March 6, 2008

 

Ethanol companies face margin squeeze in 2008

 

 

Even if corn prices were to fall, it would unlikely translate into higher profit margins for ethanol producers, said Christoph Berg, managing director of F.O. Lichts in Germany.

 

Berg said corn prices have to fall much further for publicly traded ethanol companies, especially in the US, to see better profit margins.

 

Companies such as Pacific Ethanol (PEIX) and Verasun (VSE) have been underperforming the Dow Jones Industrials Average and the Standard and Poor's 500 index all year.

 

In 2007, gasoline prices rose 7 percent on-year and corn ethanol prices rose 45 percent, but Berg said ethanol companies in the US are barely above junk-bond status because of the risk associated with ethanol.

 

Some of those risks, Berg said, include the new and growing food-versus- fuel debate, which has many nations deciding to slow down or do away with ethanol policy because of climbing food prices, caused by rising grain futures in the US and Europe.

 

"Food-versus-fuel will shape up to be a topic for years to come. There are more 'ifs' and 'buts' in the legislative process now than in previous years," said Berg, adding that Europe is also still debating what to do with ethanol. If Europe consumes less ethanol, it could affect Brazil's exports as well as futures prices for wheat and other grains, which have been rising, in part because of demand for ethanol.

 

Berg said China is looking for non-food fuel stocks for ethanol and has been unsuccessful. India is considering an ethanol mix but the oil industry there does not want to offer any big ethanol-gasoline blends.

 

"India's window of opportunity for ethanol is closing. Australia is likely to remain a medium-sized player but lacks government support for ethanol."

 

Berg said the ethanol market will continue to be local, in the US, Brazil and Europe. He doubts there will be a rise in Brazilian ethanol exports to the US this year. Brazil is the world's leading ethanol exporter.

 

"There is a chance you could see direct exports of Brazil ethanol to the US because of demand coming from the southeastern states. Then there is always the sorry state of EU's grain ethanol market that might provide some opportunities to Brazil.

Berg said ethanol mandates in the US and EU will require more ethanol than anyone is able to produce at this time.

 

"We are now entering a period of under-investmentment in capacity as demand rises ahead of supply because of government mandates. The slower capacity buildout will rebalance the market and may push ethanol prices higher in 2009 because of supply restraints," said Berg.

 

Berg was speaking at the F.O. Lichts sugar and ethanol conference in Sao Paulo, Brazil, on Wednesday (March 6, 2008).