US Ethanol Market Remains Uncertain as Over-supply Continues

HOPES FOR WASHINGTON TO HASTEN ADOPTION OF RENEWABLE FUELS

The US ethanol industry faces uncertain times. A large amount of capacity remains idle in the short term, with current output exceeding demand and ethanol producers now struggling to break-even. Given the scale of the US ethanol industry, export opportunities have been too small to make a significant difference to the US balance sheet. As a consequence, if the US Administration does not act to allow a greater amount of ethanol to be blended into gasoline - the outlook is not just bleak for the US, but for some of the other emerging ethanol markets around the world. Once again the financial viability of the US industry seems set to be determined in Washington.

  • The US ethanol industry experienced the best market conditions since the middle of the last decade in the final months of 2009.
  • As ethanol prices picked up, they decoupled from the corn market, providing a major boost to producers, as operating margins grew impressively and production hit record levels.
  • Production growth led to a large rise in stock levels and by the end of March 2010, ethanol inventories had risen by 27% from the levels seen in November 2009 triggering a 30% drop in ethanol prices in New York which fell below $1.60/gallon in mid-March 2010.
  • Ethanol values have since stabilised at around $1.70/gallon in New York, at which they are competitive with Brazilian export prices, even with a record Brazilian crop expected.
  • This has led to a large expansion in US ethanol exports, and in the first four months of 2010, around 125 million gallons (470,000cbm) of ethanol had been exported to destinations such as Europe, India, the UAE and Brazil.

Demand will be key

  • At present US ethanol values are depressed and offer high blending margins for the oil companies. Blenders are maximizing ethanol use at 10% in the majority of the US, as they look to meet their RFS requirements.
  • The EPA (Environmental Protection Agency) has been evaluating whether to increase the 10% limit on ethanol blending in gasoline, but the use of higher blends is an extremely contentious issue.
  • As the EPA is not due to make a decision until the final quarter of the year, the US ethanol market faces the risk of over supply.
  • The use of an 11% ethanol blend across the US would see demand increase by over 35% from 2009 levels.
  • In the wake of the damage to the environment and the political fall out following the oil spill in the Gulf of Mexico, the US Administration is expected to push for faster adoption of renewable fuels over the medium term.

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