Sagging ethanol prices to firm up as producer shakeout continues
By Gordon Graff -- Purchasing, 3/12/2009 2:00:00 AM
The ethanol industry, plagued by slow demand, depressed pricing and negative margins, may be in for a modest revival this year, bringing price increases and supply tightness. That's the outlook from market watchers, who say the onset of the warmer weather driving season, plus a slight upward drift in gasoline prices, could kick-start the industry and cause ethanol prices to edge up a bit. But they caution that the recent wave of plant closings, production cutbacks and bankruptcies in the ethanol arena may continue for months to come.
| Purchasing.com/chemicals Want more news on the chemicals market? Log onto Purchasing.com's Chemicals Channel page. |
Even with demand at low tide, the ethanol industry isn't about to go belly up. "Government mandates have set a floor on the use of biofuels like ethanol," says Nathan Schaffer, a fuels analyst with Houston-based PFC Energy. The latest update to those mandates, passed by the U.S. Congress in December 2007, set minimum levels of ethanol—produced domestically or imported—that must be added to fuels each year to meet energy independence goals. (For 2009 the required amount is about 10.5 billion gallons of ethanol.) Beyond meeting the minimum legal requirements of fuel blending, Schaffer notes, "biofuels producers have always had the discretion of producing above the government mandates if it makes economic sense." But lately, he says, it hasn't.
The main reason for the poor economics is not just that ethanol prices have dropped, but that gasoline prices have fallen even more. Before prices of crude oil and gasoline began their steep descent in the second half of 2008 "ethanol was cheaper than gasoline," says Karl Doenges, executive director at Protec Fuel Management, a Boca Raton, Fla.-based fuel blender. So blending ethanol with gasoline offered "a positive spread" in profitability. But now, he adds, "ethanol is actually more expensive than gasoline," so that "the spread is negative." That means that sellers of typical 10% ethanol/gasoline blends receive less money for their product than the cost of the ethanol they must buy to formulate the blends.
In fact, over the past year, ethanol has been as much as 60¢/gallon more expensive than gasoline, a gap that has narrowed to 25–30¢/gallon over the past two or three months due to a small rise in gasoline. That shift has caused some blenders to resume their purchases of ethanol in anticipation of better times ahead, Doenges says. (Many blenders, he notes, stopped buying ethanol when the economics turned sour.)
The poor demand for ethanol has sparked a wave of bankruptcy filings over the past year by major ethanol producers, including VeraSun, Renew Energy, Cascade Grain Products, and Northern Biofuels. Other companies have closed their plants temporarily or have shelved expansion plans. (See Purchasing.com for details on these trends).
For now, the ethanol supply cutbacks are not alarming ethanol buyers, but they are certainly keeping their eyes on the supply and demand picture. One ethanol buyer, Jay Stoflet, director of Renew Fuel Stations, which sells ethanol/gasoline blends at filling stations in Wisconsin, says that "we've been able to secure our ethanol supplies through our usual sources with no problem." However, he's concerned that "ethanol supplies could become tight" if the industry continues to contract.
The recent spate of bankruptcies and shutdowns "have definitely affected us" in terms of disrupting the usual supply chain, reports Doenges. However, he says his firm can obtain enough ethanol for its blending needs because "we've diversified our suppliers."
As Doenges sees it, the anemic ethanol market has certainly been a factor in the bankruptcies and cutbacks, but "bad business decisions" have also played a role in the ethanol supply market. For example, he notes that some ethanol producers adopted flawed hedging strategies for their corn feedstocks, locking in long-term contracts for corn at the peak of its price cycle, even as prices for ethanol subsequently plunged. Bad engineering made other operations unprofitable, Doenges says, pointing to one new ethanol unit in Ohio that discharged excessive amounts of wastewater, which was extremely expensive to clean up.
The credit crunch has also hit the ethanol industry hard, according to Michael Masterovsky, a renewable fuels consultant at SJH & Co. in Boston. "It is difficult for [ethanol] project developers to get money out of the capital markets today," he says. Some ethanol producers previously borrowed at relatively high interest rates, expecting a booming market for their product, notes Andy Lipow, president of Lipow Oil Associates, a Houston-based consultancy. But with the drop-off in ethanol demand, he says, those debt loads are now "seriously eating into their margins." For many ethanol producers today, Lipow adds, "the way their debt is structured will make the difference between whether they remain in business or not."
The number of players in the ethanol business may continue to contract in the short-term, according to specialists in the field. "We could possibly see some additional cutbacks" in ethanol supply this year, says Rick Kment, a biofuels analyst at DTN in Minneapolis. That would include "not just plant closings, but reductions in run rates at plants." There will probably be a consolidation of suppliers in the U.S. ethanol scene, Lipow predicts, with the larger, more financially sound participants buying the smaller players. Some companies now in bankruptcy, he adds, may be acquired by new owners and continue to operate "under a much better cost structure."
How these restructurings will combine with demand to influence ethanol prices in the year ahead is still uncertain. Ethanol demand and pricing "generally follow the energy market," says Kment, "and that follows loosely along with the economy." If the economy remains stagnant through the first half of the year, he adds, "energy prices probably won't pick up significantly," and neither will ethanol. Kment says that "the speculative kind of buying by investors" that has traditionally boosted ethanol prices will be largely absent this year.
Regardless of how the economy performs, the current low gasoline prices are not likely to remain and will gradually move up this year, along with prices for ethanol, Doenges asserts. He says the catalyst to this trend will be the increased blending demand caused by this summer's driving season, which will help pull ethanol prices "out of the well" they've been in for months.
"I would say that ethanol prices will probably be stable to trending upward this year," agrees Lipow. He bases that forecast on government mandates, ethanol production capacities, and anticipated corn prices. But whether ethanol producers will see substantial gains in their profits this year, Lipow says, "is still a question mark."
| Country/region | Ethanol production (millions of gallons), 2007 |
| Source: IEA Bioenergy | |
| U.S. | 6,499 |
| Brazil | 5,019 |
| European Union | 570 |
| China | 486 |
| Canada | 211 |
| Thailand | 79 |
| Colombia | 75 |
| India | 53 |
| Central America | 40 |
| Australia | 26 |
| Rest of world | 44 |
| Total | 13,102 |
| Source: Renewable Fuels Assoc., based on data from F.O. Licht | |
| Ethanol sources (Percent of total world production) | |
| Sugar crops | 60% |
| Corn | 30% |
| Petrochemical feedstocks | 7% |
| Other feedstocks | 3% |
| Source: IEA Bioenergy | |
| Ethanol Uses (Percent of total world production) | |
| Fuels | 73% |
| Industrial and beverage | 27% |
Ethanol prices rise to $1.59/lb
05/18/2009Ethanol suppliers continue to struggle
02/03/2009Ethanol pricing seen weakening
10/17/2006
Now Playing: 
