Skip to content

Advertisement
OOPS. Your Flash player is missing or outdated.Click here to update your player so you can see this content.
Cleantech magazine, a Cleantech Investor publication
FREE CONTENT: ETHANOL - NORTH SOUTH DIVIDE PDF Print E-mail

The US and Brazil have agreed to share technology on developing new biofuels. However, tariffs on Brazilian sugar produced ethanol remain.

First published in InFocus: Biofuel March 2007. ©  Cleantech Investor Ltd.

The race is on to bring down the price of manufacturing cellulosic ethanol (see feature on new technologies and alternative feedstocks).  However, mainstream ethanol markets are likely to remain dominated by corn and sugar based ethanol for some time. The world’s two largest ethanol producing countries are Brazil and the US. Corn is the dominant feedstock in the northern US climate. Sugar cane is predominant in the southern tropical Brazilian climate. Together, the two countries account for more than 70% of world production. However, the characteristics of the respective markets are very different.

The US, the world’s largest market, protects its domestic corn farmers by means of a tariff of 54 cents per gallon on imported ethanol from Brazil, which places the much more cheaply produced Brazilian exports at a big disadvantage to domestically produced fuel. The political focus on ‘energy security’ in the US is underpinning investment in ethanol, despite a surge in the corn price which has put pressure on profit margins in the industry. There was much speculation that President Bush would negotiate a revision of the US’s ethanol policy when he visited Brazil in March.  Brazil was reported to be pushing for a ‘global ethanol market’ with the US – and for the US to cut tariffs on ethanol imports. However, there is much opposition to a reduction in tariffs from corn growing states in the US and the Bush trip resulted only in an agreement that the two countries would share technology for the development of new biofuels. Bush confirmed that the tariff would not be reviewed before 2009.

The Brazilian domestic market is the second largest after the US. In Brazil, ethanol is used by around 40% of vehicles. More than 70% of new cars sold in Brazil can run on either ethanol or gasoline. Brazil is also the world’s largest exporter of ethanol and total ethanol shipments from Brazil are expected to more than triple over the next eight years according to Brazil’s agriculture minister. Rapid growth in the domestic market is also forecast, so the issue of demand for Brazilian ethanol is not in question, irrespective of US tariffs. The limited scope for Brazilian sugarcane based ethanol to compete in the US has underpinned investment in corn based ethanol and has been a factor in pushing up US corn prices. Meanwhile, rising levels of investment in sugar cane production capacity in Brazil have contributed to a fall in the world sugar price. But, for Brazilian ethanol manufacturers, the current focus is on merger and acquisition activity as the fragmented sugar cane industry undergoes rapid rationalisation.

Commodity price swings


US ethanol prices surged last year to a peak of $4.33 per gallon on the Chicago spot market in June as oil prices peaked. Ethanol prices fell back again as oil prices eased later and corn prices surged. At the start of January the ethanol spot price was $2.50. It had fallen since then to just above the $2 per gallon level, but appears to be rallying again. CBOT corn futures were trading at around $2.30 per bushel at the time of the peak in oil prices in 2006 and the rise in corn prices accelerated in the second half of the year as a drought in the mid west threatened crops, to reach a ten year peak of $3.9 per bushel in November. For the year as a whole, US corn prices surged by 81% and the rise has continued into 2007 with corn reaching a peak of more than $4.5 per bushel on CBOT on 26 February, the  highest level since June 1996. US corn crop grew 52% in 2006 the US Agriculture Department reported in February 2007 that the total value of the country’s corn crop grew by 52% in 2006 to $33.8 billion. The Agriculture Department estimate that US corn inventories fell by 9% during 2006 to 8.93 billion bushels. Demand from ethanol manufacturers was estimated by to have consumed 20% of the crop in 2006.

Sugar price collapse



Meanwhile, the investment ush in Brazilian sugar cane, ahead of an anticipated surge in thanol manufacturing capacity, boosted supplies of sugar and drove down sugar prices in 2006. Although almost half of the Brazilian sugar cane crop is used for ethanol production and although ethanol demand is growing, there may be a lag etween new sugar capacity coming on stream and the construction of ethanol plants to process the sugar. Sugar futures were the worst performing commodity on the New York Board of Trade in 2006 – although it should be noted that sugar prices had reached a 25 year high early in the year, driven by the perception of sugar as an energy crop. Tate & Lyle reported in November that sugar prices had fallen from a peak of 18 cents per pound to 11 cents. The Brazilian Government IBGE statistics agency forecasts that for the calendar year of 2007, sugar cane output in Brazil will reach record levels of 490 million metric tons, up from 458 million tons last year. However, sugar prices rallied in early March on news that Brazil’s Petrobras is working with the Japanese Bank for International Cooperation on the financing of projects for the production of ethanol and other biofuels for export from Brazil to Japan. Japanese demand for biofuels is growing rapidly and is set to ensure that Brazilian ethanol investment levels remain high.

