How ethanol moves and where it's going

2011 will go down in history as being one of the best years for U.S. ethanol exports in the industry to date. In July alone, U.S. producers sent 127.4 million gallons of ethanol out of the country, setting a new monthly record for exports. Much of it was delivered to Canada, which has been the No. 1 outside market for U.S. ethanol. However, a series of poor sugarcane harvests combined with high sugar prices led to a shortage of fuel in ethanol-thirsty Brazil, which emerged as a major new market for U.S. ethanol this year. European Union countries that would have otherwise received Brazilian ethanol also became large consumers of U.S. ethanol as a result of Brazil’s shortages.

The export boom came just in time. Many believe the U.S. is at or very near its ethanol blend wall and without the implementation of E15 into the market yet, producers need to find other ways to expand their market.

In September, Ed Hubbard, legislative counsel for the Renewable Fuels Association, addressed the topic of ethanol exports during a presentation at an ethanol logistics conference held in New Orleans. He noted that the amount of ethanol exported from the U.S. this year exceeded everyone’s expectations and served as a stabilizer for the industry. “We think it’s going to continue, and continue aggressively,” he said.

Others have a more cautiously optimistic view toward ethanol exports in the coming year, based on some known and several unknown factors, which will play out over the next several months. In October, the European Union took action to reclassify E90 as a fuel rather than a chemical, a move that resulted in increased import duties. Maelle Soares Pinto, director, Europe and Africa, at Hart Energy’s Global Biofuels Center, says the higher tax could have a negative impact on U.S. exports to EU member states. Part of the reason the U.S. enjoyed demand for its product in the EU this year was because Europe’s high grain prices resulted in more expensive domestically produced ethanol. “Wheat in particular was quite high last year and that’s why U.S. corn ethanol had a much higher advantage on the market,” Soares Pinto says. “Whether it’s going to continue, I’m not sure. Taxes will increase, yes, but if European grain prices stay high, I think U.S. ethanol could still find a market in Europe.”

Pinto believes that the EU’s newly enforced sustainability requirements could be of great consequence to U.S. ethanol producers next year. “If producers were not in production by 2008, they will have to meet a 35 percent greenhouse gas saving threshold,” she says. “For those who were operating before 2008, they don’t have to bother with the greenhouse gas-saving threshold until 2013, so it won’t affect them next year. But they still have to be certified.”

In July, the EU belatedly approved seven global certification schemes meant to assure a fuel’s sustainability as required by the EU’s Renewable Energy Directive. After announcing the approval of the seven schemes, EU Energy Commissioner Günther Oettinger noted that the 27 EU member states have the highest sustainability standards in the world and said the schemes are necessary to guarantee the sustainability of the entire biofuels production and supply chain. While some of the member states have upheld sustainability requirements previously, the commission’s approval of sustainability schemes means that U.S. producers looking to the EU for market opportunities need to make certification a priority. “Producers should really be concerned with trying to certify their production because so far it has not really been enforced in member states, but now we have seven schemes that have been recognized at the EU level,” Soares Pinto says. “I think many producers are forgetting this aspect of the mandate in Europe and [certification] would help them increase the value of their product on the European market.”

Brazil’s ethanol demand is somewhat of a wildcard for the coming year. The government there took action this fall to address the country’s ethanol supply shortage and temporarily reduced the nationwide blending mandate from 25 percent to 20 percent. It appeared to have an immediate downward impact on demand for U.S. ethanol, but Adhemar Altieri, communications director for UNICA, the Brazilian Sugarcane Industry Association, says demand for fuel in Brazil continues to increase due to sustained economic growth, so it is unclear how deep the blow will be to U.S. producers as a result of the reduced mandate. It is anticipated that Brazil will reinstate the 25 percent blending mandate after the next sugarcane harvest in the spring, provided that the harvest is a good one and depending on the relative price between sugar and ethanol. What happens in Brazil will have a direct impact on how well U.S. producers do in markets worldwide. Markets in Japan and elsewhere in Asia have traditionally been served by Brazil but have been open to receiving imports from the U.S. in light of nonexistent Brazilian supplies. Brazil has historically been the preferred supplier for EU states as well, but as long as U.S. producers follow through with certification requirements, low-cost corn ethanol could continue to fill their need.

