But, aside from producing more fuel for a very absorbent ethanol market, are profit margins increased when plants build bigger? The buzz phrase “economies of scale” has become common vernacular in the industry, but when it comes down to it, identifying where the line between economies of scale and diseconomies of scale—or perhaps at what point a plant starts experiencing diminishing returns—has long-term implications on where projects should be built, how big they should be built and what the construction of those plants means for future projects considering those very things.
John Urbanchuk, director of LECG LLC—a global services company with an array of analytical and consultative expertise—presented at the National Ethanol Conference a paper that he authored for the Renewable Fuels Association titled, Contribution of the Ethanol Industry to the Economy of the United States. The well-received article is a skillfully compiled piece filled with relevant, up-to-date industry statistics. Certainly this paper covers a much wider area of information than will be laid out here, but of immediate interest is Urbanchuk’s comparison of 50 MMgy dry-mill ethanol plants with 100 MMgy dry-mills. In his timely piece, released Feb. 21, Urbanchuk makes an almost counterintuitive statement. He says, “There are relatively few economies of scale in dry-mill ethanol production.”
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Just half a decade ago, Midwestern ethanol plant capacities were more commonly built at about the 20 MMgy mark. Urbanchuk says that, back then, when industry analysts were looking at the economies of scale for dry mills, the notion of building bigger plants was found to have economic benefits. “There are economies of scale benefits when you’re looking at going from a 20 or 30 MMgy plant to a 40 or 50 MMgy plant,” Urbanchuk says. “Above 50 MMgy, there’s not much more savings there.”
Urbanchuk’s paper highlights the two areas of a project where he asserts that economies of scale do exist when building big. “The most significant savings for a larger plant are lower capital costs in construction and reduced labor costs since larger, new plants are more automated,” he writes.
There is a significant percentage savings in reduced labor costs at a 100 MMgy ethanol facility, and Mark Yancey, vice president of Project Development for BBI International, agrees—but he remains careful not to overinflate the value in that savings. “Yes, there are savings there, but remember, personnel costs are only 2 to 3 percent of the total plant expenses,” Yancey says. According to Yancey, a 50 MMgy ethanol plant on average will employ between 35 and 40 employees, whereas a 100 MMgy plant needs about 55 to 60 employees.
The other advantage to building a bigger, 100 MMgy plant, as Urbanchuk points out, is the capital cost savings to be had relative to building a smaller, 50 MMgy plant. “The numbers I’ve seen range from about $1.40 to $1.50 for a 50 MMgy plant, per gallon of construction,” Urbanchuk tells EPM, which comes to an average of $70 million to $75 million in capital costs to get this scale of a project rolling. “For a 100 MMgy plant, it costs about $1.35 to $1.40 per gallon of construction.” Going by the extremes of these figures, a capital cost benefit to building big may or may not exist.
Yancey’s figures show a bit more of a savings to building with size in mind. “An average 100 MMgy plant costs around $130 million, or around $1.30 per gallon of construction, whereas a 50 MMgy plant averages a cost of around $80 million, or $1.60 per gallon of construction,” Yancey tells EPM.
Although only a few economies of scale exist in dry milling, there is a host of additional items to consider for sizing a potential plant’s capacity.
Further benefits, drawbacks to building big
With more and more ethanol plants being built, it’s worth looking at where these bigger plants might be more economically sustainable. “The main issue is the corn price,” Yancey says. An area’s corn price, along with a project’s production capacity intentions, holds a lot of economic bearing on where a project should build. Conversely, if a project is geographically limited to a particular area, its size may be a function of its surroundings. But if a project’s locating in the Corn Belt, it’s got to look at how its presence will alter the corn basis, regardless of a project’s particular size, Yancey says.
Every 100 MMgy ethanol plant that’s already on line results in fewer and fewer options for new facilities in the region to be viable. “We’re definitely seeing more people interested in these bigger projects,” Yancey says.
With this trend increasing, Urbanchuk says there are still plenty of opportunities to find sites where these large plants can cost-effectively locate, although the fringes of the Corn Belt are clearly becoming more appealing.
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