October 2, 2007 / 3:09 PM / 12 years ago

Citigroup sees US ethanol prices improving in 2008

CHICAGO, Oct 2 (Reuters) - U.S. ethanol prices will remain weak for the next six months due to a large amount of new production capacity coming on line but will improve in the first quarter of 2008, according to a survey released on Tuesday by Citigroup (C.N).

“Although near term weakness in spot ethanol prices is likely to persist, we continue to hold a solid outlook for ethanol prices and margins in the long-term, with ethanol pricing likely to show improving trends as 2008 progresses as crude oil prices remain high with no signs of letting up,” wrote analyst David Driscoll.

New U.S. ethanol capacity being added is starting to peak and will decline starting in the first quarter of 2008. About half of all new ethanol capacity being added through 2009 will come on line in the next six months.

Citigroup forecasts U.S. ethanol capacity at 8.5 billion gallons in 2007, up from 5.4 billion last year. Capacity will reach 12.7 billion by 2008 and 13.4 billion by 2009.

“Ethanol prices relative to wholesale gasoline prices have come under pressure recently driven by the abundance of new capacity coming on line and the resulting temporary bottlenecks within the distribution system of ethanol to the wholesale gasoline producers,” Driscoll wrote.

As a result, ethanol was currently trading at a 39 cent a gallon discount to wholesale gasoline and the market will not improve until the end of the first quarter of 2008, he said.

Record corn costs and soft ethanol prices have combined to squeeze the profitability of U.S. biofuel producers, analysts said. [ID:nN28543868]

On Monday, JPMorgan cut its full-year earnings estimate for the second-largest U.S. ethanol producer, Archer Daniels Midland Co (ADM.N), in anticipation of lower earnings from biodiesel and ethanol.

JP Morgan maintained its rating of “overweight,” believing that future returns on biofuels will improve. [ID:nN01462490]

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