Blame It on the Bakken

But no matter the ultimate destination, the location of the vast majority of U.S. ethanol production, in rural areas in the center of the country, means that the fuel is traveling long distances to get to the market. The rule of thumb is that 70 percent of all U.S. ethanol is hauled by rail, 20 percent by truck and 10 percent by barge. But, while rail is the undisputed ruler of U.S. ethanol transport, bottlenecks and tank car shortages have led to many headaches over the past year that will likely continue for some time.

Just a couple of years ago, tank cars could be leased for around $250. In recent months, that price has spiked to nearly $1,000. Why? An oil boom in the Bakken Formation in western North Dakota that has caused demand for railcars to skyrocket can be blamed in large part for the increase. Additionally, when the ethanol industry bust occurred in 2008, tank car manufacturers halted production. Since the industry has begun to recover, ethanol producers, too, have needed more cars to transport their product. Tank car manufacturers have responded by ramping up their production, but it’s likely to be some time before they can provide any relief to the situation, says Chad Conn, vice president of operations at ethanol marketing firm Eco-Energy Inc. “I don’t think this is something that is going to change any time soon,” he says. “I think it will affect how we go into the next year as well as the next few years.” The tank car shortage will likely result in producers having to increase their ethanol prices as they struggle to maintain profitable operations, he says, adding that he believes this scenario may already be occurring.

Unit trains, already a popular mode of rail transport for many producers, are expected to become increasingly important due to their efficiency and discounted rates. Conn estimates that about 70 percent of ethanol producers are able to ship ethanol via unit train. However, he says only about 35 percent of all terminals are capable of receiving them. Terminals are responding to this situation by building out capabilities to service that type of train, which could cause issues for the minority of ethanol producers who are unable to use unit trains. “As unit trains become more and more a part of the logistics chain, I would expect that to reduce where plants that are single manifest train capable are actually able to get into,” Conn says. For example, Dallas is a market that was once served primarily by single manifest trains, he says. Today, there are two unit train facilities serving the entire market. “If you were once a single manifest player serving the Dallas market, because of what’s happened over the past couple of years, this would be a market that you now just can’t economically serve,” he says.

Other terminal operators, particularly in the South, are in the midst of expansion projects to enable them to service unit trains. Eco-Energy has branched out to become involved in this area and, along with its partner J.T. Russell & Sons Inc., is developing an ethanol unit train and storage facility in Denton, N.C., that is expected to become operational in early 2012. The company is expected to embark on several similar projects in the Southeast in the coming year, although Conn declined to offer specific details. He says Eco-Energy believes unit train and rail access in general is a bottleneck in that area and, as an advocate of the ethanol industry, the company believes it is important to open up those markets. In areas such as Atlanta, rail tie-in projects have increased in necessity as terminal operators seek to find a way to get rail back to their facilities. “Here you have an area of the country that were very small markets 75 years ago when the gasoline terminals were being built,” he says. “If you go to these cities today, you’ll see that rail exists into these terminals. The problem is that if you were to walk about three miles up that track you’ll find that there’s now a shopping mall.”

For ethanol producers currently using single manifest modes of transport, Conn suggests that they could try to collaborate with a neighboring producer to form a unit train. But he cautions that railroad companies aren’t particularly receptive to this type of creative solution. In the face of sustained high rail car prices, more producers may forget about rail transport entirely and seek out trucking alternatives, but the downfall of truck transport is that trucks just can’t cover the long distances as efficiently as trains can. Conn says there are also limitations as to which cities can handle truck deliveries and which can use rail. Barge transport has obvious limitations and isn’t likely to experience a major increase in popularity.

As producers plan their operations and weigh their logistical options in the coming year, Conn says he’s reminding his customers to keep an eye on the economy. “Over the last few years, the ramp up in ethanol has occurred as the economy has been plummeting,” he says. “As the economy improves, more goods will be shipped via rail and truck, so you could see turn-times increasing, more congestion on the rail and more fuel to haul by truck.”

Author: Kris Bevill
Associate Editor, Ethanol Producer Magazine