US ethanol firms may scrap plants as margins fall
Source: Reuters
By Matthew Robinson NEW YORK, Jan 22 (Reuters) - U.S. ethanol producers may start scrapping plant construction plans after a surge in the cost of corn and a slide in gasoline prices put profit margins into the red, analysts said on Monday. The outlook could damp a dramatic building boom as the United States looks to boost renewable fuels to reduce dependence on oil imports, eroding industry's plans to double output capacity by the end of 2008. "We assume a lower completion rate for planned projects, as high feedstock costs are lowering implied returns which should cause some cancellations and deferments," Credit Suisse said in a report. Investment in ethanol has surged since the United States mandated its use and phased out MTBE, a suspected carcinogen, as an oxygenate additive for gasoline last year. Calls by the Bush administration and Congress to pump up domestic supplies to cut foreign oil reliance have also fueled interest. U.S. producers mainly use corn to make ethanol, but competition for food and animal feed pushed prices to 10-year highs of $4.20-1/2 a bushel on Jan. 17 after harvest estimates were revised lower. Prices for natural gas, used to fuel ethanol plants and to produce corn fertilizer, also rose as oil and refined products prices fell, reducing the profitability of producing ethanol. "Back in July 2006, a new plant would have commanded returns in the 35-40 percent range using $2.50/bushel corn and $2.50 per gallon ethanol," Credit Suisse said. "More recent prices of $2 per gallon ethanol and $3.50/bushel corn generate implied returns of only 5-13 percent," the report added. Higher building costs are also forcing project delays as companies rush to build new plants, driving up the price of materials such as stainless steel. "The biggest reason that you are seeing projects being delayed has been the cost of building a plant has gone from $1 to $1.25 a gallon to $2 or $2.25," said Monte Shaw, executive director for Iowa Renewable Fuels Association. "That dramatically changes the risk profile on some of these projects." While some producers which own corn plantations could deal with a short period of poor margins, some might be tempted to cut ethanol output to sell corn into more profitable markets. "Continued high levels of corn prices and low margins would make it more profitable for an integrated producer to actually sell the corn into the corn market rather than to turn it into ethanol at a lower profit," Goldman Sachs said in a report. Margins could also improve in the short term as the United States heads into the summer driving season, when higher demand typically lifts gasoline prices. But growing imports could weigh on ethanol prices longer-term. "In the medium to longer term it is possible that the large amount of ethanol production due to hit the U.S. in the next two to three years, along with increasing imports from Europe, will keep U.S. gasoline prices under pressure," Credit Suisse said. "Lower gasoline prices mean lower ethanol crush spreads."
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