Wall St glum on US ethanol margins, volatility

26 February 2008 23:05  [Source: ICIS news]

ORLANDO, Florida (ICIS news)--Financing for greenfield US ethanol plants will be virtually impossible until the industry's margins improve and its internal market dynamics mature, investment community representatives said on Tuesday.

"This is one of the most cyclical and volatile industries I have seen," said Brian Bolster, a managing director at investment bank Goldman Sachs.

"There are not a lot of correlations, and there are a lot of knee-jerk reactions among investors," Bolster told the Renewable Fuels Association (RFA) annual conference.

US ethanol firms' debt is trading at around 60-70% of nominal value, with share prices at the same rate as the replacement value of company assets.

Aside from the current general weakness of the US stock markets, the investment experts blame the pessimism on the margin squeeze caused by the surge in feedstock corn prices to around $5/bushel and ethanol's inability to maintain a premium over gasoline.

"We have been through a rash of 'this will never happen' events - and they did," Bolster said.

Paul Ho, director of the energy group at investment bank Credit Suisse, said ethanol's ability to dip below US gasoline values in recent years "spooked" investors.

"They are gun shy right now," Ho told the conference. "Once investors see a more stable relationship between ethanol and [gasoline], there will be more investor interest."

Better defined infrastructure for getting ethanol to market would help stabilise pricing and boost financial confidence about the industry, he added.

David Perlman, managing director of investment firm Fieldstone Private Capital Group, said another negative factor is investor skepticism about the political mandates for ethanol production and consumption, which do not have enforcement mechanisms.

"How do you turn what was in the Energy Bill into real demand?" Perlman asked.

"If the industry fails to make the requisite number of gallons at any point, I don't see anything happening," he said.

The US government has set a target of 36bn gal/year of alternative fuels in the national fuel pool by 2022, with ethanol to be a mainstay.

US ethanol production in 2007 was 6.5bn gal, and the official Renewable Fuel Standard requirement for 2008 is 9.0bn gal.

For more on ethanol visit ICIS chemical intelligence

Bookmark Simon Robinson’s Big Biofuels Blog for some independent thinking on biofuels

By: Stephen Burns
+1 713 525 2653

< previous article(VIDEO - ICIS news Europe Lunchtime Bulletin 3 November 2009)

For the latest chemical news, data and analysis that directly impacts your business sign up for a free trial to ICIS news - the breaking online news service for the global chemical industry.

Get the facts and analysis behind the headlines from our market leading weekly magazine: sign up to a free trial to ICIS Chemical Business.

Printer Friendly