FocusEurope Q3 ethanol contracts fall on macroeconomic concerns

19 July 2012 14:35  [Source: ICIS news]

LONDON (ICIS)--Macroeconomic weakness in Europe has undermined market sentiment for all grades of traditional (non-fuel) ethanol and resulted in average decreases of €2–3/hl for Q3 contract prices, according to market participants.

In the past year, prices for 96% beverage grade and 99% industrial grade ethanol reached record highs in France, Germany, Italy and the UK. All are now on a downward trend.

Summer is usually a strong season for 96% beverage grade ethanol, because beverage consumption traditionally rises at this time of the year.

However, the effect has been very muted this summer, on account of cool weather and macroeconomic concerns, which have encouraged buyers to adopt a hand-to-mouth purchasing strategy.

One producer said that many Europeans are opting to save their money rather than spend it this year.

“In my opinion, it’s much more due to lack of demand than the oversupply situation,” the producer said, summarising the situation as “bad summer, bad spring, bad consumption”.

The decline in offtake and consequent improved supply resulted in Q3 contract prices being settled at average decreases of €2–3/hl ($2–4/hl) (hectolitre).

Earlier in the year, domestic prices for 96% beverage grade were assessed by ICIS at record highs of €77–80/hl FD France, €79–82/hl FD Germany, €83–86/hl FD Italy and £67–72/hl (€86–92/hl) FD UK.

By mid-July, prices had fallen to €74–78/hl FD France, €74–79/hl FD Germany, €81–83/hl FD Italy and £65–68/hl FD UK.

An even weaker price trend has been recorded for 99% industrial grade ethanol, which is typically a less seasonal market, but which has also been impacted by lower consumer spending.

In addition, producers of 99% industrial grade are divided between those reliant on the sugar fermentation process and those that take ethylene as their principal feedstock, using it to produce “synthetic” ethanol.

There are two producers of synthetic ethanol in Europe: INEOS has 340,000 tonnes/year of capacity at Grangemouth in the UK, while Sasol has a 140,000 tonne/year plant in Germany.

The competitiveness of synthetic ethanol relative to fermented product is determined chiefly by the cost of ethylene.

Synthetic ethanol producers were able to offer competitively priced tonnes in Q4 2011, but successive increases in ethylene costs totalling €225/tonne in the first four months of 2012 severely eroded their margins, as most of the increase was not passed on to consumers.

The upward trend on ethylene was then reversed, with prices plunging by a total of €310/tonne over the April-July period, including a record €170/tonne drop for July. This brought ethylene to its lowest level since December 2010.

While this represents a significant drop in raw material costs, falling ethanol demand has resulted in greater competition for market share, and thus less scope for synthetic producers to capture the implied increase in margins.

As buyers have attempted to maintain their inventories at minimal levels, European sellers have had to become ever more aggressive in their efforts to protect their share of the market.

The outcome of this has been the conclusion of Q3 contract prices at average decreases of €2–3/hl, with price cuts of €4–5/hl heard for some large accounts.

Domestic prices for 99% industrial grade were at a record high in October 2011, when they were assessed by ICIS at €81–84/hl FD France, €81–86/hl FD Germany, €87–89/hl FD Italy, and £910–990/tonne FD UK.

By mid-July 2012, prices had fallen to €76–79/hl FD France and Germany, €86–89/hl FD Italy, and £830–900/tonne FD UK.

A similar picture has been seen on 96% Rectified Neutral (REN) grade. Prices fell from the low €70s/hl FCA Rotterdam in January to the mid-€60s/hl FCA Rotterdam in July, owing to the unseasonably mild winter, which undermined demand for screenwash in Europe.

Even as the last Q3 contracts were being concluded, market sentiment was starting to firm, based on a sharp rise in fuel ethanol prices that began at the end of June and accelerated in early July.

The hike in fuel ethanol prices was prompted by stronger feedstock wheat and corn values, which have been increasing since the middle of June.

Producers said the downward adjustment on ethanol Q3 contract prices may have been an overreaction to previous bearish indicators.

“This is not sustainable, it’s going too fast,” said a traditional ethanol producer, referring to the Q3 contract settlements.

Market participants said that the higher fuel ethanol prices would encourage producers to divert material away from traditional applications to fuel.

($1 = €0.82, €1 = £0.78)

By: Samuel Weatherlake
+44 20 8652 3214

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