biodiesel’s Effect on Soap Manufacturers
The recent surge in biodiesel production has alarmed soap manufacturers since it impacts both input costs and revenues. A dramatic increase in biodiesel production will drive up the price of fatty acid inputs and further reduce the price of glycerin. Animal fat and vegetable oil are used as feedstock for the manufacture of natural fatty acids. Biodiesel producers have cut into the vegetable oil supply and driven up prices across the board and animal fats are expected to be a significant source of biodiesel in the future. Thus, natural

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input supplies for soap manufacturing will be more expensive if biodiesel experiences major sustainable growth. Soap manufacturers are already dealing with a shortage of beef tallow. Their short term remedy is to import Malaysian palm oil or use petrochemical (synthetic) stock26. If domestic manufacturers lose access to cheap inputs, the production will move overseas for cheaper labor and inputs. The biodiesel industry negatively impacts glycerin revenues which soap makers have traditionally relied on. The 2006 price of refined glycerin is more than thirty-one cents below the average price of the previous twenty years. The development of alternative uses of glycerin may provide soap producers some relief from sagging glycerin prices in the future, but glycerin prices will continue to be depressed in the short term.

Key Take-Aways
The glycerin market is a complex, volatile market which is dependent on global supply. There have been many changes in the glycerin market over the last twenty years, making it difficult to develop a model to predict future spot prices. The price of domestic refined glycerin is negatively correlated with Middle Eastern petroleum production and European glycerin production. Global glycerin production has increased drastically in recent years due to renewable fuel production driven by subsidies, tax breaks, and usage mandates. Prices have dropped due to the increased supply of glycerin. Refined glycerin prices have almost halved while crude prices hover between five and fifteen cents a pound. Biodiesel production is inadvertently affecting the soap manufacturing and fatty acid production industries by competing for input feedstocks and driving down glycerin prices. This will likely cause some of these companies to move their operations overseas. Since the majority of domestic refineries are owned by soap and fatty acid manufacturers, this would cause a decline in refined glycerin capacity.

“Biofuel News”, The Grass Farmer http://wincustomersusa.com/stockman/index.php?option=com_content&task=view&id=84&Itemid=9

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The future volume of biodiesel production is uncertain. The reality of petroleum prices and the rising costs of input feedstocks are coming to a head with the optimism of legislated renewable fuel policies. Biodiesel producers are having a difficult time maintaining profit despite direct subsidies, tax breaks, and usage mandates. Although growth in biofuels is expected to continue, future production may be below current projections, thus glycerin production may be lower than initially projected. Markets which have traditionally consumed glycerin (cosmetics, food products, and oral care) are mature and growth is slow. However, Southeastern Asia’s rising standard of living is the highest growth opportunity for refined glycerin. Glycerin is currently favorably priced compared to it substitutes, many of which are petroleum derived; however, this is not pushing the needle enough to significantly improve glycerin demand. Research and development for new uses of crude glycerin are promising. Corn replacement in livestock rations and second generation biofuels (i.e., glycerin to ethanol, glycerin to biodiesel) may provide outlets for large quantities of crude glycerin. This will help to alleviate the crude glycerin glut and improve biodiesel producers’ glycerin revenue.

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