OUTLOOK '12: End of tax credit, tariff, to challenge US ethanol

28 December 2011 17:28  [Source: ICIS news]

The US ethanol industry will start 2012 without a key government tax credit and tariff, and could face some additional competition and political issues from South America and Europe. By Brian Balboa and William Lemos

HOUSTON (ICIS)--The expiration of a key tax credit and tariff will challenge the US ethanol industry in 2012.

The US Volumetric Ethanol Excise Tax Credit (VEETC) is set to expire on 31 December.

The VEETC has provided gasoline blenders with a credit of 45 cents for each gallon of ethanol blended with gasoline.

Additionally, a tariff of 54 cents/gal on imported ethanol will expire at the end of the year.

With the expiration of the VEETC, US ethanol market sentiment has suggested there will be less incentive to blend ethanol.

Some market participants have even said the loss of the VEETC could lead to a discount for consumers at the pump, and even some consolidation in the US ethanol market.

“The loss of the VEETC is likely to have two marginal impacts,” said a US-based ethanol broker. “First, given competitively priced gasoline, mostly blenders are unable to ‘keep’ the tax credit, meaning that it gets passed on to the consumer in the form a 4.5-cent discount on ethanol blended gasoline at the pump.”

The broker added that if blenders have been able to keep some or all of the VEETC credit, then it has allowed plants that are operating on thin margins to continue producing.

“So, the loss of the VEETC could have the effect of consolidating the market - if only marginally,” the broker said. “The plants with the highest capital costs, highest labour costs and highest feedstock costs would be the first ones to be mothballed.”

On the other hand, the demise of the tax credit and tariff could be good news for those seeking to export ethanol to the US.

The Brazilian Cane Sugar Association (UNICA) has welcomed the removal of the tariff on US ethanol imports and the VEETC tax credit, which it says will open the US market and spur long-term growth for Brazilian ethanol.

“If there is one thing we should be importing from Brazil in 2012, it should be their resolve to become energy independent,” said Stephanie Dreyer, senior public affairs associate for ethanol trade group Growth Energy.  

“Brazil has a robust ethanol industry in great part because they’ve opened their domestic market, with Flex Fuel pumps and Flex Fuel autos.”

An ethanol trader said the expiration of the VEETC will make it tougher economically for US ethanol exports.

“Right now the economics just aren’t there for head-to-head competition,” the trader said.

The US Renewable Fuels Association (RFA) has said corn ethanol is the lowest-cost motor fuel source in the world, which is the key driver behind US exports.

Other US market sources have said they do not expect much competition from Brazil, adding that Brazil makes sugarcane ethanol – classified by the EPA as an advanced biofuel.

“This fuel will never compete directly with corn ethanol,” said one US market participant. “When fuel prices and D5 [advance biofuel] RIN [renewable identification numbers] prices allow, we will see small volumes of Brazilian ethanol coming into the US, but those imports will likely be offset by US exports of corn-based ethanol.”

Ethanol prices in Brazil were trending down in December, pressured by weaker-than-expected motor fuel demand so far this month.

The outlook for January, when demand tends to be seasonally weaker than in December, pointed to more softness in the market, another broker said.

The decline in fuel demand in Brazil comes amid a softening in the Brazilian economy, a distributor said, linking the financial crisis in Europe to a drop in consumer confidence in Brazil.

Despite the drop in spot prices in December, ethanol prices in Brazil are closing 2011 with a premium of around 12% compared with a year earlier.

The increase followed a year of mostly higher prices, resulting from tighter supply because of a smaller-than-expected sugarcane crop in the key centre-south region.

Centre-south sugarcane crushing in April-November totalled 488.46m tonnes, a drop of 10.23% compared to the volume processed in the same period of the previous year (544.12m tonnes), Unica said its latest crop update.

The sugarcane harvest in the centre-south runs from April to November/December.

Brazil also produces ethanol in its northeastern region, but the sugarcane harvest in the area runs from September to March.

For more on ethanol visit ICIS chemical intelligence

By: Brian Balboa
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