02 January 2008 17:35 [Source: ICIS news]
By Stephen Burns
HOUSTON (ICIS news)--The US political establishment's passionate backing for biofuels, particularly ethanol, should keep the industry on an expansion path in 2008 despite growing misgivings about the its economic and environmental benefits.
Ethanol was a key component of the comprehensive energy bill signed into law by President George Bush on 19 December that mandates a four-fold increase in ?xml:namespace>
The bill sets a Renewable Fuels Standard that requires the cellulosic process to account for the lion's share of ethanol output - addressing an Achilles heel identified by critics. The cellulosic process can convert a wide range of organic material, such as switchgrass, into ethanol without impacting food supplies.
The higher prices have been a boon to farmers but have, in turn, squeezed the operating margins of existing and planned ethanol plants; higher prices have also hurt the economics of soybean-based biodiesel production.
The squeeze on margins in 2007 lowered operating rates and put the brakes on some plans for capacity additions, but the Renewable Fuels Association (RFA) said investors should take heart from the industry's official backing.
As of 18 December, there were 135 US ethanol plants with 7.4bn gal/year (28bn litres/year) of capacity, according to RFA data. Another 6.1bn gal/year of capacity is on the way from 65 plants under construction and another nine undergoing expansions.
"By requiring that nearly 60% of the new Renewable Fuels Standard be met by advanced biofuels, including cellulosic ethanol, Congress has provided the necessary assurance for ethanol producers and investors that a market for their product will exist," said RFA president Bob Dinneen.
"As a result, the commercialisation of these important next-generation ethanol technologies will develop far sooner than conventional wisdom suggests," he added.
The speed of that commercialisation is uncertain, though, and the logistical issues that would accompany development of the cellulosic process have yet to be addressed.
In the meantime, ethanol producers have to contend with opponents, including those within the oil industry, who have been garnering rising media attention.
The food-versus-fuel debate is certain to continue in 2008. The US Department of Agriculture (USDA) forecast in December that ethanol feedstock demand will consume 24% of the
However, the USDA noted that earlier forecasts for ethanol were overblown, and that operating rates and the pace of new development have both slowed.
A similar cooling of optimism about biodiesel has also taken place. Of the 168 biodiesel plants recognised by the National Biodiesel Board (NBB), market participants say only about 25% are in full operation as unacceptable costs squeeze margins.
In the second half of 2007, biodiesel suppliers were looking for ways to circumvent high-priced soybean oil by switching to fats to make more fatty acid methyl ester (FAME) than soy methyl ester (SME).
Soybean prices were at a 32-year high of around $11.50/bushel in the open market. In turn, that has pulled crude soybean oil futures prices well above the critical 40 cents/lb ($882/tonne) mark at which biodiesel margins start to disappear, and many plants have shuttered production.
The shift to FAME and the use of fats has pushed prices up in the grease market, adding to the food-versus-fuel noise.
The negative publicity about biofuels has not shaken support in government circles, which reflects the historical political power of the
US retail gasoline prices of around $3/gal (€2/gal) - half or less of the prices in most other industrialised countries - have not yet been enough of a factor to push many consumers into embracing biofuels.
That consumer reluctance is at the heart of this chicken-and-egg problem will continue to confront the ethanol distribution system particularly in 2008. Retailers do not want to invest in ethanol-specific equipment if there is insufficient demand, and motorists are wary of committing to a fuel source that may not be readily available outside the
FFVs account for more than 85% of
Unica said FFV sales would likely climb by another 20% in 2008 to 2.2m units. That would mean
Strong demand in the domestic market has eased concerns that
Brazilian ethanol consumption was expected to jump to 1.6bn litres in December in what would be the third monthly consumption record in a row. Ethanol demand in November was 1.55bn litres, up from 1.54bn litres in October, according to Unica.
($1.00 = €0.69)
Additional reporting by Judith Taylor and William Lemos
Bookmark Simon Robinson's Big Biofuels Blog for some independent thinking on biofuels
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