Globalization of Ethanol Impacts US Industry

The proliferation of international ethanol trade during the past decade has been impressive to watch. The current global market for ethanol stands at 30 billion gallons, with 1.2 billion gallons trading hands overseas.
By Ryan Strickland | July 14, 2016

It’s a big world out there and ethanol is primed to explore it—finding new markets through competitive pricing, high octane and low-carbon advantages that no other fuel on the planet today can match. The proliferation of international ethanol trade during the past decade has been impressive to watch. The current global market for ethanol stands at 30 billion gallons, with 1.2 billion gallons trading hands overseas. There is no denying the globalization of ethanol that is taking place and the impact it has on U.S. production margins. The U.S. has been a net exporter of ethanol since 2010. With 15 billion gallons of annualized production and 14.2 billion gallons of domestic demand, it’s clear that growing export markets should be a primary focus for our industry.

Mandated foreign markets short on domestic production are allowing for a ratable flow. However, growth opportunities for our industry lie where economics, environment and relationships are the deciding factors. In nonmandated markets, price and octane are the primary selling points for U.S. ethanol. Ethanol is an octane booster for gasoline as well an attractive option in programs to reduce greenhouse gas emissions.

Although the U.S. continues to be the world’s low-cost ethanol producer, the massive sell off in crude oil prices has reduced year-over-year flows. Even in the midst of oil’s deepest downturn in decades, ethanol cargoes continue to be booked, highlighting the value placed on ethanol’s octane. Roughly 40 million gallons per month are ratably exported to mandated markets, primarily Canada and the Philippines. Nonratable, mandated countries that offer the greatest potential for U.S. exports include Brazil, India and China.

Brazil has one of the most progressive ethanol mandates of any nation and is the second-largest ethanol producer in the world and, thus, is uniquely positioned to influence global ethanol trade. Brazil is also the largest sugar producer in the world. Expectations for a global deficit have spiked sugar prices to a four-year high, resulting in sugarcane mills shifting production to sugar in an attempt to capture higher earnings. This shift in the supply mix is expected to limit or reduce ethanol production for the current crushing season. This impending vacuum offers an opportunity for the U.S. ethanol industry to fill Brazil’s shortfall, as well as displace a portion of Brazil’s market share abroad—either of which would dynamically support U.S. ethanol fundamentals and margin.

One of the world’s fastest growing economies, India is set to overtake Japan as the world’s third-biggest consumer of oil this year with an annual economic growth of 7 to 8 percent. The government is investing $14 billion in 2016-’17 to expand and improve the country’s road network and infrastructure. Sales of passenger cars and utility vehicles are expected to grow by as much as 12 percent in the next fiscal year. Recent indications from India’s government point to increasing the blend rate from 5 to 10 percent in coming years and actually enforcing it, which historically has not been done. India’s domestic production currently is enough to meet beverage demand and a portion of the fuel and chemical markets as well. While India does not allow imports of fuel ethanol, U.S. ethanol fills the deficit in chemical usage. If India moves to a 10 percent fuel mandate, the U.S. stands ready to help fill any resulting ethanol shortfall.

In late 2015, China rapidly emerged as one of the largest ethanol U.S. export markets. Although volumes were substantial through April, it appears China will not be a ratable buyer, primarily driven by corn policy. Instead of buying corn at a high fixed price for its state reserves, the government announced it will allow markets to set prices for the grain and subsidize farmers directly. This move is set to close the import arbitrage from the U.S. in the short term. However, if the government intends to enforce its current E10 mandate, or expand it nationwide, China will likely need to import as it is opposed to the depletion of corn stockpiles. Domestic employment and social stability are the primary policy drivers for China’s government, which frames the party’s negative view of imports. Nonetheless, air pollution mitigation is increasingly becoming a strong driver to expanding ethanol blending.



Author: Ryan Strickland
Commercial Manager, Alliance Marketing, Eco-Energy
ryans@eco-energy.com
615-786-0783