US fuel ethanol producers continue to face margin pressure, some consider the switch to industrial production

Author: Alex Snodgrass

2020/05/20

HOUSTON (ICIS)-- US fuel ethanol producers continue to feel margin pressure, despite indications of demand recovery, as stocks remain elevated and consumers remain hesitant to resume their normal lives.

Fuel producers continue to lament the low margin territory that has resulted in shutdowns across the industry, as the coronavirus has essentially halted road travel.

The blow to fuel ethanol was especially present in Q1 earnings, which left some with negative earnings and a demand loss of over 50%.

US Green Plains expects fuel ethanol demand to lag behind gasoline demand in the recovery from coronavirus shutdowns across the US, it said in an investor call.

"Recovery in gas demand could potentially outpace recovery in ethanol demand", they said.

Total motor gasoline inventories increased by 2.8 million barrels last week, and are about 10% above the five-year average for this time of year. This highlights the demand problem for both gasoline and fuel ethanol.

Finished gasoline and blending components inventories also increased last week.

Green Plains has also called for strategic restarts, citing the industry's past record of bringing full capacity on too quickly.

While some plants have announced longer shutdowns, others are in what is called a 'warm' shutdown, wherein a plant can be up and operating within a week.

Around 20% of the shuttered ethanol plants are in a cold shutdown. It will take around six weeks to get one of these plants back online, according to Green Plains.

SWITCHING TO INDUSTRIAL PRODUCTION

As industrial demand continues to soar and is expected to remain elevated even as the coronavirus subsides, fuel market participants continue to look into a permanent switch to industrial production.

Smaller fuel producers are more likely to consider the switch, as larger fuel ethanol producers are typically able to weather downturns for a longer period of time.

If demand for industrial remains elevated as part of a longer term trend, the switch to industrial production could be worth the investment, as producers are likely to return the costs.

Second quarter industrial ethanol contracts rose to record highs on booming demand, highlighting the dichotomy between the two products.

As the sanitization trend is likely here to stay, the cost incentive for some fuel producers to focus on industrial production is present, especially as the fuel industry is historically hampered by US federal regulations and a seemingly never-ending war with refiners on the biofuels mandate.

Ethanol is used as a gasoline blendstock, in pharmaceuticals, and in food and beverage applications, such as hand sanitizers and vodka.

Focus article by Alex Snodgrass

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