Natural disasters such as Hurricane Katrina and mechanical failures at pumping stations have highlighted the limited availability and unstable supply of fossil fuels. Europe's desire to be less dependent on oil imports has revived interest in alternative fuels. This need to be self sufficient has also induced encouraging legislation from individual EU member state governments for the biodiesel market.

"The biodiesel market has enjoyed excellent European Commission support by way of the Kyoto agreement and Directives 2003/30/EC and 2003/96/EC, which specifically seek to promote biofuels and establish indicative targets for their use in the transport industry," notes Frost & Sullivan Industry Analyst Robert Outram.

These regulations are expected to encourage biofuel use and make them cost competitive with mineral fuels. Encouraged by the EU legislation, individual member states have implemented their own incentives such as tax relief, renewable transport fuel obligations (RTFOs) and blending mandates.

In general, blending mandates have particularly aided the biodiesel market and the fuel industry. This legislation requires oil companies to blend a set percentage of biofuel in all its fuels, presenting them with a huge logistical challenge.

"Oil companies will require large volumes of biofuel to meet the mandate levels, even though percentage levels are usually low," explains Outram. "This means the oil companies are likely to team up with biofuel producers in long term agreements or even invest in their own plants."

Such helpful mandates however, are expected to contribute to escalating feedstock prices.

Since the production of vegetable oil in Western Europe has touched full capacity and has remained constant over the past decade (at between 11 and 12 million tonnes), the intensely competitive biodiesel market is hard pressed to procure feedstock at competitive prices. Even with the new EU member states contributing an additional 1 million tonnes, approximately 9.5 million tonnes of biodiesel will be required to meet EU Directives that aim to make biodiesel account for 5.75 percent of all transport fuels.

"Assuming a 1:1 conversion of vegetable oil to biodiesel by volume, over 80 percent of all the vegetable oil currently produced in Europe would be required for the biodiesel market," observes Outram.

The overwhelming demand for finite commodities such as feedstock will inevitably hike biofuel prices to a level where producer margins will start thinning. As feedstock costs account for 70 percent of the total plant operating expenditure, biodiesel producers will rely heavily on an effective feedstock procurement strategy and reduced logistics costs.

To this end, biodiesel manufacturers will team up with agricultural concerns and look to achieve downstream integration as well as leverage related business activities to lower costs and increase profit margins.