US ethanol in oversupply, shutdowns likely - bank

18 July 2008 20:38  [Source: ICIS news]

WASHINGTON (ICIS news)--The US bio-ethanol market is in oversupply and will likely remain awash in excess output through next year, forcing some producers into sale, bankruptcy or shutdown, a leading investment bank said on Friday.

Friedman Billings Ramsey (FBR) Capital Markets said in a new analysis that “The recent completion of several large ethanol plants has pushed US ethanol production capacity to 9.8bn gal/year, well above the 9bn gal/year estimated current consumption rate”.

“As these plants ramp up and new ones start producing, ethanol production margins should face increasing downward pressure,” the investment firm said.

FBR said that there are 40 US ethanol plants under construction, and when those facilities come on line, they will boost total US output capacity to 13bn gal/year by early 2009.

Data available from the Renewable Fuels Association (RFA), the biofuels industry trade group, confirm that 134 existing US ethanol plants have 7.23bn gal/year capacity and that 77 new plants are under construction or expanding to add 6.21bn gal/year of output for a total of 13.4bn gal/year.

“Such a big increase in capacity strongly suggests that domestically available ethanol supplies will be more than adequate to meet [federal government] mandates and consumer demand through next year,” the FBR analysis said, noting that US consumption of bio-ethanol is not likely to reach 13bn gal/year until late 2009.

Under the latest federal biofuels mandate, the US is to be producing and consuming 36bn gal/year of ethanol and other biofuels by 2020, but some in Congress have raised questions about the impact of corn ethanol production on food and feed prices, suggesting that the mandate should be reconsidered. However, no effort to alter the mandate is expected to pass Congress this year.

FBR noted that large ethanol producers have economy of scale and substantial industry resources but also significant debt interest and overhead costs. The nation’s many smaller producers, many of them farmer-owned, lack large-scale efficiencies but typically have lower overhead.

However, in either operational category, “Those producers who cannot cover their interest and overhead costs will be forced to declare bankruptcy, sell out or shutdown”, the investment bank said.

“Substantial consolidation is necessary in order to lower cost-per-gallon overhead costs and improve efficiency,” FBR said.  However, consolidation will likely be slow to develop, the bank said, due to the lack of available financing and the large number of individual producers.

A spokesman for RFA did not challenge the bank’s analysis but said that with US corn ethanol at low prices, “refiners ought to be maximizing ethanol blending and passing the savings on to consumers”.

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By: Joe Kamalick
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