Group says massive ethanol volume increases needed
In a recent report, Houston BioFuels Consultants LLC (HBC) outlined the critical role additional discretionary ethanol demand will have to play in the next two years to balance the large increase in capacity.
Findings indicate with ethanol supply much greater than renewable fuel standards (RFS) volumes mandated under the Energy Policy Act of 2005, it will be the end of this decade before existing mandated RFS volumes have any meaningful effect on demand.
Because of lags in ethanol production, import and inventory data of at least two months, many market participants have not been able to see how the market has changed, and not changed, since MTBE exited the U.S. gasoline pool in May 2006, according to HBC. Logan Caldwell, HBC president, says his firm has developed methods to estimate current month ethanol demand that matches Energy Information Administration data once it is issued.
"It is difficult to make good decisions on buying, selling or investing without an accurate view of the market," Caldwell says. "We believe all market participants would benefit from a current view of ethanol demand, rather than rely on just the price signals from the thinly traded ethanol spot markets. Knowing the volume reveals the other half of the picture."
Other highlights of the report include:
- Ethanol Demand has been running at a flat 5.9 billion gallons per year annualized rate ever since MTBE was replaced in RFG by ethanol in early May 2006. Variations in ethanol demand have been typically well within 10%, and can be attributed largely to fluctuations in overall gasoline and RFG demand and the winter oxygenate program.
- There has been very little change in discretionary blending of ethanol all year, which may come as a surprise to many market watchers.
- U.S. ethanol production capacity is now approximately 5.6 billion gallons per year.
- U.S. ethanol production capacity is forecast to exceed U.S. ethanol demand sometime in the spring of 2007, since by March 2007 new plant additions will bring U.S. production capacity to 6 billion gallons per year. Every month thereafter for the next two years, more new U.S. ethanol capacity is expected such that by the end of 2008, somewhere between 8 and 10 billion gallons per year of ethanol production capacity will be available.
- The mandated use of ethanol has played a negligible role in the volume of ethanol used since May 2006. The increase in ethanol demand was due to the disappearance of MTBE from reformulated gasoline and ethanol being the only economically viable replacement in the short run. The current RFS volumes do not reach current ethanol demand levels until 2009 when 6.1 billion gallons per year is required. Even if Congress increases the mandate early next year, due to the time required to modify facilities and establish supply chains, this will not have a significant impact on ethanol demand until 2009.
- In the meantime, for ethanol demand to increase, ethanol producers and marketers have only the mechanism of price incentive to spur potential blenders of additional ethanol to invest capital and resources to modify facilities and begin using ethanol.
- With current spot prices of ethanol 30 cents a gallon higher than gasoline even after accounting for the 51 cents a gallon ethanol blender tax credit, many gasoline blenders are likely to be cautious and may commit capital to modify facilities for ethanol blending only after the supply overhang is priced into the market. In the meantime additional ethanol production capacity will continue arrive in the marketplace.