Associated Press
10-02-07
Ethanol Construction Slows As Glut Looms
A Matter of Timing, Ethanol Construction Slows
NEW YORK (Associated Press) Eager to build a plant that would turn corn into
108 million gallons of ethanol a year, Chet Perry got all of his ducks in a row.
His ITECH Refining and Marketing Co. got a site near Princeton in north-central
Illinois labeled an enterprise zone to accommodate his plant. After months of
waiting, it finally snagged the crucial state air quality permit in July.
If only the timing was better.
Like many other would-be ethanol plants in the Corn Belt, Perry's venture is
stalled at least for now, thanks to soaring construction costs compounded by high
corn prices that have swelled operational expenses. The sliding price of ethanol
sure hasn't helped.
When it comes to moving dirt for new ethanol sites, "almost everyone is on hold,"
Perry said, still hoping to break ground early next year. "We definitely are going
ahead with the project. It's a matter of timing."
Similar stories are playing out elsewhere.
In Iowa, the nation's top corn producer, there have been only two new plant
construction starts this year _ the lowest number at this time of year since at
least 1999, said Monte Shaw of the Iowa Renewable Fuels Association.
"There's no doubt the pace of new construction starts has slowed dramatically,"
Shaw said.
In Illinois, the state environmental department has doled out 38 construction
permits on 53 applications it received since the beginning of last year, the
agency's Richard Breckenridge said. But just five of the plants are under
construction, the Renewable Fuels Association trade group says.
On Monday, VeraSun Energy Corp. _ one of the nation's largest ethanol
producers _ said it would halt construction of a 110 million-gallon-per-year
biorefinery in Indiana. The South Dakota-based company said it might resume
construction next year if market conditions improve.
"Given the abrupt change in market conditions that have seen ethanol prices
drop nearly 50 cents per gallon in the last 60 days, it is prudent for us to adjust
our current pace of expansion," said Danny Herron, VeraSun's chief financial
officer.
The price of ethanol has slid by 30 percent in recent months and now stands
about $1.60 on the Chicago Board of Trade. At the same time, the price of corn _
ethanol's chief ingredient _ remains high, squeezing margins.
And prospects of a glut loom: U.S. ethanol demand now is less than seven billion
gallons, though the nation's ethanol capacity by next year could reach 12.4 billion
gallons, according to Eitan Bernstein, an energy analyst at Virginia-based
Friedman, Billings, Ramsey and Co. That imbalance will hold down prices
possibly through 2008, he said.
The slowdown isn't likely to affect buildouts already under way and those with
financing in place. But it raises questions of whether the fuel additive touted by
President Bush and lawmakers as way to cut the nation's dependence on foreign
crude has been overhyped.
"For such a young industry, people sure want to write its obituary all the time,"
Shaw said. "I just find that humorous because it's completely nonsensical if you
look at the economics of the industry, if you look at the public policy and the
socio-economic concerns that are driving the industry. It's definitely headed
forward full throttle."
Others offer grimmer assessments.
"I think this is a painful, difficult period for the ethanol sector. It doesn't mean a
death knell for ethanol at all," said Neil Harl, an Iowa State University
economics professor who lectures on ethanol and is a consultant for
producers. "I don't think the ethanol boom will ever be viewed quite the same
way."
Increasing scrutiny of ethanol, he said, "is certainly going to lead to a chilling
effect on new investment," including construction of new distilleries that create
the fuel additive from mashed and fermented grain.
Across the country, the number of ethanol plants has ballooned to 129 today, up
nearly 50 from 2005, the Renewable Fuels Association says.
U.S. ethanol production has swelled; the RFA says 15 new refineries came
online last year and, combined with other expansions, added more than a billion
gallons of production capacity. More than 6 billion gallons of additional capacity
could come online by 2009, the trade group has said.
But Perry, whose company has had its hands in ethanol since the 1980s, said
the climate for building new plants began souring last fall, when sometimes
breathless attention to what many considered ethanol's booming renaissance
sent the price of corn spiking. Early this week, ethanol plants were paying about
$3.30 per bushel of corn, down from last year's even loftier levels.
Construction costs got "out of whack" starting in the summer of last year, with
plants that could be erected for $1.36 to $1.41 per gallon of ethanol lately costing
$2.10 per production gallon, Perry said.
Combine that with the sliding price of ethanol, and any possible cash flow
vaporizes, he said.
Initially put at $136 million last summer, the price tag of Perry's project swelled to
nearly $200 million until it recently began to drop.
Partly to blame was the cost of nickel and steel _ key ingredients in stainless
steel, a component needed for ethanol production. They shot up because of
demand from China, inflating Perry's budget for the product by $39 million. And
the cost of dryers used to rip moisture from distiller grains _ a byproduct of
making ethanol, used to feed livestock _ has doubled from the $1 million to $1.2
million the equipment was fetching last year.
Construction of at least nine ethanol plants in Nebraska will continue and by the
end of next year should double the state's capacity to about 2.25 billion gallons,
said Todd Sneller of the Nebraska Ethanol Board.
But citing "uncertainty of the ethanol marketplace," Sneller said that moving the
45 other Nebraska ethanol projects beyond the blueprint stage will be achieved
by those companies with experience in a "very cyclical" industry.
"We've seen this ebb and flow many times in the past, and in a large part it's
based on public policy at the state or national level," he said.
Because of federal mandates requiring the use of ethanol _ and prospects that
Congress might significantly boost those demands _ "it's not the end of ethanol,"
said Bernstein, the energy analyst.
But "I think it's the beginning of rationalization. In 2006, the economics looked so
great that everyone jumped in to ethanol, and unfortunately that's what sort of
created this situation," he said.
Back in Iowa, Shaw thinks the industry will weather this lull just fine, especially if
crude oil prices remain high.
"I don't have a crystal ball, but at some point in the future we'll probably look back
to this time frame and say, `Gee, why didn't we start building more plants?'" he
said. "Sometimes the pendulum swings one way and sometimes it swings the
other, but overall those market forces will lead you in the right direction."
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