from the australian

Biodiesel stocks

WARNING: this article contains sheep references which may be offensive to Kiwi readers.

The generous interpretation of the Australian biodiesel sector is that it's poised at the crossroads, but in danger of being mowed down by a (conventionally-powered) juggernaut of negative influences. Investor zeal has dissipated with a string of production hitches, start-up glitches, as well as the Government's lukewarm attitude to the sector.

With petrol prices retreating to as low as $1 a litre, the energy crisis of a few weeks back has been superseded by the water crisis. It all spells bad timing for Axiom Energy, which is trying to raise $36 million to build a biodiesel plant near Geelong.

Axiom's raising was to have closed on Friday, with the listing due next Tuesday. An Axiom spokeswoman last night told Criterion the raising had been extended to Friday week, but don't be surprised if it doesn't get over the line. Jupiter Energy, which wanted to raise $75 million to spin-off a biodiesel listing, has pulled its prospectus altogether.

But help may be at hand for the sector from an unusual source: New Zealand's sheep, which produce vast quantities of tallow (animal fat) after their carefree gamboling days have ended at the abattoir.

Just to explain: the NZ Government is pondering a biofuels replacement scheme with serious penalties for non-complying companies.

NZ uses about 3.2 billion litres of petrol and 2.8 billion litres of diesel annually. The plan is that 0.25 per cent of this fuel pool would derive from biofuels in 2008, rising to 2.25 per cent from 2011. In the case of biodiesel, this may create guaranteed demand for around 140 million litres of fuel, notes Patersons analyst Benn Skender.

In comparison, Australia only has a poorly-defined 350 million litre biofuel target, as well as excise rules which are unfavourable to some end users.

If the NZ proposal goes ahead, refiners such as Caltex (who are dabbling with biodiesel here) should easily adapt. A potential winner is Australian Renewable Fuels , which stresses tallow-based production. ARW also has a tie-up with Transpacific, which has merged with tallow collector Waste Management NZ.

We last rated ARW a SPECULATIVE BUY at 84c a month ago and will reluctantly continue to do so.

It's too early to say ewe beaut, but the Kiwis look far more serious relative to our Government's baa-humbug attitude.