March 8, 2007

 

US ethanol eyes big supply overhang in 2007
 

 

It's hailed as the fuel of the future for a greener and leaner America, but the rush to build new ethanol plants is expected to outpace demand this year and undercut prices, experts said.

 

The damper outlook comes after a banner year for the biofuel in which demand surged as the oil industry used it to replace gasoline additive MTBE (methyl tertiary-butyl ether), a suspected carcinogen, and the White House promoted it as an alternative to foreign oil.

 

Guy Caruso, head of the US Energy Information Administration, said there will be more corn-based ethanol capacity than needed for blending with gasoline as he looks for a relatively softer market this season.

 

Ethanol prices soared last spring to a peak of over US$5 a gallon, triggering a frenzy of plant construction that brought US production to 4.9 billion gallons and sparked a huge boost in demand for corn, the grain from which most US ethanol is produced.

With another 78 ethanol plants on the books for 2007 and beyond, US ethanol production capacity is expected to surge another 63 percent to near 8 billion gallons, according to the Renewable Fuels Association (RFA), which represents ethanol producers.

 

But demand is expected to rise just over 10 percent to about 5.3 billion gallons, according to Mark Routt of Energy Security Analysis Inc in Boston, leaving a 2.7-billion-gallon overhang that could pressure prices.

 

The announcement of capacity, said Routt, is far in excess of what should be the required demand. 

 

He added that some of the capacity is already committed to be built and therefore is likely to suppress ethanol prices.

 

He said that forecasts from the US Department of Agriculture "15 billion gallons is all you can produce without a severe disruption to the corn crop."

 

The ethanol industry is expanding beyond traditional grain belt states like Iowa, with plants being built in Washington state, New York State and Arizona, said RFA President Bob Dinneen.

 

He stressed the ethanol industry "set new all time records for ethanol production, sales and capacity". 

 

But he said all the players in the industry must do more to ensure that demand will be there in the years to come, including promoting E85, a motor fuel blend that is 85 percent ethanol and 15 percent gasoline.

 

This will also gauge whether ethanol has really been accepted, said Dinneen.

 

He stressed six million FFVs or flexible fuel vehicles capable of using E85 is already a feat but only 1,000 E85 refueling stations capable of refuelling the vehicles is inadequate.

 

The skyrocketing price of corn could also prove detrimental to whether the projected growth in production capacity pans out.

 

Goldman Sachs said in a recent report it believes ethanol margin weakness, due to the high price of corn hovering near 10-year highs, does not justify new construction of plants.

 

At US$4 per bushel corn prices, Goldman said, WTI crude oil needs to be above US$65 per barrel and ethanol above US$2.25 per gallon to justify ongoing ethanol capacity expansion.