February 25, 2008

 

US ethanol boom may be running out of gas

 

 

Overcapacity in the US ethanol market has eased over the past six months, though the the industry still needs to find new markets for the corn-based fuel according to  the head of Aventine,  one of the largest independent US ethanol  producers.

 

Ethanol producers already face the challenge of rising corn costs and sluggish selling prices as they try to persuade refiners to blend more of the fuel with gasoline. Market conditions are expected to remain tough as new capacity comes online and corn prices continue their upward path, with US farmers expected to plant less of the crop this year.

 

"We're not seeing a new wave of construction," said Ron Miller, president and chief executive officer of Aventine Renewable Energy Holdings (AVR), which on Thursday reported a 74-percent  decline in fourth-quarter net income.

 

Aventine produces ethanol and also markets the fuel on behalf of third parties, notably smaller cooperative-owned plants that have mushroomed across the Midwest alongside larger refineries financed by a wave of investment over the past two years.

 

Miller said some of its alliance partners had shelved expansion plans. "The ones that are under development are staying under development and waiting for a better margin environment," he said.

 

Aventine estimated annualized US ethanol capacity was 7.5 billion gallons at the end of 2007, though plants were not running at full production. The company predicts industry capacity will rise above 9 billion gallons by the end of this year, exceeding the demand outlined by a new federal Renewable Fuel Standard, or RFS.

 

"We're going to be surplus to that minimum mandate, but not as out of balance as we thought six months ago," said Miller.

 

The Pekin, Ill.-based Aventine is building two new plants of its own, but said there were no current plans to drop the development, despite market conditions and a squeeze on liquidity following the recent freeze in the auction-rate securities market.

 

Aventine is halting further sales of its student loan-backed securities and turning to alternative funding sources. The prospect of a curb on development or a liquidity squeeze wiped out about a fifth of Aventine's market value in Friday morning trading. 

 

The company's stock touched an all-time low of US$6.79 last week,. Aventine went public in June 2006 at US$43 a share.

 

Still, Miller expressed confidence in the long-term prospects of the US ethanol market, which benefits from a 51-cent a gallon federal subsidy, but said the industry needed to open new markets for the corn-fuel.

 

Ethanol producers are pushing the fuel outside its base in the Midwest, notably in the Southeast, where states including Georgia have introduced their own mandates for blending it with gasoline.