Ethanol margins in US will be tight for years - analyst

16 June 2009 23:06  [Source: ICIS news]

DENVER, Colorado (ICIS news)--US ethanol margins will remain tight during the next four years unless the US increases its renewable-fuel mandates, an analyst said on Tuesday.

Under those mandates, the US is required to blend 11.1bn gal (42bn litres) of renewable fuels in its gasoline in 2009.

That figure will jump to 12.9bn in 2010, 13.9bn in 2011 and 15.2bn gal in 2012.

But even if the mandates are raised, ethanol makers are unlikely to see the same kind of margins from three years ago, said Will Babler, a manager with First Capital Risk Management.

“We will never go back to the fantasy land of 2005-2006,” he said, referring to the boom caused by the phase-out of methyl tertiary butyl ether (MTBE).

US ethanol margins soared in 2006 due to tight supply during the displacement of MTBE from the US gasoline pool.

Ethanol was widely used as a replacement for MTBE.

Babler said the market for ethanol makers was unlikely to get any easier than it is today, but he said short-term margins could increase slightly if blend economics were to improve.

Blend economics for ethanol tend to improve when the price of gasoline is significantly higher than the price of the biofuel. That prompts blenders to use more ethanol than they are required to as a means to improve their own margins.

US ethanol margins can vary significantly from mill to mill, but as a general rule, cost calculations include dividing the price of corn by 2.8 and adding 25 cents/gal for other operational expenses.

Babler spoke at the Fuel Ethanol Workshop & Expo (FEW), which opened on Tuesday in Denver, Colorado.

The conference will end on Thursday.

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By: William Lemos
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