Biofuels: ethanol’s growth is spelled I-N-D-I-A

When USDA forecasts of corn ethanol exports to China dropped below 80 million gallons from 225 million last year — and Green Plains CEO Todd Becker issued a “zero exports expected” addendum to his 2017 outlook for the ethanol giant — informed sources began describing 2017 as a ethanol year in search of a market for the potential to grow.

Indeed, where’s the growth opportunity? Let’s take a look at the hard data.

On the production side, corn and ethanol producers have consistently risen to the challenge of expanding the ethanol supply. According to the latest analysis from the Renewable Fuels Association, the four-week average for ethanol production increased to 1.041 million b/d for an annualized rate of 15.96 billion gallons.

Average weekly gasoline demand rose to 400.0 million gallons, the highest weekly average since September 2016 and slightly above year-ago levels — but refiner/blender input of ethanol averaged 911,000 b/d, according the the Energy Information Administration.

That leaves 130,000 barrels per day — if this trend continued throughout an entire 52-week cycle, that’s 1.99 billion gallons. As they say, that’s not nothing.

Where does extra ethanol go when it’s not needed? Here’s the general answer: If it can’t go into the E85 market, try the E15 market, otherwise try Canada, China, Brazil and India.

The high ethanol blend market problem

Although E15 has grown from 180 outlets to 394 at the end of 2016, it’s a sideshow when it coms to moving an additional 2 billion gallons of fuel. The E85 market has 3600 outlets as of the end of 2016, and that could have made a more substantial dent, but there are E85 pricing issues.  At the wholesale level we see E85 available for as little as $0.97 per gallon — that’s the price at the QCCP and The Andersons gates this week.

But nationally, E85 is pricing at retail at $1.93 compared to $2.29 for E10 — and that 15.2% price discount is less than the drop in energy in the fuel, meaning that E85 customers are paying more, per traveled mile, than E10 customers. Until that pricing mismatch is resolved, E85 is not going to provide the excess “swing demand” to meet the booming production of US ethanol.

The Canada Problem

The good news is that, as we reported last November, Minister of Environment and Climate Change Catherine McKenna says that Canada will adopt a national clean fuels standard. The overall objective of a clean fuel standard would be to achieve annual reductions of 30 megatonnes (Mt) of GHG emissions by 2030. This reduction will provide a significant contribution towards achieving Canada’s commitment of 30 percent emission reduction below 2005 levels by 2030.  This is like removing over 7 million vehicles from the roads for a year.

The bad news is that Canada will adopt a 2030-focused national clean fuels standard of the LCFS type — a standard that hugely favors cellulosic feedstocks, renewable diesel and biodiesel. Ethanol is terrific (especially the cellulosic kind), but ramping up near-term ethanol import demand isn’t a likely outcome of the Canadian shift.

Next steps

Environment and Climate Change Canada will publish a discussion paper in February 2017 to help guide consultations consisting of meetings, workshops, and technical working groups that will help inform the development of Canada’s clean fuel standard.

The China Problem

Put simply, here’s the China problem: the country has a huge corn inventory of 8.4 billion bushels, according to analysis from CCM, and CCM notes that “The main problem of this corn is, that it is partly very old, harvested in 2012 and 2013 and additionally indicates low quality. This corn cannot be used for animal feed, nor corn starch production…the government is seeking for effective ways to get rid of the remaining inventory.” That supply is enough corn to make 8.4 billion gallons of corn ethanol, enough to supply China for years at its current demand.

CCM thinks that supply will be released for corn ethanol production in China and notes that “China’s textile and clothing manufacturer Shiqi Group is going to create a gigantic plant for a yearly production of 300,000 tonnes of fuel ethanol in June 2017.”

A lot of that excess corn inventory will go towards the production of sweeteners — but let’s write off China for the moment.

Which leaves Brazil and India.

The Brazil problem

Brazil’s been importing because sugar producers are taking advantage of good sugar prices to export more sugar and produce less ethanol.

But sugar prices have come down from a September 2016 high of 23.3 cents and are hovering at the 22 cent mark now, and Agrimoney said that it expects “a raw sugar price of 19 cents a pound in the last three months of 2017.”

Meanwhile, we have seen some recovery in Brazilian ethanol prices that would encourage more domestic production. This week, we reported that the hydrous ethanol parity price in Sao Paulo continues to edge closer to the technical 70% point where ethanol becomes more economical compared to gasoline at 71.7% last week, compared to 72.5% the week prior. Ethanol prices have been falling over the past several weeks, helping to ease the parity level that will eventually trigger increased demand and support prices in return. March hydrous consumption in the Centre-South region is expected to hit 900 million liters, up from 800,000 liters in February and 1.1 billion liters expected for April.

