Motorists warm to ethanol as oil prices soar
By Reese Ewing - Reuters
Tue Sep 6, 1:35 PM ET
Motorists around the world are filling their cars with more biofuels, such as ethanol made from sugar cane or corn, in the hunt for cheaper alternatives to stratospheric gasoline prices.
Even before the recent surge in crude prices, countries in the Americas, Europe, Asia and Africa were integrating biofuels into national energy plans. France and China said in the past week they would step up the adoption of renewable energies.
"The ethanol market looks extremely bright," said Peter Nessler, vice-president of renewable fuels with FC Stone in West Des Moines, Iowa, in the U.S. corn belt.
In the latest U.S. ethanol production data, output in the month of June set a record of 249,000 barrels a day and demand was growing even faster, hitting 277,000 barrels a day.
Ethanol production as it is practiced in the United States -- the world's biggest fuel market -- and Europe using grain or sugarbeet, only began to become economically competitive with gasoline when world oil prices rose above $40 a barrel.
On Tuesday at the NYMEX futures exchange in New York, crude for October delivery was trading at nearly $66, down from last week's peak close to $71. Expects say the market could run to new highs should supply disruptions or an unexpected rise in demand emerge.
In Brazil, the No.1 ethanol consumer and producer, demand is skyrocketing but not due to rising world oil prices, although gas prices are twice those of ethanol at the pump.
Brazil's state-run oil firm Petrobras is holding down local gasoline prices. The explosion in demand has come from the development of flex-fuel car engines which can run on gasoline, ethanol or any blend, whichever is cheapest.
"In recent years, about 45 percent of the cane crop went to ethanol, the rest to sugar. This year, more than 51 percent is going to ethanol because of demand from flex-fuel cars," ethanol manager at trader Coimex, Nelson Ostanello said.
REMOVING KINKS
Ethanol fuel, also used as a gasoline additive to reduce pollution, a substitute for lead and sulfur and to extend gasoline stocks, is just emerging as a commodity on the global market and kinks in supply and demand have yet to play out.
Ethanol futures contracts that debuted in March at the Chicago Board of Trade have failed to find a strong following. And experts can only speculate what even a modest uptick in world demand for ethanol would do to other commodity markets.
When oil topped $70 a barrel last week, sugar traders in New York and London said it set off speculative fund buying in the belief that sugar prices would rise as more of the world's No.1 cane crop is diverted to make ethanol rather than sugar.
"Growth in Brazil's sugar market will slow. Ethanol demand is there, untapped by Brazil's cane industry that is trying to develop it," said Tarcilo Rodrigues, director of sugar and ethanol consultants and brokers Bioagencia.
"That said, Brazil commands the largest share of the world sugar market, which is mature. Mills are not going to let sugar demand go unmet. That would cause prices to rise too much and bring other producers into the market," he said.
Perhaps the largest potential ethanol market in the near term is in the United States, where President George W. Bush recently signed an energy bill that requires more renewable fuels, such as ethanol, in gasoline.
About 11 percent of U.S. corn in both 2003 and 2004 flowed into ethanol plants, according to the U.S. Department of Agriculture. That was expected to climb to 14.5 percent this year, even before gas prices topped $3 a gallon.
"There's no doubt that as ethanol use and ethanol production continues to grow that's going to put an upward pressure on corn prices," said Monte Shaw, spokesman for the Renewable Fuels Association in Washington, D.C.
Shipments of Brazilian ethanol to the United States through Caribbean countries such as Jamaica and El Salvador, which circumvents a 50 percent tariff on direct U.S. imports, is now again in the money.
"Direct exports may soon be feasible at this rate, despite the tariff," Datagro President Plinio Nastari said.
Obstacles remain to ethanol becoming a world commodity.
Japan opened voluntary blending of 3 percent ethanol in the world's No.2 gasoline market in 2003 but it is barely used. And it is unlikely to make it mandatory soon because Brazil is the only large exporter and it is concerned about supply. Japan's capacity to produce ethanol itself is limited and expensive.
Oil majors remain hesitant about ethanol from food crops which are vulnerable to drought and disease, adding volatility to the price of their products. Firms are developing cellulose based ethanol but it's not widely used yet.
"If we're going to get involved in serious biofuels, then the government is going to have to take some action to overcome what is clearly a very strong resistance by the oil companies," Ian Ballantyne, general manager of Australia's grower organization Canegrowers, said.
(Additional reporting by Chris Stebbins and Lisa Haarlander in Chicago; Zachary Howard in New York; Chikafumi Hodo in Tokyo; Michael Byrnes in Sydney; Hari Ramachandran in New Delhi; Muriel Boselli in Paris)
Ethanol in the News - 09.06.05
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