Caixin
Jan 18, 2013 11:49 AM

The Shandong Oilman

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(Beijing) -- It's oil with an extra something, but there's nothing virgin-like about it. Pumped from sewers outside of restaurants, or pressed from trash, the oil is born from waste holes both human and mechanical.

Known as "gutter oil" in China, it's commonly used at greasy spoon restaurants and canteens, many of which purchased the cheap oil processed by businessmen like Liu Liguo.

In July 2011, Liu was arrested at the gate of one of the gutter oil companies he founded. Prosecutors say one of Liu's companies used cutting edge technology to produce, at peak operation, 60 tons of oil per day.

Investigators at Liu's trial in December 2012 revealed details of a massive distribution network concentrated in four provinces. The trial, which began in August 2012 in Ningbo, Zhejiang Province, exposed all links of one gutter oil supply chain, involving 58 companies, some of which were well-known cooking oil brands. A verdict has not yet been announced.

The largest case of gutter oil manufacturing to date, Liu's story began with a modest biodiesel facility that later gave way to companies which sold off as much as 12,000 tons of the waste as cooking oil and raked in nearly 100 million yuan in sales since 2007. Though the oil can resemble edible oil, it can contain carcinogenic compounds and hazardous chemicals.

The prosecution's indictment states that Liu knowingly traded the non-edible waste oil to resellers that would "pass off the purchased oil as soybean oil."

Taste for the Oil Business

Liu was born in Pingyin, Shandong Province, in 1977. He worked at a nearby aluminum plant for 10 years until the management failed to pay its workers. In 2003, Liu left and pooled money from relatives and friends to open the Pingyin Changshun Oil Processing Plant.

A former colleague from the aluminum plant surnamed Li said that at the beginning, Liu started off producing real cooking oil. "At the time, the factory processed pig lard. That is, the factory took animal fat, removed the color, took away the smell and sold it. It was for meant human consumption," Liu later told China Newsweek from the detention center.

In the first two years, Liu lost money due to his lack of experience. He continued to borrow money from relatives and friends, accumulating some 2 million yuan in debt.

For Liu, 2005 marked a turnaround in business. At the time, China's biodiesel industry was still in its infancy and there were no uniform regulatory standards. Liu's business acumen led him to restructure the company. He renamed the factory and purchased biodiesel equipment.

In other countries, biodiesel can be used as a renewable fuel for vehicle engines. In China, this is also seen as a lawful use of gutter oil. But fluctuations in the price of petroleum fuel – which gas stations were adulterating with biodiesel – later shuttered many of the industry's suppliers. For Liu, staying in business would mean the oil just needed go somewhere else.

The Liberation Daily reported that in 2005, the price of a ton of gutter oil was 800 yuan. By 2006, the price had shot up to 3,000 yuan per ton. Producers of biodiesel could refine it for roughly 3,500 yuan and sell it for 5,000 yuan per ton.

Much of the gutter oil used by Liu's companies came from Beijing sewers. With no domestic standards at the time, the biodiesel would sell as long as a customer agreed to buy it. "During that time, I learned much more about the gutter oil business," Liu said.

Fuel oil was in short supply, and many gas stations began mixing biodiesel with diesel. Liu's business grew daily. At its highest, monthly profits reached 200,000 to 300,000 yuan.

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