Which leaves India

As we reported in January, “for the past four years since the E5 policy was implemented, oil marketing companies have failed to achieve the volumes set for blending. In 2015/16, OMCs achieved 4.15% blending. The tender floated for blending this year wouldn’t even achieve 3%.”

And the E5 domestic production outlook in India doesn’t look superb right now. As we reported earlier this year, “ drought impacts in major sugarcane areas such as Maharashtra will reduce ethanol production this year due to a lack of molasses for feedstock, making it unlikely that the country will achieve its blending mandate yet again.”

Drought to keep India from reaching E5 blending mandate

No doubt, domestic production is on the rise. We reported in December that Indian “sugar mills are responding to increased demand for ethanol thanks to the policy changes made to make it easier for them to supply ethanol to oil marketing companies, producing 50% more of the fuel during 2015/16 at 1.1 billion liters. As a result, mills were able to supply 4.4% of gasoline consumption compared to just over 2% the previous year. To achieve the boost in supply availability, the food ministry worked with mills located near oil depots to ensure supplies were available.”

Indian sugar mills boost ethanol production 50% during 2015/16

But Indian sugar producers want ethanol market supports back in place before they shift more production to ethanol. As we reported in January “sugar mills are demand the government reinstate the excise duty waiver for ethanol as well as a return to the ethanol prices set last year as part of a wider support package to help bail out the industry. The national sugar millers association says resetting the ethanol policies would help encourage mills to produce more ethanol with better returns, thereby boosting profitability and strengthening bottom lines allowing mills to pay farmers the higher cane prices they demand.”

India’s soaring ambition

But ambition in India for renewables so far outstrips — by a country mile — the production reality.

We reported last July that “the government is preparing to release its new policy to support biofuel production from non-conventional feedstocks in an effort to boost ethanol blending above 22% and biodiesel to 15%.  Anticipated feedstocks include bamboo, rice straw, wheat straw and cotton straw whereas ethanol is currently produced from molasses. Already the government announced in December 2014 that it would deregulate ethanol feedstocks to allow others to be used but this new policy is expected to give that shift a major push to attract investors.”

Meanwhile, we’ve seen a surge in investment.

We reported in January that “the (Indian) biofuels industry is set to invest $2.25 billion in new projects over the next few years to build up the industry’s value towards $7.5 billion by 2022 thanks to the new policies coming into place that will boost production of cellulosic ethanol and biodiesel. A subsidiary of Bharat Petroleum Corporation announced it would build a 300,000 metric ton biofuel plant, Praj said it would build multiple biorefinery projects valued at $142 million, CVC Biorefinery will set up two projects in Gujarat and Punjab while Munzer Biofuel will set up a biodiesel plant in Mumbai.

There’s been a surge in next-gen ethanol investment

We reported in November that “Indian Oil Corp. Ltd (IOCL), Bharat Petroleum Corp. Ltd (BPCL) and Hindustan Petroleum Corp. Ltd (HPCL) announced they will invest $586 million in developing seven second-generation ethanol plants to help the government achieve its 22.5% ethanol blending goals. Each facility is planned to produce between 100,000 and 150,000 liters of ethanol per day along with compressed-CNG for use in vehicles. Praj is among several technology providers with whom the state-run oil companies are discussing the projects, the sites for which are still being determined.”

But the build-up in capacity will take time. Meanwhile, there’s the fuel ethanol demand and also ethanol demand in the chemical industry to be supplied to.

As we reported in April, “biofuel blending mandates and demand for ethanol from the industrial sector have finally found a balance with domestic production going towards the 5% blend while cheaper Brazilian and US imports will satisfy the chemical market. For this first time in three years that the 5% blending mandate has been in place, the country will comply with the required sourcing levels and via domestic molasses-based production. The government is now pushing towards a transition to E10.”

The Bottom Line

Where’s the excess ethanol going to go? For now, we can spell it in five letters: I-N-D-I-A. That country is becoming the latest great hope for the global ethanol industry — first-gen and next-gen — in its ambitions for growth.

One special trend to note — India has long been a diesel-dominated market, with transport more focused on shipping than personal cars. But gasoline demand is surging. Last year, according to the Indian Oil Ministry, gasoline demand rose 14.5 percent to 21.8 million tonnes, compared to a 7.8 percent jump for diesel. That’s despite a higher tax rate for gasoline than diesel.

Overall, the International Energy Agency projects that as much as 25 percent of global energy demand growth through 2040 will come via India. When you look at the ethanol market, that’s not surprising at all.