FocusUS ethanol Q2 results improve, but industry seeks incentives

17 August 2010 20:45  [Source: ICIS news]

By Ben DuBose

HOUSTON (ICIS)--Second-quarter results for US ethanol producers slightly improved year over year amid growing demand, sources said on Tuesday, but any significant market movements will likely depend on government decisions on tax credits and fuel blending limits.

Pacific Ethanol, whose subsidiaries exited US bankruptcy protection earlier this year, said on Tuesday that its second-quarter net sales grew by 9% year over year to $76.8m (€59.9m), even as the average sales price of ethanol for the quarter decreased by eight cents to $1.67/gal (€0.34/litre). Total gallons sold increased by 88%.

Pacific operates four refineries with a combined ethanol capacity of about 220m gal/year (833m litres/year).

“Right now, there is a very tight relationship between supply and demand,” Pacific CEO Neil Koehler said. “2010 has been pivotal. Market conditions have improved and we are stabilising.”

Koehler cited favourable blend economics for US ethanol, a theme echoed by other producers in earnings conference calls.

“Looking at current market conditions, ethanol spot prices are 40-to-60 cents below unleaded gasoline, and with the 45 cents/gal tax credit, the blender has a significant incentive to buy additional gallons,” said Archer Daniels Midland (ADM) CEO Patricia Woertz.

ADM is the third-largest US ethanol producer with about 1.07bn gal/year of capacity, and its bio-products segment swung to a $21m profit from a $160m loss in the year-ago quarter due in large part to better ethanol margins, it said.

ADM also cited indications of a strong US corn crop as a potential supply boost to the ethanol industry. However, whether that supply will be needed would depend largely on policy issues in the US Congress, sources said.

For one issue, the 45 cents/gal tax credit is only in place through the end of 2010, Woertz said, noting that Congress was considering how to extend it.

But more importantly for the industry, policymakers have yet to rule on proposals to increase the 10% ethanol blending restriction (E10) to E12 or E15.

“The 10% blend restriction is limiting incremental blending, resulting in excess supply and a challenging margin environment,” Woertz said. “Our technical team has provided our analysis to the EPA [Environmental Protection Agency] in support of E12 blends for all vehicle model years.”

“They have multiple options to punch through this blend wall, but I can’t predict the outcome,” she added. “So we’re hopeful, but we’ll see.”

POET – the largest US ethanol producer with 1.5bn gal/year of capacity – is a privately-held firm and does not release quarterly earnings.

However, POET said it had recently met with US Secretary of Agriculture Tom Vilsack at one of its refineries, at which company officials stressed the need for a higher blend limit.

“I believe it will happen,” Vilsack said. “Obviously I wish it had happened now, but I believe it will happen sometime this fall.”

US officials are expected to issue a ruling in October.

In the ethanol marketplace, ADM and POET are also facing new competition from Valero, which entered the market in earnest in 2009 when it bought 10 ethanol plants from bankrupt producers. That boosted total capacity to 1.1bn gal/year, making it the second-largest US ethanol producer, according to company officials.

In its second-quarter earnings, Valero cited difficult market conditions for ethanol but still managed to boost ethanol earnings by 59% as a result of blending economics and having bought its plants at discounted rates, it said.

US Gulf spot ethanol prices were assessed by ICIS at $1.68-1.70/gal FOB (free on board) midwest in the week ending 11 August, up from $1.48-1.49/gal a month earlier amid strong demand for the product, market sources said.

Prices were $1.51/gal FOB midwest a year earlier, and dropped as low as $1.41/gal early in 2010.

($1 = €0.78)

For more on ethanol visit ICIS chemical intelligence
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By: Ben DuBose
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