NEW YORK, Oct 16 (Reuters) - More U.S. ethanol producers are expected to mothball refineries and delay new plant construction due to crumbling profit margins for the biofuel, hailed by U.S. President George W. Bush as a way to help wean America off of foreign oil.
In the latest announcement, privately held Alchem Limited, one of the oldest U.S. ethanol producers, said it will shut its 10.5 million-gallon-per-year plant in Grafton, North Dakota, next week.
The closure, expected to be temporary, comes after three other U.S. ethanol refiners canceled plans for new construction, among them major producer VeraSun Energy Corp VSE.N.
Over the past year, U.S. corn prices have increased sharply, making it more expensive for ethanol producers to buy the feedstock, and ethanol prices have fallen, thus squeezing the profits of ethanol producers.
“Certainly the economics of current commodity prices for ethanol producers are not very attractive,” Raymond James analyst Pavel Molchanov said. “It is definitely a plausible possibility that some ethanol producers would shut production temporarily.”
The shift comes on the heels of a boom in ethanol refinery construction since last year that has outpaced rising demand for the renewable fuel at a time when the price of corn — the preferred feedstock for ethanol production — has surged.
U.S. corn futures, at $3.60 per bushel, are up 27 percent from lows a year ago. But cash ethanol prices, either side of $1.60 a gallon, are down 35 percent from 2007 highs.
The crush spread — the profit margin of turning corn into ethanol — stands at 41 cents per gallon, down sharply from a 52-week peak of more than $1.10 per gallon in May, Molchanov noted, putting many ethanol producers in the red.
While Alchem’s shutdown is small, it may be a bellwether for other players in the industry.
VeraSun said this month it will suspend construction of its biorefinery in Indiana, while Glacial Lakes Energy said it was postponing construction of an ethanol plant in South Dakota, and Chippewa Valley Ethanol Co said it was postponing an expansion of its plant in Minnesota.
The three project suspensions delay, and potentially remove, future capacity additions of 195 million gpy.
“Weak ethanol market conditions are beginning to reveal their effects on the ethanol industry,” Citibank analyst David Driscoll said in a research note. “The initial wave of shutdowns appear to be coming from the higher cost small scale ethanol plants,” he said.
Overseas, Spanish energy group Abengoa (ABG.MC) said last month it had suspended ethanol production at the biggest of its three Spanish plants, citing similar reasons.
There are some 130 ethanol plants in the United States that can produce 7 billion gallons a year, up 40 percent from a year ago. New expansions on the books had been set to boost that number to 13.7 billion gpy by 2008 or beyond, but that has slipped in recent weeks about 1 percent to 13.5 billion gpy, according to industry group Renewable Fuels Association.
The Bush administration has called for Americans to cut gasoline use by 20 percent by 2017, mostly by increasing use of fuels such as ethanol.
Some analysts point out some positive factors for ethanol producers.
Driscoll raised his 2007/2008 corn ending inventories — estimates for this winter’s crop — to 322 million bushels, the second-largest corn ending over the last 15 years.
“This should herald declining corn prices which is positive for ethanol production margins,” Driscoll said.
Other analysts, as well as ethanol producers, remain upbeat about the long-term prospects for the ethanol industry.
“I don’t think these recent singular events are any indication of any long-term trend,” said Bruce Scherr, chief executive of Informa Economics, a Tennessee-based consulting firm.
No. 1 U.S. ethanol producer POET says it has five ethanol plants under construction and one plant under expansion.
“We have no plans to cut back on that ... We continue to believe in this industry long-term,” said spokesman Nathan Schock. [ID:N16291839]