Ethanol plants face closing if EPA cuts target

Source: Lincoln Journal Star • Posted: Monday, December 9, 2013

U.S. ethanol companies, producing at the fastest pace in 21 months, expect mill closings and cuts in production since President Obama’s administration proposed reducing consumption targets for the first time.

The Environmental Protection Agency proposed last month cutting the amount of ethanol that refiners are required to blend with gasoline by 9.7 percent next year from the targets set in 2007. Production of the corn-based fuel has rebounded across the nation’s 210 plants as crop supplies recovered from last year’s drought, the worst since the 1930s.

Ethanol plants, concentrated in the grain-rich Midwest, face shutdowns less than seven years after the start of the law designed to help the U.S. wean itself off foreign energy. Advances in shale drilling mean the U.S. is now producing the most oil in a quarter century, at a time when fuel consumption is weaker than expected. Gasoline demand next year will be 13 percent less than projected in 2007, Citigroup Inc. says.

“You’ll probably have in my estimate 10 or 20 plants close down,” said Mark Marquis, president of Marquis Energy LLC, which operates a 110 million-gallon-a-year distillery in Hennepin, Ill. “It will be the weaker plants that are on the margin. Those are folks who invested and now the government’s moved the goalpost.”

The proposed cutback in conventional ethanol as proposed by EPA is 1.39 billion gallons. That is the equivalent of production from the 20 plants Marquis mentioned, said Todd Sneller, administrator of the Nebraska Ethanol Board.

“If there is not a domestic market it will be tough to find a home for that volume,” Sneller said in an email last week. “It is inevitable that price depression follows, margins go from nominal to break-even or worse and plants stop production as they did in late 2012 and early 2013. Several plants are evaluating ethanol exports but trade agreements, competition from Brazil, transportation and other factors make exports an uncertain strategy.”

EPA has effectively undermined a long-term policy goal intended by Congress passing the Renewable Fuel Standards: to move more renewable biofuels volume into the US gasoline pool, Sneller said. “The oil industry is having none of that and you can see the mountain of dough being spent to repeal the required volumes.”

There are 24 active ethanol production plants in Nebraska, according to the Nebraska Ethanol Board, with a combined production capacity of over 2 billion gallons of ethanol each year, and requiring more than 700 million bushels of grain in the process.

These ethanol plants represent more than $5 billion in capital investment in the state and provide direct employment for some 1,200 Nebraskans, the board says.

“A cut in the mandate means plants will be shut down, there’ll be layoffs,” said Christopher Standlee, a St. Louis spokesman for Abengoa SA, which operates six bioethanol mills in the U.S., including those in York and Ravenna. “The remaining plants will be less profitable and more reluctant to keep investing.” The Ravenna and York plants suspended production early this year, because of the market conditions — the high price of corn — but they resumed production later.

Despite the predictions, ethanol prices climbed for six days through Thursday as demand from Asia to North America supported prices in the futures and cash markets

Exports to the Philippines jumped to 691,000 barrels this year through September, from none last year, while sales to Canada, the U.S.’s largest buyer, rose 12 percent in the same period, data from the Energy Information Administration showed. Stockpiles are down 22 percent from a year earlier.

“The export market has been very strong,” Chris Wilson, an analyst at Atten Babler Risk Management LLC in Galena, Ill., told Bloomberg News. “And you also have tight inventories that are being supportive at this moment.”

Ethanol exports jumped 13 percent to 43,000 barrels a day in September, the highest level since March, EIA data show.

January-delivery denatured ethanol gained 2.4 cents to settle at $1.885 a gallon on the Chicago Board of Trade Thursday.

U.S. ethanol inventories were 15.1 million barrels on Nov. 29, according to the EIA. Production has exceeded 900,000 barrels a day for six weeks in a row after not reaching that level for more than a year.

Corn-based Renewable Identification Numbers, or RINs — the currency of the ethanol market — gained 5 cents to 35 cents a gallon Thursday. RINs are certificates attached to each gallon of biofuels to prove refiners are using as much ethanol as the law requires. They can also be traded among companies.

In cash markets, ethanol rose 35 cents to $3.45 a gallon in New York and 2.5 cents to $2.625 a gallon on the West Coast, according to data compiled by Bloomberg. The price fell 5.5 cents to $2.55 in Chicago and 4.5 cents to $2.65 on the Gulf Coast.

The government’s proposed target for next year, announced Nov. 15, is 12 percent lower than the 14.8 billion gallons the industry has the capacity to produce, according to data from the Renewable Fuels Association. An average ethanol plant employs 40 to 50 people, the lobbying organization says.

Much higher prices for RINS than those that prevail now gave refiners from Valero Energy Corp., which also produces ethanol in Nebraska, to Royal Dutch Shell ammunition to argue for a reduction or elimination of the target known as the Renewable Fuels Standard.

RINs rose more than 20-fold to a record $1.43 on July 17, from 7 cents at the start of the year. Valero estimates that compliance will cost it as much as $600 million this year, more than double the $250 million spent in 2012.

Petroleum industry advocates such as the American Petroleum Institute and the American Fuel and Petrochemical Manufacturers contend that the Renewable Fuel Standard targets are unworkable.

Until the EPA proposed to cut back, the escalating volumes of ethanol required to be mixed in gasoline, while demand for gasoline is falling, was pressuring refiners to sell a mixture of the fuel that exceeds 10 percent, a phenomenon referred to as breaching the blend wall. Lots of motorists don’t want to use 10 percent ethanol, much less E15, and the oil industry pressured EPA to reduce the amount of ethanol required to be used.

The U.S. will consume 133.2 billion gallons of gasoline next year, the EIA says, compared with its forecast in 2007 of 153.9 billion gallons.

Ethanol companies increased output by 27 percent to 927,000 barrels a day in the week ended Nov. 22, matching the highest level this year, EIA data show.

Christina McGlone, a strategist at Deutsche Bank AG, said some ethanol plant capacity must be idled, or exports have to pick up the slack.

Even if the proposal to cut back becomes law, producers still would have 13 billion gallons of guaranteed demand and they’re seeking more customers overseas, said Bob Dinneen, president and chief executive officer of the Renewable Fuels Association.

“The challenge for our industry will be to find export markets,” Dinneen said. “Or plants shut down.”