March 5, 2007

 

China against too many corn-based ethanol projects

 

 

China's industrial demand for corn is unlikely to increase sharply in the coming years as the government, worried about food security, is not in favour of a rapid expansion of processing capacity in the sector, a researcher with a government think tank has said.

 

"(Such concerns) will make it difficult to boost the country's industrial demand for corn," said Lan Haitao of the Academy of Macroeconomic Research under the National Development and Reform Commission (NDRC).

 

The Academy advises NDRC on key policy matters.

 

Lan said China will issue more guidelines to control expansion in the corn processing sector this year, and restructure the sector by encouraging the development of big enterprises at the expense of smaller ones.

 

Such policies may be related to land, loan control and tax issues, he said.

 

A rapid increase in the use of corn-based ethanol, a major product in the industry chain, may have a negative impact on China's grain security, Lan said.

 

China's grain output rose 2.8percent to 497.46 million tonnes in 2006, the National Bureau of Statistics said in a statement Wednesday.

 

China is targeting a similar output this year and wants to boost annual output to 500 million tonnes by the end of 2010, the Ministry of Agricultural said earlier this year.

 

Grain demand is also expected to reach 500 million tonnes by 2010, making the demand and supply almost match.

 

If output reaches 2006 level this year, domestic corn prices may remain stable or even decline slightly because of sufficient stocks and a slower-than-expected rise in industrial demand, Lan said.

 

As the world's most populous country, grain security has always remained the focus of Chinese government policy.

 

Fuel ethanol targets may be missed

 

In December 2006, NDRC, China's top economic planner, issued guidelines to curb what it called over-investment in corn-based ethanol projects.

 

Under the guidelines, new ethanol producing projects and expansion of existing facilities need special government approval before construction can start.

 

NDRC also said China will encourage ethanol production based on non-grains raw materials. China is the world's third largest ethanol producer and consumer after Brazil and the United States.

 

China has set a target of raising its annual fuel ethanol production capacity to 5 million tonnes by 2010, the end of the "Eleventh Five Year Plan", from the current 1.02 million tonnes, said Lan.

 

As most of the fuel ethanol is made from corn, and it takes 3.3 tonnes of corn to make one tonne of ethanol, the target puts China's fuel ethanol demand for corn at more than 12 million tonnes by 2010, compared with around 3.3 million tonnes now.

 

However, the government is unlikely to move ahead with such large expansion plans in the near term, Lan said.

 

As a result, China may remain a net corn exporter in the next two years, but there is a possibility of the country turning a marginal importer by the end of 2010 because of rising industrial demand, Lan said.

 

Many analysts have predicted China will become a net importer of corn as early as in 2007, amid rising demand from the industrial sector, as well as higher feed consumption.