Biofuels Companies Remaking Themselves As Biobased Chemical Companies

There is a trend in the biofuels and industrial biotechnology area that investors and industry observers should pay attention to.

When biofuels start-ups were all about generating investor interest to raise money, the market for transportation fuels was the focus. The volumes are enormous. In the USA alone, about 140 billion gallons of gasoline is pumped into vehicles each year, with a value at the pump of about $420 billion. The usual story goes something like this: “just getting a small slice of that $400 billion-plus pie offers a huge potential upside, and there is plenty of pie to go around.”

And when oil prices surged a couple of years ago and it looked like $150+ oil might become the norm, many of these companies were flying high and raising lots of cash from venture investors. A couple of companies (Amyris, Codexis) managed to raise significant money in IPOs, largely predicated on their technology advantages together with that concept that the market for biofuels was so large that even a small piece of it would provide excellent risk-adjusted returns for investors.

Things are changing.

The technology is still the same. The product is often still the same. What is different now is the target market. The focus is shifting toward renewable chemicals.

The reason: the same technology accesses a higher-priced end product. Chemicals used as process solvents or as starting materials to make plastics are typically up to 10-fold more valuable than something you pump into your gas tank to burn as a fuel, yet that product is often the same or similar to the fuel. Butanol or isobutanol are good examples where a robust market for the chemical exists that is distinct from the market for the fuel.

The recent S1 released from Gevo provides good information on one of these: isobutanol, Gevo’s lead fuel/chemical product. Gevo is looking at the potential for generating sales from isobutanol as both a chemical and a fuel. In fact, the opportunity for selling isobutanol as a chemical is cutting a higher profile than before. Quoting from Gevo’s S1: “Customer interest in our isobutanol is primarily driven by its potential to serve as a building block to produce alternative sources of raw materials for their products at competitive prices.” Looking at the word “primarily” in that statement, it sounds like the chemical market has become the focus, not the market for use as a fuel.

But there is a rub. Although the value per pound or per gallon of a large-volume chemical is several times that of a fuel, the renewable chemical market is comprised of a number of different products, each of which has a much smaller volume than the market for, say, gasoline. Again, let’s look at the example of isobutanol.

According to Gevo, the total global market for isobutanol as a fuel blendstock and specialty chemical represents approximately 41.1 billion gallons.

Now let’s look at the break down of that 41.1 billion number, taken directly from the S1:

Volume for isobutanol as a chemical: 1.1 billion gallons

Volume as isobutanol a fuel: 40 billion gallons

There is a big difference in the projected size of those two markets.

This is not to say that Gevo will not be highly successful. A healthy slice of just the billion gallon-plus chemical market can generate substantial sales and be the basis for a successful bio-based chemicals business. But it is only a fraction of the fuels market, so one needs to maintain perspective.

Gevo is not alone in making this shift from fuels to chemicals. Many of the companies formerly promoting themselves as a biofuels companies are now looking at chemicals as an earlier and more realistic market entry point.

Amyris: Announced its intention to market farnesene as a specialty chemical to launch its first product.

LS9: Struck a deal with P & G to develop chemicals for the cosmetic ingredient market, and every announcement mentions renewable chemicals ahead of fuels.

Codexis: Recently announced the hiring of a new VP and General Manager of Biobased Chemicals.

Solazyme: Promotes a platform of products from algae that include chemicals and nutritional fatty acids along with diesel fuel.

The evolution from fuels to chemicals is not unexpected, as we have noted here before. Along with established companies like DuPont and DSM which have been developing bio-based chemicals processes for several years, and up-and-coming companies like Genomatica, the bio-based chemical space may be where the real action is for the next few years.

Tagged as: biobased chemicals, Biofuels companies, butanediol, butanol, Codexis, Genomatica, Gevo, isobutanol, LS9