US fuel ethanol margins pressured, industry bright spot is industrial demand

Author: Alex Snodgrass

2020/04/09

HOUSTON (ICIS)-- The US ethanol market is facing two drastically different market scenarios, making it one of the more precarious of the markets that has been impacted by the coronavirus.

While the fuel ethanol market is seeing record inventory levels, low to almost non-existent margins, and weak demand, the industrial sector has seen demand reach unprecedented levels and supply is unable to keep up.

Fuel ethanol

The volume of ethanol stocks was already at a record level even before the coronavirus demand destruction occurred, which means that margins had no wiggle room going into this.

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Around 20% of US fuel ethanol production capacity has already shut on weak demand and no profit, and more is expected to follow.

Demand levels for gasoline, and subsequently fuel ethanol, are at unprecedented levels.

This has resulted in many US producers sending their fuel ethanol to Europe, in order to offload some inventory.

The US Department of Agriculture (USDA) has lowered its forecasted demand for corn that is used to make ethanol, due to plummeting demand and oversupply.

The World Agricultural Supply and Demand Estimates, a monthly report, said that corn demand for ethanol will be 5.05 billion bushels for the 2019-2020 crop season.

Previously, the USDA had said that it would be 5.425 billion bushels, a loss of 375 million bushels.

Some US senators and ethanol trade groups have also been pushing for a biofuels bailout as the industry continues to be hit with severe impacts on profitability.

This low demand and oversupply scenario will likely pressure those producers who are leveraged in debt or have high interest expenses, which could ultimately result in bankruptcy filings.

Industrial ethanol, the bright spot

While the industrial market, the more steady and reliable sector, has seen unprecedented levels of demand as sanitizers are in short supply and some fuel producers have been tweaking their plants to produce industrial.

"Prices for industrial are all over the board, I've seen 2x to 40x typical pricing for this time of year," a source said.

Industrial ethanol contracts are quarterly and typically settle at the beginning of the quarter, but they have been delayed this year as many market participants say that they haven't even had time to deal with contracts as they can't keep up with spot demand.

The tightness in industrial supply also has some downstream markets scrambling for product.

The US ethyl acetate (etac) market uses industrial ethanol to make its product, but market sources have started seeing issues obtaining needed material.

While some US fuel suppliers are able to tweak their production process to make industrial grade product.

Making industrial alcohol from ethanol requires a further step in distillation, so not all fuel ethanol plants are able to accomplish this.

It also requires permits from the US Food and Drug Administration and the federal Alcohol and Tobacco Tax and Trade Bureau.

Some industrial ethanol is retailing for $40/gal while fuel ethanol is less than $1/gal, marking the stark contrast between the two products.

Visit the ICIS coronavirus topic page for analysis of the impact on chemical markets and links to latest news.

Focus article by Alex Snodgrass