U.S. Producers Come To The Rescue As China Begins To Import Ethanol

Source: By Sal Gilbertie, Forbes • Posted: Thursday, January 28, 2021

Planned ethanol mandates have mostly been reduced to “suggestions” across China’s provinces, but increasing ethanol demand still can’t be met by Chinese domestic producers. U.S. ethanol exports to China will fill the gap.

Since 2017 Beijing has had big plans to mandate a U.S. style 10% ethanol blend into its gasoline pool; the original target date was 2020. Domestic logistics, weather, the trade war, and COVID all got in the way of an actual mandate implementation, but today demand for ethanol continues to grow in lock-step with China’s massive gasoline powered motor pool, the world’s largest.

By 2017, years of government support to corn farmers resulted in a surfeit of corn inventories across China, and Chinese authorities needed a plan to deal with the situation. Corn is used to make ethanol, and ethanol blended into gasoline helps reduce the need for fuel imports. Additionally, the burnable fuel (ethanol) created from corn and other agricultural products can be net carbon neutral, depending upon how it’s grown, which helps combat environmental pollution. Reduce reliance on energy imports, support farmers by finding a use for their crop, and clean up the air and environment – all goals that can be achieved by adding ethanol into a gasoline pool; it was an easy call for China’s leadership to adopt an ethanol policy.

But it takes time (1-2 years) to plan, design, and build ethanol plants, blending facilities, and distribution infrastructure, which is why Chinese authorities originally decided that ethanol blending mandates wouldn’t be imposed until 2020. The timetable seemed reasonable, but several things got in the way of China’s planned 2020 ethanol mandate rollout.

For one thing, China began to shift its agricultural incentives away from the production of corn, which was in surplus in 2017, toward other much needed food commodities like soybeans, rice and wheat. Predictably, this tightened China’s corn supplies, and when weather problems this year turned the supply/demand tables completely upside down for corn in China – domestic corn prices surged, supplies dwindled, and imports skyrocketed to record levels. Needless to say, it isn’t very economical in China right now to produce ethanol from corn.

Next, China couldn’t build ethanol plants and the infrastructure needed to distribute ethanol quite as fast as it had hoped; private analysts believe China has managed to build about 1.2 billion gallons per year of ethanol production capacity, give or take a few hundred million gallons. Regardless of the actual number, China still can’t produce all the ethanol it needs, leaving the United States, the world’s largest producer and exporter of ethanol, as the obvious source to fill the gap. But for much of 2018, all of 2019, and some of 2020, the trade war kept Chinese importers at bay.

When the COVID pandemic subdued automobile traffic around the globe, China was given a temporary reprieve from its ethanol needs, as was the United States. Ethanol usage plummeted, and U.S. ethanol prices fell precipitously. Profit margins collapsed for most U.S. ethanol producers and many plants closed, at least temporarily. U.S. ethanol prices still remain at depressed levels, relatively speaking.

Chinese traders are notoriously adept at stepping into markets at just the right time, and they don’t take small positions when they decide to act. China’s economic recovery is in full swing, gasoline usage is on the rise, and ethanol demand is undoubtedly rising too. It’s little wonder that ADM revealed in its most recent earnings call that China has been buying ethanol in large volumes from the U.S.

It will take some time for the actual amounts of ethanol purchased by China to be reported by official U.S. government sources, which will give some clarity to the situation. But markets will react accordingly; ethanol producers should benefit from the increased demand, and perhaps higher prices, that China’s ethanol purchases will bring.