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Bioethanol Market

Global Production & Trade volumes

In 2013, the worldwide production of Bioethanol reached 88.7 billion liters (F.O. Licht). Ethanol markets are dominated by the United States (50.3 Bl), Brazil (23.7Bl) and, to a smaller extent, the European Union (with 5.2 Bl). Despite a fragile global economy, the GRFA (Global Renewable Fuels Alliance) is predicting a nearly 2.7% growth in global ethanol output this year, up from 88 Bl produced in 2013 to 90.38 Bl in 2014. Exports accounted for only 4.7 % of US ethanol 2013 sales and 9.2 % of Brazilian ones.

Demand is expected to surge in the coming years

Global ethanol demand is expected to expand by 70%, mainly driven by Biofuel policies to reach 168 Bl by 2022

Impact of Biofuel Policies

Countries representing approximately 80% of global petroleum demand have introduced blending targets

Ethanol Production Trend in USA & EU

As result of poor returns & steep controversy (food competition & derisory energy conversion), the rush to build grain ethanol plant in US and came to an end in 2009.

Cellulosic ethanol plant using either BTL technologies (Fischer-Tropsch) or enzymatic ones will not be cost competitive before 2020 at best. High investment tag (600-750 US$/ M3 annual capacity or (6 times the cost of ethanol plant) will likely slow down, if not halt, the pace of Cellulosic ethanol projects.

Bioethanol / Crude Oil Price Correlation

The world crude oil price is expected to increase in real terms by 6% between 2014 and 2022. This will lead to an increase in demand of ethanol by flex-fuel cars owners in Brazil by almost 50% over the same period, putting upward pressure on the world price of ethanol in the medium-term. This result is based on the assumption that the Brazilian State / Petrobas will stop freezing the retail price of gasoline.

Crude oil/Ethanol / Corn / Sorghum Grain prices Correlation

During years of grain harvest surpluses, corn prices are largely determined by the level of crop end-of year balance. However during drought years, the scarcity of corn tends to push prices towards the break-even level determined by the ethanol /crude oil prices.

The sorghum being a substitute of corn in feed ration, Sorghum & Corn prices are correlated.

The Ethanol price trend

The EPA decision to maintain the total mandate for advanced Biofuels unchanged in spite of the reduction of the cellulosic Biofuel mandate reduction would require Sugarcane & Sweet Sorghum ethanol to expand and replace the volumes of cellulosic Biofuel. In practice, this would mean more than tripling the rate of growth of Sugarcane & Sweet Sorghum Biofuels between 2014 and 2022.

The United States are expected to import about 14.6 Bl of Sugarcane based ethanol by 2022 (mostly from Brazil), since it is the cheapest alternative to fill the advanced Biofuel mandate.

The shortfall of cellulosic production should continue for at least 8 years. The most likely scenario is that cellulosic mandate will be waived year after year with a corresponding switch to Sugarcane & Sweet Sorghum ethanol. However it cannot be discarded that the advanced fuel mandate volumes will be reduced sometime in the future.
So far, the ceiling price of ethanol (& D5 RIN value) have been be largely determined by the Brazilian domestic price (which in turn is governed by the internal gasoline price which is regulated in Brazil).

But this may change has the US import volumes may quickly exceed the Brazilian export limit: to meet the 2014 advance fuel mandate requirement, the US would have to import an estimated 6.8 Billion liters from Brazil; This volume represents 25 % of the total Brazilian fuel ethanol production (25.9 Bl of which 21.5 Bl is required to cover domestic consumption).

Theoretically, the supply / demand gap could be filled with a shift from sugar to ethanol production by flexible Brazilian millers (it is estimated that the Brazilian ethanol installed capacity is 40 Bl). In this likely scenario, the sugar & ethanol prices should be increasingly linked to each other. In conclusion, higher volumetric Advanced Biofuel mandates from 2014 and smaller RIN carry-over, should push both RIN D5 and ethanol prices up in the years to come (but if the E10 blend wall hits in).