Ethanol Recovering From Four-Year Low Thanks to Exports

Source: By Mario Parker, Bloomberg • Posted: Friday, December 5, 2014

The U.S. is adding ethanol to the list of fuels it dominates in world markets.

Exports of the additive derived from corn rose 31 percent this year to the highest level since 2011, meeting demand from South Korea to Persian Gulf oil producers. The growth in sales follows a tripling of gasoline and diesel exports since 2009.

While the shale-oil boom created a stream of refined products flowing overseas, the ethanol surge is being driven by record crops. The U.S. is producing about 66 million metric tons more corn than a decade ago, almost as much as the rest of the world will export this year. Global demand for U.S. ethanol is helping ward off a glut after the government eased obligations to blend the fuel with gasoline.

“They have to have an export market,” Wallace Tyner, an agricultural economist at Purdue University in West LafayetteIndiana, said by phone yesterday. “We’ve got excess capacity. It’s there, it’s ready, it’s reasonably priced.”

Denatured ethanol on the Chicago Board of Trade increased 18 percent since Oct. 3, making it the best-performing fuel over the period. Crude oil by contrast slipped into a bear market, dropping 38 percent since June and spurring a 43 percent slump in gasoline futures.

With 14.9 billion gallons of ethanol capacity and no more than a 10 percent share of the 135 billion-gallon U.S. gasoline market, producers have no choice but to export, Tyner said.

Ethanol fell 1.2 percent to 1.75 a gallon at 12:22 p.m. Singapore time. Brent crude lost 42 cents to $69.22 a barrel.

Fuel Exports

The U.S. overtook Russia in 2010 to become the dominant exporter of petroleum products, shipping 2.31 million barrels a day, government data show. Overseas sales reached a record 4.38 million barrels a day a year ago. Crude oil exports, largely banned in the U.S., are dominated by Saudi Arabia and Russia.

The country’s biofuels mandate is in limbo after the government said last month it would delay setting this year’s consumption quotas, something that hasn’t happened since the Renewable Fuels Standard was enacted in 2005.

The Environmental Protection Agency proposed reducing the amount of ethanol to be blended with gasoline by as much as 9 percent to 13.1 billion gallons in November 2013. It was a concession to oil refiners, who argued that the rules should take account of weaker overall demand.

That proposal, aligning consumption to about 10 percent of the gasoline market, was met with “significant comment and controversy,” the EPA said in a Nov. 21 statement, citing it as one of the reasons for the delay in setting new targets.

Trade Delegations

The ethanol industry has been searching for new sources of growth. Trade delegations have traveled to PeruPanama, Japan and South Korea and trips are planned to Thailand, Malaysiaand the Philippines this month, according to the Renewable Fuels Association, a Washington-based trade group. A Commerce Department-sponsored trade mission to northern Brazil last year won sales contracts valued at $29 million, the RFA says.

Archer-Daniels-Midland Co. (ADM)Green Plains Renewable Energy Inc. (GPRE) and Valero Energy Corp. (VLO), three of the four largest U.S. ethanol companies, have highlighted exports as a source of growth. Green Plains has foreign sales booked through the third quarter of 2015, which is unusual, Chief Executive Officer Todd Becker said on an Oct. 29 conference call.

U.S. ethanol exports may average 950 million gallons to 1 billion gallons from 2015 to 2020, more than double 2010 levels, New York-based Citigroup Inc. estimates.

“Part of that is due to competitive U.S. prices,” Aakash Doshi, an analyst at Citigroup in New York, said in a Nov. 21 phone interview. “That’s the one saving grace for the industry.”

Fermenting Starch

U.S. ethanol is made by fermenting starch from corn in distilleries located mostly in the grain-rich Midwest. Back-to-back record harvests gave producers an unprecedented supply.

Brazil, the second-biggest producer, is now less competitive because of increased manufacturing costs, according to Alejandro Zamorano Cadavid, a biofuels analyst at Bloomberg Intelligence in New York. The country makes ethanol from sugarcane and yields have dropped 6.1 percent since 2010 as investment in the fields fell, data compiled by Bloomberg show.

With less competition from its biggest biofuel rival, the U.S. has sold to countries flush with oil. Customers include OPEC members Saudi ArabiaNigeria and the United Arab Emirates, according to data from the U.S. Energy Department.

In September, ethanol exports totaled 1.35 million barrels, or about 2 percent of the 75.5 million barrels of gasoline and diesel the U.S. shipped abroad, government data show.

Oil Products

Propelled by the shale boom in North Dakota’s Bakken and other regions, the U.S. became a net exporter of petroleum products in 2011 for the first time since 1949, according to the Energy Information Administration.

That’s also made the U.S. less dependent on foreign supplies. Imports of finished crude products were the lowest last year in records going back to 1981, EIA data show.

As more countries institute pollution policies, the U.S. could expand its list of ethanol customers, said Darrel Good, professor emeritus in agricultural and consumer economics at the University of Illinois at Urbana-Champaign.

The U.S. and China announced a pact on Nov. 12 to reduce emissions from the world’s two-biggest polluters. China said its total carbon dioxide emissions would peak by 2030.

A year ago, China made its biggest ever purchase of U.S.- made ethanol, which is added to gasoline to boost octane and reduce emissions, when it bought 84,000 barrels. In August, the country purchased another 79,000 barrels, EIA data show.

“If we can’t sell it here, we’ll sell it someplace,” Bob Dinneen, president and CEO of the Renewable Fuels Association said by phone Nov. 25. “We’re going to focus overseas.”