To Market, To Market

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BY PATRICIA NICHOLSON

This article is the third in a series on bioproducts that will conclude in the November issue.

Bioproducts are turning up everywhere from fuel tanks to rooftops, but in many cases they remain “green” substitutes rather than major brands. Supporters of bioproducts are eyeing markets for opportunities to change that scenario.

Gord Surgeoner, PhD, president of Ontario Agri-Food Technologies (Guelph, ON), identifies fuels, automotive products, fine chemistry and construction materials as some of the major bioproducts markets.

Ethanol, biodiesel and environmentally friendly energy sources fall under the fuels category. Automotive products include car components that can be made from composite materials.

“Things like inner door panels — a lot of things that plastics can do — will be plastic composites. So you’ve got a combination of plastics and agriculture or forestry fibres,” Surgeoner says. “I think the automobile sector is a big one. In fact, in Europe it is fairly significant today, but not in North America.”

The fine chemicals market covers paint resins, inks, foams, glues and adhesives, while construction materials include products such as strawboard, wood substitutes and roofing shingles made from flax fibre and recycled tires.

Fueling Up and Scaling Up

The energy and fuels market is one of the most advanced for bioproducts. Warren Johnson is chief technology officer for DynaMotive Energy Systems Corp. (Vancouver, BC), a company that uses fast pyrolysis to convert biomass into BioOil, an environmentally friendly fuel. He names four main market sectors for biomass energy products: regions requiring off-grid power; island economies that wish to decrease oil-import costs; countries — including Canada — that have adopted legislation on climate change requiring more environmentally friendly energy sources; and economies based on agriculture and forestry operations where waste management and energy costs can be mitigated.

Johnson groups the development of biomass energy products into four stages of increasing sophistication. DynaMotive Energy Systems has completed the first two stages: industrial fuels to be burned directly in boilers, kilns and furnaces; and power generation fuels to be used in turbines and diesel engines. The company is researching technologies for the later two stages: transportation fuels, including blends, “syngas” and biomethanol; and refining chemicals for derivative products.

But even when a technology is perfected at the research level, it must be scaled up to mass production. Although Surgeoner cites scalability as one of the key characteristics for successful bioproducts, he says funding the scale-up process can be a big hurdle.

“The biggest challenge we have is what I call scalability and financing — a different kind of financing for scalability. In other words, if I’m going to make the inner door panel of a Chrysler minivan, there are 1,500 minivans rolling off the assembly line a day, and that means I need 6,000 door panels,” Surgeoner says. “I can get my little bench-scale thing and be punching out three of these a day. But now to move to 6,000 of these a day to be global — and that’s just one assembly line — it takes some significant financing. And as you know, any time you commission a large plant, you’ve got a certain amount of working out the bugs in the system. So it’s that financing for scalability that is the biggest issue to me.”

He also notes that financing can be difficult to come by without a plant, and vice versa. “You’ve got to secure a contract,” Surgeoner says. “You’re not going to want to make that investment without a contract; a company’s not going to want to make a contract without a plant — you’re into a chicken-and-egg situation.”

Surgeoner uses biodiesel technology as an example of the difficulty in financing scale up.

“We have a unique patented technology, it comes out of the University of Toronto. We’ve got a demonstration pilot plant that makes a million litres a year. The next size production is 60 million litres,” Surgeoner says, noting that such a plant would cost between $10 million and $20 million, and the only way to know for certain that it will work is to spend the money and see the results.

“We can have all the engineering studies we want, but until it’s built you can’t be sure,” he says. “Once you make your first plant and it’s all working nicely, it’s easy to sell your second, third, fourth plant because you can show them: there it is, 60 million. But to get to that level — that first plant on a patented technology — it takes people with vision and financing.”

Productive Policies

In some cases, a boost from the public sector can also help develop markets.

“I’d like to give the government a lot of credit on the fuel side: removing the excise and road tax, or gasoline tax, for ethanol or biodiesel,” Surgeoner says. “The Ontario government took off a 14.4-cent-per-litre tax and the feds a 4.7-cent-per-litre tax.”

