NEW YORK -- Ethanol's frenzied growth over the past year is coming to a halt, according to The Wall Street Journalat least for now. The price of ethanol has fallen by 30% over the past few months as a glut of the corn-based fuel looms, while the price of ethanol's primary component, corn, has risen. That is squeezing ethanol companies' profits and pushing some ethanol plants to the brink of bankruptcy.
Financing for new ethanol plants is drying up in many areas, said the report, and plans to build are being delayed or canceled across the Midwest, as [image-nocss] investors increasingly decide that only the most-efficient ethanol plants are worth their money.
Some ethanol companies are "under deathwatch" now, Chris Groobey, a partner in the project-finance practice of law firm Baker & McKenzie, which has worked with lenders and private-equity funds involved with ethanol, told the newspaper.
That could be fine for big efficient players like Archer-Daniels-Midland Co. (ADM), one of the nation's biggest ethanol producers by output. ADM and other big ethanol companies probably can ride out the storm, even though they might have to scale back on their production, the report said. Smaller players may not fare as well, and may be snapped up by bigger survivors.
The downturn exposes the industry's reliance on political support in Washington, which has offered tax credits to refiners to blend ethanol with gasoline, as well as tariffs on imported ethanol and other measures. Some lawmakers and the Bush administration are pushing corn-based ethanol as a complement and substitute for gasoline amid tight and unpredictable global oil markets.
Ethanol companies are seeking increases in pending energy legislation in the amount of ethanol refiners are required to use. At the same time, food, cattle, poultry and other interests are quietly nudging lawmakers to pull back on subsidies that encourage ethanol production and have indirectly led to increases in food costs due to the increase in the price of corn and other grains.
"It's probably going to get worse before it gets better," Brian Bolster, a vice president in the investment-banking division at Goldman Sachs Group Inc., which has invested in at least one ethanol plant, told the Journal. He nevertheless remains bullish over the long term for the industry, amid expectations of increasing government support, infrastructure improvements and other factors.
Pure-play ethanol companies like VeraSun Energy Corp. are trying to adjust to the new market dynamics. Shares of VeraSun, Brookings, S.D., which traded at nearly $27 a share in November, are now near their 52-week low of $10.41 reached last week, trading at $11 each in New York Stock Exchange 4 p.m. composite trading, said the report. VeraSun has said it is increasing production and making other efforts to achieve greater heft and become more economical.
Fueled by government mandates and calls from President Bush that ethanol could help wean Americans off foreign sources of fuel, output of the corn-based fuel hit highs in the past year. U.S. ethanol production rose to 4.8 billion gallons last year, up from 1.7 billion gallons in 2001, according to the Renewable Fuels Association. The number of ethanol plants increased to 119, up from 56 in 2001. And there are 86 more plants under construction.
But ethanol has gotten snagged by its own success, the report said. The price of ethanol has dropped to about $1.50 a gallon, down from about $2.50 at the end of last year, according to the Oil Price Information Service. That is largely because too much ethanol is being produced. Part of the problem appears to be that oil companies aren't able to blend ethanol into gasoline as quickly as ethanol is produced.
By next year, U.S. ethanol capacity is expected to reach about 12 billion gallons, according to Eitan Bernstein, an energy analyst at Friedman, Billings, Ramsey Group Inc., Arlington, Va. Currently, demand is just less than seven billion gallons.
Ethanol might be faring better if the transportation infrastructure was more amenable to the fuel. But the pipelines in place aren't ideal for transporting ethanol because the fuel tends to be corrosive to them. Also, the tanks used to store ethanol are in short supply.
Meanwhile, ethanol producers say the price to build new plants is rising. A new ethanol plant costs about $2.20 per gallon of annual capacity, said Bernstein, up from $1.50 a year ago.
"What we saw in the last few years was a number of other lenders or potential investors who maybe got a little bit more enthused than we thought was warranted," Jack Cassidy, a vice president at CoBank, a Greenwood, Colo., rural lender, told the paper.
Panda Ethanol Inc., a Dallas energy company that said last year it would build an ethanol plant in Hereford, Texas, that would use cow manure to power the plant, is slashing expenses in an effort to ride through the "great deal of uncertainty in the marketplace," the company said in August.
Dallas-based Earth Biofuels Inc. said in its most recent filing with the Securities & Exchange Commission (SEC) that its losses and its "limited financial resources" raise doubt about its ability to continue as a going concern.
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