While Australia was one of the pioneers in biofuel production in the Asia Pacific region, the early promise has dissolved under pressure from an unfavorable tax regime and rising feedstock prices over the past two years. The production of biodiesel has been largely uneconomic during this period with high feedstock prices and unfavorable changes to the fuel tax regime. Limited uptake from major oil companies has further jeopardized market prospects over the past two years. Nonetheless, increasing concern over global warming and the political will to strengthen efforts to reduce carbon dioxide emissions remain strong factors fuelling optimism in the Australian biofuel markets.

New analysis from Frost & Sullivan, Strategic Analysis of the Australian Biodiesel Industry, finds that the total biodiesel production in Australia was 60,000 tonnes in 2008, a fraction of the available production capacity of 485,000 tonnes. However, if State or Federal governments enact measures such as biofuel mandates to stimulate the market, production is forecast to grow to 230,000 tonnes by 2014.

"The industry has been hit by a series of blows including rocketing feedstock prices, lack of support from the major oil companies, and weakening of political support attributed to the 'food versus fuel' debate," says Frost & Sullivan Managing Director, ANZ Mark Dougan. "In spite of these factors, the long-term prospects of the market look strong - subject to more direct government intervention."

Currently, the production of biodiesel from tallow or waste cooking oil in Australia is economic, considering the relative feedstock and mineral diesel prices. However, the need to reduce dependence on imported oil is a prominent driver for this sector.

"Amid expectations of the demand for oil outpacing supply, non-conventional liquid fuels such as biofuels, oil sands, and coal-to-liquid have emerged to fill the shortfall," notes Dougan. "Misgivings surrounding the increasing reliance on imported oil, especially from regions facing political turmoil, too encourage the use of biofuels to shore up domestic energy security."

Besides helping reduce Australia's deficit in oil, biodiesel offers a contribution to reducing greenhouse gas emissions from transport fuels as well as an alternative market for local farmers. However, more direct government intervention in the form of mandates or tax breaks are crucial for the market to harness its full potential.

"It is imperative for the Australian Government to provide active support to promote the growth of the biodiesel industry; taking a cue from countries including the European Union, New Zealand, and several Asia Pacific countries where government endorsement has enabled the sector to develop," says Dougan. "Without further governmental support, the domestic biodiesel industry is likely to decline and may even disappear."

Market participants need to continue to step up the rhetoric for more political support, while continuing the quest for alternative low-cost feedstocks that improve the economics of production. Governmental measures, especially those requiring oil companies to market a specific percent of biodiesel by volume, are expected to revitalize the flagging market.