In August, the federal government announced $100 million in funding to encourage construction of ethanol plants and support the development of cellulose-based ethanol as part of its Climate Change Plan for Canada. The announcement also opened the possibility that increased availability of ethanol may make it feasible to mandate biofuel content in all gasoline sold in Canada.

Surgeoner points out that current procurement programs, under which organizations preferentially buy bioproducts, can only be as successful as supply allows. He uses the example of several municipal governments and organizations that have procurement programs for biodiesel.

“Toronto Hydro, City of Brampton, City of Guelph, Kingston — they’ve all procured product. But that product is coming from the U.S. now,” Surgeoner says. “So you can do all the procurement you want,” he says. But supplying Canadian product will still require investors willing to take a $10- to $20-million risk. “And I consider it to be a very low risk,” Surgeoner adds. “In fact, I think the risk of getting a new drug in versus the risk of getting one of these plants functioning smoothly is a lot less on the plant side, and cash flow is a lot sooner. Plus you’ve got hard assets like land and concrete.”

The building materials market is another sector in which Surgeoner says regulatory changes could help bioproducts. Companies making bioproducts for use in construction have encountered problems with standards that are based on product, rather than performance. Surgeoner uses the example of building codes that call for the use of wood two-by-fours, rather than products that perform to the specifications of a wood two-by-four — such as composite products made from cement and wood fibre.

According to Brian Richardson, chief financial officer for DynaMotive Energy Systems, it is market forces that will ultimately determine the size and timing of the market for biomass products. Richardson notes that there are technological and critical mass goals that must be met in order to reach a point of efficient production — and therefore reasonable product price. Government support and tax structures are factors that could accelerate technical development.

“From a taxation and regulatory point of view, governments must ensure that a level playing field is created. Programs and regulations must be in place to allow new biomass energy programs to advance without requiring rewriting regulations for each new bio-energy product. Appropriate incentive programs for fast tax writeoffs (similar to existing hydrocarbon exploration writeoffs) also need to be in place,” he explains. “To obtain critical mass, investment from both the private sector and government is required to finance the market growth of the most promising companies and their technologies.”

Richardson says DynaMotive Energy Systems is striving not only to improve its technology, but also to improve its production economics. “Quite clearly, the more cheaply and reliably we can produce BioOil, the larger our potential market,” he adds.

On the Horizon

Benoit Caron, general manager of Norac Concepts Inc. (Orleans, ON) and workshop leader for the BioProduct Markets and Opportunities working group of the Innovation Technology Roadmap on BioProducts, differentiates between market price and cost of extraction.

“If we look strictly at the price out in the marketplace, a lot of the time we don’t take into consideration some of the secondary costs that are associated with extraction, such as environmental costs or health costs. Biotechnology may be more competitive in years to come as a result of that. So your business model has to take into consideration all the costs associated with extraction,” Caron says. “There are also questions of lifetime of supply, quality of the product. The biggest issue that we will have in years to come in terms of biotechnology will be the quality and the supply in order to meet the market demand.”

Caron also takes into consideration the need to look at what might influence future markets, such as climate change legislation.

“When we speak of costs, there’s also the opportunity costs of not being involved, and not developing technologies that today may not have the best market potential, but in years to come your market is going to develop in such a way that you’re going to lose out if you don’t take the necessary steps,” Caron says, citing Shell Canada Ltd.’s (Calgary, AB) investment in bioethanol producer Iogen Corp. (Ottawa, ON) as an example of positioning for the future.

“If you properly evaluate your market through different studies and through different analyses, then you can meet that demand or even direct that demand in years to come,” Caron says. “That’s why I think that the major companies are definitely looking into what’s happening in the biotech industries so as to make sure that they don’t lose out on what is coming down the pipeline.”

But the products themselves are the most important factor of all. Surgeoner points out that bioproducts will have to thrive by the rules of the marketplace: they have to beat the competition.

“At the end of the day, what’s going to drive this is performance, number one. So whatever we come up with as a bioproduct has to have equivalent or better performance than the existing product that you’re going to try to replace. It has to be economical, it has to be scalable,” Surgeoner says. “And then the green — the nice environmental things — are a small add-on. But without economics and performance driving it, it doesn’t work.”