September 29, 2010

High grain prices may hurt EU biofuels industry

The head of a European bioethanol trade body said Tuesday (Sep 28) that the EU's burgeoning biofuels sector may suffer if grain prices stay high for too long.

Rob Vierhout, Secretary-General of the European Bioethanol Fuel Association, or eBio, said a recent surge in the price of grains such as wheat, which bioethanol refiners process to make fuel alcohol, could lead to some plants shutting down.

"It could well mean that some companies stop producing because the raw material is such a substantial part of production costs - up to 70% with grain at the level it is now," Vierhout said.

Ethanol prices in the EU have increased significantly in the past year. According to figures from analyst FO Licht, European ethanol prices in Rotterdam on a free-on-board basis last week were at EUR620 (US$844.42) to EUR640 (US$871.60) a cubic metre, up around EUR100 (US$136.19) from the same time last year.

Vierhout attributed part of the increase to a surge in world grain markets, which have seen prices spike in recent weeks after Russia banned grain exports for up to a year.

Europe's biofuels sector has expanded rapidly in recent years. Fuel ethanol production in the 27-nation bloc rose by 31% in 2009 to 3.7 billion litres, stoked by targets to reduce EU greenhouse gas emissions by 50% compared with fossil fuels by 2017.

Demand for bioethanol-which can be mixed with gasoline to create a cleaner form of fuel-is also rising. Last year, the EU consumed 4.3 billion litres, up from 3.5 billion the previous year, an increase of 23%.

But Vierhout said he does not expect expansion to increase as demand struggles to keep pace with supply. He estimates that this year the sector will see a three billion-litre overcapacity as production from existing projects increases and new plants come on line.

"I think we will see new investments in 2013-2014 but the production capacity that we have installed is too big for the market right now," he said.