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Stalling growth In bio-ethanol demand

London, 4 May 2012

After a decade of expansion, bio-ethanol usage fell in 2011. This comes despite a rise in crude oil prices that should make renewable alternatives competitive: So why the fall? The reasons are both economic and rational according to Czarnikow.

Demand is led by a mix of mandates and market incentives. Mandates can ensure usage and encourage development. In contrast, markets are more short term in the way they allocate resource via price, but more flexible to change. It is this flexibility that is behind the fall in 2011 usage. But it could also drive up demand in 2012.

Corn vs Cane

As food prices outpace energy prices, cane has been reallocated to food production - a trend seen in Brazil since 2009. This has pushed up the price of bio-ethanol, and dampened discretionary use. A smaller cane crop also led to an ethanol shortfall in 2011, forcing Brazil to import U.S. supplies.

This marks the biggest shift in the market: Brazil’s shrinking cane harvests, and cheaper U.S. corn ethanol, are transforming the trade dynamic between the two countries.

Corn ethanol is now the cheapest bio-ethanol on the market. However, U.S. renewable energy policy is also encouraging second-generation biofuels derived from non-food sources. California is also trying to implement policy to incentivise the use of cane-based ethanol, because it emits less carbon than corn.

The slower than called for emergence of cellulosic ethanol production method may also boost demand for Brazilian cane ethanol; U.S. 2012 production is expected to achieve just 2% of the country’s original target (1.9Bln litres).

The Crude Price Conundrum

The change in crude prices has impacted on ethanol, but not as might be expected. Over the long-term, higher crude prices make biofuels more viable. Short-term, the reverse has happened, as rising crude has reduced overall fuel consumption in the U.S, and hence consumption of ethanol via the country’s mandated fuel mix (“E10”, or 10% ethanol). That mandated mix means there is no additional scope for growth.

Changing the blend ratio for U.S. fuel could change this. But changing the mix may also impact on vehicle warranties. Not to mention the complication of having to add new pumps at petrol stations.

A More Promising Future

Overall, the potential for bio-fuels continues to grow, as price trends and policy combine to encourage growth in the market. Short-term, in the U.S., price dynamics have outpaced technology, making it harder for the world’s biggest market to absorb additional bio-ethanol. But for U.S. exporters, Brazil remains a promising market, amid falling cane production and a shortage of domestic ethanol. Exporters may also find new markets in the Middle East, and other gasoline-deficient regions.

Toby Cohen, director at Czarnikow, said: “The growth in bio-ethanol usage over the past decade has been huge. Despite short-term headwinds, the trend is set to continue with new technologies playing an increasing role”.

Henry Toller, analyst at Czarnikow, said: “Despite the fall in bio-ethanol usage in 2011, the potential for bio-fuels continues to grow as price trends and policy combine to encourage growth in the market”.

Ends --


Czarnikow Group is a global commodity house with a highly regarded analytical team and activities from physical trading to corporate finance. The company did physical business in over 90 different countries last year with a turnover in excess of $3bn in physical transactions.