MTBE phaseout will spur ethanol demand
By Staff -- Purchasing, 9/2/1999
A panel of advisors to the U.S. Environmental Protection Agency (EPA) known as the Blue Ribbon Group recently recommended legislation be passed to discontinue the use of oxygenates, which include methyl tertiary butyl ether (mtbe), in gasoline formulations.mtbe came under attack from environmentalists, as well as local and state governments, when it was discovered in California drinking water supplies. That prompted California to introduce legislation to phase out mtbe gasoline requirements by 2002.
Along with the EPA's recommendation, federal legislation has been introduced to amend the Clean Air Act--which regulates the use of oxygenates in gasoline formulations--to prohibit mtbe as a fuel additive in the U.S.
While the consensus of analysts, producers, and buyers believe mtbe will be phased out, some point to ethanol, the other main oxygenate used in fuel additives, to be used to formulate etbe as a substitute.
"If regulators decide to ban mtbe, but still require oxygen in gasoline, ethanol will prosper," says Chuck McSpadden, a fuel analyst in affiliation with The pace Consultants, Inc., a petrochemical market analysis firm located in Houston, Texas.
"If that is the case, ethanol plants will be built and prices will increase dramatically, as producers race to keep up with surging demand," he says.
McSpadden says that ethanol will continue to be used in gasoline formulations regardless of the decisions facing mtbe and other oxygenate requirements. "Ethanol offers many favorable properties besides the oxygenate component. For instance, it offers good octane ratings and helps dilute some of gasoline's bad actors," he says.
"Ethanol producers are looking at a bit of a win-win situation, because, even if they do away with mtbe and oxygenates, refiners still need ethanol in gasoline."
The current contract price of ethanol is about $1.70/gal, according to data from Purchasing's monthly survey of chemical buyers. Spot market prices average about 10¢/gal less at $1.60/gal. These prices are forecast to remain flat through the end of the third quarter.
In the fourth quarter, look for contracts of 200-proof ethanol to increase by about 5¢/gal to $1.75/gal. Spot tags will remain flat through the end of the year, say buyers.
For methanol producers, the decision to eliminate mtbe could be the final straw to signal withdrawal from the industry. mtbe accounts for more than one-third of the domestic demand for methanol, and the market is already depressed.
While methanol prices have shown some recent strengthening, they are near all-time lows. "Oversupply and competition from cheap imported material from Latin America, the Middle East, and Canada have undercut U.S. prices and limited growth," says McSpadden.
Also, about 3.2 million tonnes of added capacity is scheduled to start up late in 1999, according to an industry source.
"About a year from now, a number of methanol plants are going to be mothballed or abandoned entirely," says McSpadden.
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