Highway 75, a lonely rural route winding through the Iowa countryside, passes scores of small towns, most without a gas station, bar, convenience store or church. It's December, and the fields once lush with green corn stalks are now cleared, encrusted in snow and waiting for the next planting. Along this forlorn road is Arthur, Iowa, population 245. A few years ago, Arthur was a town held together by the business that came to the town's grain elevator and truck stop. In 2006, it became the construction site of Platinum Ethanol LLC's 110 MMgy plant. 
 
 John Handel serves as the Platinum Ethanol project manager. Wind rocks the trailer that houses his office where he views the work of industry analysts through the lens of firsthand experience. Handel has heard about plants in trouble; a nearby biodiesel plant—its foundations already laid—recently had to halt construction to sort out financing issues. Plant construction is a stressful business, but Handel is relaxed, leaning back in his chair with a warm grin. The current slowdown in ethanol plant construction hasn't stopped work at his site. "We still have deadlines to meet. [Construction workers at the site] are doing their best to keep us on target for startup in the summer of 2008," he says. Handel acknowledges, however, the increased cost of labor has been an issue. "Specific costs for things like concrete workers, welders…there's been an increase in the costs to get those people on site, but it hasn't delayed construction," he says. 
 
 This is still the case at the majority of ethanol plants under construction. Rising costs have slowed the rate at which projects announce they intend to begin construction, but only a handful have been immobilized by financial issues. The reason may be as simple as the fact that no one makes a profit until fuel is being produced, or as significant as strategic management through complicated changes. 
 Throughout 2007, ethanol plant construction slowed with only four projects begun in the last six months of the year. Some analysts point to high feedstock costs, market saturation and "Big Oil's" stranglehold on the fuel industry as impediments to progress. Dave Vander Griend, president and chief executive officer of ICM Inc., attributes some of the construction slowdown to "lender fatigue." "We're seeing plants that [future producers] were trying to get equity for and the price of the plant kept going up," he says. "If the lender has already decided that a project gets so much per gallon of production, then the [future producer] needs to raise more money, and when we had such a floating target, it made [raising equity] a challenge. I think you'll begin to see the price of plants come back down." Vander Griend's optimism stems from his belief that the country can support more ethanol before any kind of market saturation is reached, or feedstock supplies run out. "We have adequate grain stocks to support more ethanol from grain, but it's a political football to determine where we go from here."
 
 Of concern to all is the rising cost of doing business in the ethanol industry. One of the factors driving the increase in plant construction costs is the shrinking labor pool for projects, and thus a premium is placed on skilled workers. "This isn't new, this declining labor pool; we've seen this happening over the past five to 10 years," Vander Griend says. The waning pool of potential workers is a cost producers can generally account for in their budgets and proposals, but, according to Vander Griend and others, this is a cost that will not decrease in the near future. 
 

 According to figures from the Bureau of Labor and Statistics, construction employment is projected to rise by about 1 percent each year through 2016. This increase represents 781,000 construction jobs for 2008. After food service and the health care industries, construction is the third-fastest growing in terms of the number of jobs to be added. As demand for skilled labor increases, plant operators will be forced to pay more to get the best people. "That's the reality of the industry," Vander Griend says. "Everything in the construction trade is getting more expensive."
 
 Economic Pressures
 Construction in the ethanol industry has dropped dramatically in the past six months, and could be a reflection of the overall turbulence in the construction industry itself. During the late 1990s, cost increases for materials such as concrete, stainless steel, asphalt and diesel were minimal, or at least predictable. 2004 saw prices begin their ascent, continuing into 2006. 
 
