US Ethanol Industry Looks To Possible Future As Exporter

Skyrocketing sugar costs could have a sweet side effect for the U.S. ethanol industry.

Brazil, faced with tightening supplies of its sugarcane-based ethanol as growers there find better profits in sugar, said last month it is considering importing U.S., corn-based ethanol.

While there are limits on how much ethanol would be available for export from the U.S. and how much Brazil could import, as well as uncertainty about how long the opportunity might last, the news offers the U.S. ethanol industry a new way to look at demand.

"It's a new, fundamental twist that I don't think anybody really would have ever anticipated," said Jason Ward, a corn and ethanol analyst with Northstar Commodity.

The news on Brazil is helping feed the notion that the U.S. ethanol industry, which has been prone to booms and busts but has plenty of incentives and a mandate from the government to increase production, could serve more than just the domestic market. There's even talk that China could be a potential customer as it rapidly increases its use of the alternative fuel.

Talk of significant ethanol exports was non-existent until sugar prices started getting "ridiculous" about six months ago, Ward said. A drought-stricken sugarcane crop in India, along with crop problems in Brazil, have sent prices soaring, with raw sugar futures on ICE Futures U.S. trading near three-decade highs in recent months.

As a result, mills are finding sugar production more profitable than ethanol. The ethanol shortfall is driving up the costs of the renewable fuel, to the point that Brazilian motorists are finding it more economical to fill up with regular gasoline rather than ethanol.

It is unclear how long Brazil might be in the market for U.S. ethanol. Latin America's largest country still sees its future as a major producer of the alternative fuel, as evidenced by news Monday that Brazilian sugar and ethanol group Cosan Industria e Comercio SA (CSAN3.BR) and the local unit of Royal Dutch Shell PLC (RDSA.LN, RDSB.LN) are teaming up on a multibillion-dollar joint venture to produce and sell ethanol. Brazil is on of the world's biggest markets for biofuel, with all new cars equipped with flex-fuel engines that can run on any mix of ethanol and gasoline.

At the moment, though, even with a 20% import tariff, shipping and logistics costs, U.S. ethanol is still cheaper to import to northeastern Brazilian ports than the cost of domestic ethanol, analysts said.

Tarcilo Rodrigues, director of Brazilian sugar-cane milling group Bioagencia, said he believes imports would be economically feasible. However, while there is a lot of talk now about U.S. imports, "they don't seem to be arriving yet," Rodrigues said.

Nathan Schock, spokesman for POET, the largest U.S. ethanol producer, said ethanol will go "wherever it receives the highest value after taking everything into consideration."

There are questions, however, about how much ethanol the U.S. can ship abroad. The U.S. is still using every gallon of ethanol it produces as a fuel additive.

The federal renewable fuels standard called for 10.5 million gallons of ethanol to be blended in 2009, a milestone it reached by the end of October, and 12 million in 2010. Matt Hartwig, spokesman for the U.S. Renewable Fuels Association, said current capacity is around 12 million gallons.

Hartwig and others say that capacity could be quickly increased should a viable export market emerge, as many of the plants built during the ethanol boom of 2006 and shuttered during the subsequent bust are brought back online.

"Let's face it, we're going to need another market right now, especially with all the plants that we've built, and then pulled back," said Phil Flynn, energy analyst with PFG Best.

The idea that China could become a viable market has generated market chatter recently, according to Northstar's Ward. Last month the Chinese government cut its ethanol import tariff to 5% from 30%, and it has also said it plans to increase ethanol usage fivefold during the next 10 years, which would need to come from imports.

Industry officials also say Europe, which has relied in part on Brazil to meet its ethanol demand, could become a U.S. customer.

Operating margins currently are working in the U.S. industry's favor, thanks in part to a steep slide in corn prices over the past month. That pressure on the corn market is due to huge estimates of the 2009 crop and expectations farmers will plant even more in 2010--which would leave plenty of corn for ethanol plants.

source: nasdaq