HAMBURG, Feb 2 (Reuters) - Germany's biodiesel industry, Europe's biggest, is seeing demand fall largely due to new taxes at the same time the European Union is encouraging biofuel use.
   "The position of biodiesel producers is very difficult," Arnd von Wissel, chairman of the German biodiesel industry association VDB, said.
   "I believe the industry is not working at full capacity, for most of 2006 it did so. The number of new biodiesel orders has been reduced substantially."
   Germany last August started taxing biodiesel because it could not afford the huge loss of revenue as drivers cut back on heavily taxed fossil diesel.
   The government introduced a 9-euro-cent (11.7 cent) per litre tax on biodiesel, saying this would rise in stages to the same 45-cent-per-litre tax on fossil diesel by 2012.
   Germany is the EU's largest biodiesel producer, with production capacity rising from 1.2 million tonnes at the end of 2004 to two million tonnes at the end of 2005 and 3.2 million tonnes at the end of 2006.
   Germany consumed 29.0 million tonnes of fossil diesel in 2006, so biodiesel is making significant inroads.
   For a time, Germany's biodiesel industry was able to absorb the new tax as high fossil fuel prices still gave biofuels a price advantage. Falling crude oil prices have changed this.
   "We are losing our price advantage as fossil diesel prices have fallen, the government has imposed taxes and the cost of our raw material, vegetable oils, is rising," von Wissel said.
   "As the development of fossil fuel prices is so difficult to forecast, our main customers such as petrol stations and trucking companies are not placing long-term contracts for biodiesel, they are only ordering short-term supplies."
   Biodiesel is currently only about three euro cents cheaper than fossil diesel. To be competitive it has to be about 10 cents cheaper as vehicles consume more to travel the same distance and it creates higher maintenance costs.
   A survey from biodiesel quality management association AGQM estimated that following years of growth, German biodiesel sales at petrol stations in 2006 fell to 476,000 tonnes from 520,000 tonnes in 2005, substantially because of the new tax.
   Sales in December alone were 47 percent down on the year and many petrol stations are giving up biodiesel.
   "The results of this market research are clear," AGQM said. "They show that the effect of the taxes after only five months are grave."
   "Germany could quickly throw away its leadership in the biofuels industry."
   Blending of biodiesel with fossil fuels at German oil refineries became compulsory on January 1 but this will absorb only about 1.4 million tonnes of biodiesel annually, von Wissel said.
   "We cannot live from blending alone, we still need petrol stations and direct sales to end-users," he said.
   Around 1.1 million tonnes are sold directly to trucking and bus companies, but these also are turning away from biodiesel.
  
   WEAK SALES CONTINUE
   The weak sales trend continued in January, said Thomas Mielke, CEO of German oilseeds analysts Oil World. Biodiesel demand in the German petrol station market has "collapsed", Mielke said.
   "In petrol stations, biodiesel is just too expensive compared to normal diesel," he said. "This has led to a reduction in production."
   Von Wissel also said production had been cut. "Profit margins for biodiesel producers have become very small or even negative (loss making)," he said.
   Many trucking companies which have converted vehicles to biodiesel find they operate well on unrefined food oil and have been increasingly turning to this, von Wissel said.
   Vegetable oil used as fuel will not be taxed in Germany until 2008. Cost savings were large enough to compensate for increased vehicle maintenance.
  
   MORE CAPACITY, IMPORTS COMING
   To compound the misery, construction on several major new biodiesel plants began before the government's tax plans were announced and they will come on stream this year.
   "I think about 500,000 tonnes of new...capacity will come into production this year," von Wissel said.
   "We also face more pressure from imports as large numbers of biodiesel plants are being built in the EU and need to sell their production somewhere."
   Asked what the future holds in store for Germany's biodiesel industry, von Wissel said: "We just do not know, a lot depends on the development of fossil fuel prices."
   The association is pressing the Germany government to change its plans for automatic annual biodiesel tax rises, delaying them if fossil fuel prices are low.
 ((Reporting by Michael Hogan, editing by Michael Roddy; email michael.hogan@reuters.com Reuters messaging: michael.hogan.reuters.com@reuters.net +49 40 419 03 275.))
($1=.7681 Euro)