 The cumulative increases are reflected in figures from the Bureau of Labor and Statistics' producer price index for these and other construction inputs. Since December 2003 (and adjusted seasonally), the price of concrete products in general increased by 31.5 percent, with ready-mixed increasing by 36.2 percent. Stainless steel prices have risen 50.5 percent through October 2007. Asphalt at the refinery has increased by 117.2 percent, but prepared asphalt costs only increased by 26 percent over the same period. Finally, No. 2 diesel, which is most commonly used in heavy machinery, rose by an astounding 154.4 percent in less than four years. In the five key areas for construction indicators—highway, heavy, nonresidential, multi-unit residential and single-unit residential—inputs climbed by 28 percent. Of most importance to ethanol builders, nonresidential construction inputs alone rose by 26.7 percent. 
 The figures are compelling when compared with the 13 percent rise in the consumer price index, which the Bureau of Labor and Statistics uses to calculate total inflation. For plant builders this means that proposals prepared using the 2003 through 2005 figures under the assumption that construction costs would grow at a slower pace, may explain why so many projects in ethanol and biodiesel have been delayed, redesigned or altogether canceled. 
 
 The U.S. Census Bureau reports that between 2006 and 2007, nonresidential construction spending increased by an average of 14 percent, accounting for $545 billion dollars overall. While the Census Bureau doesn't mention ethanol specifically, the increase does signify a changing landscape. 
 
 Ken Simonson, chief economist for the Associated General Contractors of America, which represents more than 30,000 general contractors, subcontractors and industry suppliers of goods and services, says the construction industry has been expanding in the past several years. "We've seen eight straight quarters in which investments in private, nonresidential structures have grown faster in gross domestic products (GDP). That's the longest string of expansion and expanse of the GDP since the 1950s." This extended period of growth has tightened reserves of materials and labor. "Certainly, energy projects take very specialized labor so there is already a relatively small pool of those workers to draw upon," Simonson says. 
 
 The volatility seen in the construction industry overall, and ethanol in particular is surprising to many because the situation seems to be unique. "Most other businesses are not experiencing the kinds of cost increases that have hit construction," Simonson says. This comes as a surprise to some groups focused on the labor side of the equation. Overall, figures for construction labor actually declined by 1.6 percent between November 2006 and November 2007, however, the declines came entirely from the residential side. Simonson points to the lack of transferability between industries as key to understanding this phenomenon. "You can't take a carpenter's helper from a single-family home and put him on top of a tower crane." There is only limited crossover in these two markets. 
 
 Moving forward, a key indicator of potential growth opportunities may be found in the Federal Reserve's move to lower short-term interest rate targets to encourage lending. The decline in residential construction may be having an impact on the nonresidential side of the industry. As the Federal Reserve takes steps toward improving lending opportunities for families, a side effect may be the potential easing of credit restrictions for ethanol plants. That said, it may be that with these lending opportunities will come tighter restrictions and standards, cooling the construction industry to a more sustainable growth pattern. 
 

 Lowering interest rates may be good for borrowers in the short term and make debt-to-equity solutions more bearable by easing the requirements banks place on borrowers, but this good news may be followed by a continued depression of the dollar, driving inflation. In the end, the Fed's action may be a double-edged sword for construction as prices on imported petroleum and materials are pushed higher by such a move. 
 
 Looking Forward
 In Iowa, it's business as usual at Platinum's construction site. The possibility of lower cost materials may benefit the project, or may be seen as too little, too late. To look at a single indicator, the diesel the site uses in its engines would have to drop nearly 20 percent by early 2008 to be in line with January 2007's prices. This is unlikely with a barrel of oil hovering in the $100 range. 
 Analysts and future producers will be watching the price of these indicators closely. Once the cost of materials moves back to a reasonable level, it should only be a matter of time before steady growth in the ethanol industry is realized. EP
 
 Craig A. Johnson is the Ethanol Producer Magazine plant list and construction editor. Reach him at <a href="mailto:cjohnson@bbibiofuels.com">cjohnson@bbibiofuels.com</a> or (701) 738-4962.

Platinum Ethanol LLC a 110 MMgy ethanol plant under construction in Arthur, Iowa, is targeted for startup in the summer of 2008.

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The bottom line is a big concern for those in the ethanol industry today. EPM takes a detailed look at what's changed on the construction side of the equation in the past year that could impact the industry in the coming year.

Constructing Economics

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