Corn buying decisions key to US ethanol manufacturer profitability levels

 

The respective profitability of US ethanol producers this year will hinge around their decisions on corn buying. The key is whether they have bought forward and at what price – and the extent to which they have hedged their corn exposure. In the meantime, falling ethanol prices are contributing to pressure on profit margins. The US Renewable Fuels Association is forecasting that domestic US ethanol production will double to almost 12 billion gallons by 2010. Currently, there are 114 operating U.S. ethanol distilleries, with capacity to make 5.63 billion gallons a year, according to the Renewable Fuels Association. However, there are indications that banks are becoming less willing to finance ethanol plants and that the pace of investment in the US is slowing. There is also, reportedly, a lack of construction capacity available for the volume of ethanol plant construction which is planned.  

Ethanol IPOs on US markets


Three ethanol companies launched IPOs on US markets during 2006. Their share prices have come under pressure. US BioEnergy, which listed in December, is part owned by CHS Inc, the largest US agricultural co operative. US BioEnergy is planning to spend $880.5 million on five new plants to take its capacity to 1 billion gallons by 2009. It already ranks number two in the market in terms of capacity with 250 million gallons, after Archer Daniels Midland Co. US BioEnergy shares were trading at $13 at the end of February, compared to a listing price in December of $13. Shares in VeraSun, which ranks as the number three player in the US market in terms of capacity, listed through an IPO in June last year. VeraSun shares were trading at $17.48 at the end of February, compared to a listing price of $23 per share and a peak of over $30.

US ethanol producers on AIM


GTL Resources, which has invested in US ethanol facilities,  announced that operations had commenced at its Rochelle, Illinois plant at the end of December. The plant completed acceptance tests and booked its first $1 million of revenue in mid January. The tests confirmed that the plant could operate with an annualised capacity of 50 million gallons, an ethanol yield equivalent to 2.8 denatured gallons per bushel of corn at predetermined electricity and gas usage levels. The plant is now being operated by Illinois River Energy, GTL’s 85% owned subsidiary and ethanol shipments to Chicago and New York have commenced. GTL has hedged its corn price exposure for 2007 and management are optimistic that the plant will operate profitably for the year. Separately, GTL announced the appointment of Morgan Stanley as Nomad and broker.


Renova Energy quarterly update


Renova Energy, which produces and sells ethanol in the Rocky Mountains region of the US, released its quarterly operating update on 1 February. Renova announced a 62% increase in sales volumes for the nine months to December 2006 to 7 MMgal and a 21% increase in average prices to $2.31/gallon. Production volumes increased by 18% over the period, despite a five week shut down at Torrington ahead of the start up of the new plant. Renova’s profitability has come under pressure since the end of the reporting period by price declines, however, with average prices in January at $1.95/ gallon. However, management are upbeat, in the face of falling oil prices and rising corn prices. Renova has forward purchased corn and has been largely sheltered from rising corn prices so far. The company stated that it has contracted 90% of its feedstock for the current year at an average price of below $2.8/bushel. Renova confirmed that its Heyburn plant, a 20 MMgal/year plant, is on schedule to start production by the end of 2007.


The Brazilian Ethanol Market


Domestic Brazilian ethanol demand is growing rapidly and is forecast by São Paulo based Louis Dreyfus Commodities Bioenergia to double over the next four to five years, from the 2006 level of 14 billion litres (4 billion gallons). The growth is being driven by purchases of flex fuel cars, which can run on ethanol, gasoline or any blend of the two. Flex fuel cars currently account for some 80% of new car sales. The potential for growth in demand in the Brazilian sugar and ethanol manufacturing markets has set off a spurt of merger and acquisition activity. Commodity trader Louis Dreyfus announced in February that it is buying four sugar, ethanol mills from Group Tavares de Melo. The deal should make Louis Dreyfus, which expects to be processing 18.5 million metric tons by 2009, the second largest processor of sugarcane in the country. Brazil’s largest processor of ethanol is Cosan SA Industria & Comercio, which is listed in Brazil and capitalised at BRL7.7 billion (£1.9 billion). Cosan, which has cane crushing capacity of 40 million metric tons, made a $750 million hostile bid for Cia Acucareira Vale do Rosario in January. Vale do Rosario, which crushed 5.36 million metric tonnes of sugar cane last year, producing 375,090 tons of sugar and 200 million litres of ethanol, owns the third largest single mill in Brazil. The former number two producer in Brazil, São Martinho SA, now ranks third after the Louis Dreyfus deal. São Martinho raised BRL368.4 million (£92 million) in an IPO on the New Market section of the São Paulo stock exchange in early February, which was priced close to the top of the expected range. São Martinho's mill in Pradopolis has the capacity to process 7 million metric tons of cane a year into 500,000 tons of sugar and 300 million litres of ethanol. Its mill in Iracemopolis, can process 2.6 million tons.
 
[ Back ]