Financial Times (11.15.10)

US ethanol exports fuel European unease

By Greg Meyer

After a disastrous couple of years brought on by high corn prices and low demand, the US corn ethanol business has emerged as a force in global energy markets.

The US pumps out a record 37m gallons of ethanol a day, easily surpassing rival Brazil’s sugar-based industry in output.

Producers are running out of places to put this ethanol. The US government mandates 12bn gallons in the fuel supply this year, but a decline in American driving and a 10 per cent cap on how much can be blended into motor fuel has created a glut.

“The domestic market here in the US is essentially saturated. We are looking for a home for the surplus,” says Geoff Cooper at the Renewable Fuels Association, a US trade group.

That home is increasingly abroad. US ethanol exports are more than double those of a year ago, totalling 251m gallons in the nine months through September, government trade data show. The surge comes as rising sugar prices and the real’s appreciation against the dollar made Brazil’s product more expensive.

The export trend puts a spotlight on the government support for ethanol that totalled $7.7bn in 2009, according to the International Energy Agency.

The US Congress will decide the fate of a 45 cent-per-gallon blender’s tax credit set to expire on December 31. Four Corn Belt senators last week said extending the credit was “crucial to reducing the nation’s dependence of foreign petroleum”.

Companies that blend US ethanol with petrol may claim the credit even if the fuel is shipped overseas. Blends of up to 90 per cent ethanol imported in Europe also enjoy customs duties that are €60-€70 lower than the €102 per cu m duty on purer “denatured” ethanol, says Christoph Berg, managing director at consultant F.O. Licht in Hamburg. The US ethanol trade data mask additional volumes hidden in petrol blends.

“There is increasing trade from the US to Europe which is using domestically produced ethanol and blends this ethanol with gasoline, thus being eligible for the [US] tax credit and also being eligible for lower import duties in the European Union. This of course makes quite a profitable operation,” says Mr Berg.

Traders acknowledged using the credit for ethanol blends before it leaves the US. “If the [credit] is not there, the demand for product stays. It just means there are higher prices,” said a senior executive at one US exporter.

But use of the credit threatens to open a rift between the US and the much smaller European ethanol industry, echoing an earlier US-EU dispute over biodiesel.

Rob Vierhout of ePure, a trade association for Europe’s ethanol industry, said: “The European ethanol industry is very concerned about the growing volume of US ethanol exports to Europe. Obviously, the weaker dollar and the blend wall create circumstances that make non-US fuel ethanol markets attractive.”

European government support to ethanol was $2.1bn in 2009, IEA said.

The US also ships ethanol to some major oil exporting countries including Saudi Arabia and the United Arab Emirates. Analysts say in many cases these exports are used as an additive to raise the quality of local petrol stocks.

US demand for ethanol could grow after the Environmental Protection Agency raised the blending cap to 15 per cent, for cars sold since 2007. But fuel retailers are reluctant to adopt the changes, and a coalition of food groups – concerned that ethanol production is driving up the corn price – last week sued to overturn the decision.

The US Department of Agriculture forecasts ethanol production will consume 4.8bn bushels, or 38 per cent, of the US’s 12.5bn bushel corn crop this year. Some residual grain will return to the food supply in the form of animal feed.