NEW YORK -- Following yesterday's report from The Wall Street Journal that the frenzied growth of ethanol may have come to an endat least temporarilymore than 40% of the respondents to a Kraft/CSP Daily News poll said the ethanol boom will go bust "relatively soon." A subsequent report from CNNMoney, however, said thereports of an ethanol bust may be greatly exaggerated.
At presstime, more than 38% of the approximately 160 respondents to the question Will the ethanol boom go bust? said not for some time, while about 21% said no.
Ethanol has seen its price tumble in the last few months; spot prices for a gallon of ethanol in Chicago went from about $2.30 five months ago to about $1.50 today, according to numbers from the Oil Price Information Service cited by CNNMoney. In 2006, ethanol briefly sold for more than $4 a gallon.
The price of corn, the raw material for most ethanol produced in the United States, has nearly doubled since the start of 2006. This one-two punch has hit shares in ethanol companiesVerasun has lost about half its value over the last year, as has Pacific Ethanol, said CNNMoney.
The drop in ethanol's price has been attributed to too much product on the market, the result of overeager investors pouring money into the sector and new plants springing up across the Midwest. But thanks to ongoing investments in bringing the product to market, a renewable energy bill that calls for greatly expanding ethanol's use and a base price that is now about 50 cents less than gasoline, experts say ethanol is unlikely to remain in oversupply for long, said the report.
"It's cheap, and you can cheapen the price of gasoline," Tom Kloza, an analyst at the Oil Price Information Service, told CNNMoney. "Everybody is trying to get the logistics worked out so they can have ethanol in their gasoline by 2008."
By everybody, Kloza means the gas stations, most of which are independently owned and would make more money on already thin profit margins by using the cheaper ethanol as a blending agent in gasoline, according to the report. Normal cars can run on a blend of 90% gasoline and 10% ethanol with no modifications.
Kloza said using that blend would shave 4 to 10 cents off the price of a gallon of gasoline.
But transporting ethanol out of the Midwest to markets on the East and West Coast is a challenge, said the report, primarily because ethanol is corrosive and absorbs water and, therefore, can't be shipped in normal gasoline pipelines. Problems transporting ethanol have been cited as one reason for the buildup in supply.
"I've always seen this as one of the big issues," J. Bryant Evans, a portfolio manager at Cozad Asset Management, Champaign, Ill., told the news outlet. "It's going to take a couple of years for the infrastructure to catch up."
With regular pipelines out of the question, most ethanol is currently transported by rail. Both railroads, like Burlington Northern Santa Fe, and companies that build tanker cars like Trinity Industries, said they have seen an a sizable increase in infrastructure investment. "It has been a major part of our orders for the last few years," James Perry, an executive at Trinity, told the website. He noted that the company had converted two facilities from making box cars to making tanker cars in the last year.
A spokesperson for Burlington Northern said the railroad has been transporting nearly 20% more ethanol every year for the last 10 years. "It's definitely a growth area for us," she told the website.
While the long-term prospects for well established companies are good, Evans said some of the smaller ethanol companies may not last the couple of years it will take for the infrastructure to get built. He also said ethanol stocks in general could fall substantially more over the next 12 months before bottoming out. But in the long run, he expects a healthy industry, especially for big ethanol players like Verasun or, even better, diversified large players like Archer Daniels Midland (ADM). "I see it as a bump in the road," he said. 'It's fairly typical when any new product gets ramped up."
The ethanol industry itself points to the relatively low percentage they have of the current transportation fuels market as evidence that they have plenty of room to grow. "We're using 140 billion gallons of gasoline a year," Bob Dinneen, president of the Renewable Fuels Association, told CNNMoney. "How does 6.5 billion barrels [2007's projected ethanol production] mean a glut?"
Dinneen, along with others in the ethanol industry, suggested refiners and others who blend gasoline were deliberately shunning ethanol so they could use more of their product and keep the price of gasoline high.
A spokesperson for the National Petrochemical & Refiners Association (NPRA), who pointed out several of the criticisms against ethanol in general, denied those charges, saying the industry was blending more than they were required to by law and that demand for more ethanol just isn't there.
But Kloza said there's probably some truth to the ethanol industry's gripes.
"If you're a refiner, you say 'well, I don't want to cede 10% of my production to ethanol," he said.
Dinneen said that was all the more reason to push the federal government to increase the amount of renewable fuel gasoline companies are required to sell. Currently the mandate is 7.5 billion gallons by 2012, a level that is expected to be reached well before then. But a proposal that has the support of the president and fairly strong backing in Congress would increase that to 36 billion gallons of renewable fuel by 2030.
Click here to read yesterdays CSP Daily News story on ethanol.
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