The Road Ahead

Since August 2008, no new corn-fed ethanol plants have begun construction. Does this signal the end of an era?
By Craig A. Johnson | November 11, 2009
"New ethanol plant construction" is fast becoming an oxymoron, like "genuine imitation" and "definite maybe." Based on the incredible pace of growth across the ethanol industry in 2006 and 2007, the recent decline in new plant construction is unsurprising. Evidence of the drop-off in demand for new corn-ethanol projects can be seen by looking at the workloads of some of the industry's leading build firms. Fagen Inc., known to many as the pre-eminent ethanol plant builder, at one time had teams working on more than 40 sites at the height of the ethanol industry build out. Today, the company is constructing a single plant, which it plans to complete by the end of the year. The 2010 corn-ethanol project calendar at Fagen is empty.

The flat-lining of new ethanol plant construction, as one builder described it, is not due to irresponsible management, poorly thought out business models or the failure to recognize risk. Rather, the ethanol industry is facing myriad challenges, not the least of which is a struggling economy. Add to that the volatile energy and commodities markets in 2008, the complete collapse of lending and the 10 percent blend wall, and it is not hard to see why no one wants to build a new corn ethanol plant.

The Big Boom
In 2005 and 2006, an average of four and one-half groundbreakings at ethanol plants occurred every month, according to EPM's plant construction lists. Across the Midwest, speculators and investors worked feverishly to find the best sites on which to place their plants. The frenzy to build was so great that at the 2007 International Fuel Ethanol Workshop & Expo, latecomers to the industry were requesting personal introductions to the most in-demand engineering teams and suppliers in order to better their chances at securing a construction contract.

Between 2006 and 2007, construction commenced at about 40 ethanol plants per year. In 2008, the number dropped to nine, and no plants have begun construction in 2009.

The boom period of new-only construction began roughly in June 2005. New plant construction went from one or two start-ups each month to a total of 24 new plants beginning construction in the second half of 2005. With only a few hiccups, this trend was maintained through 2006 and into the first half of 2007. Of the 184 producing ethanol plants currently operating in the U.S., about 100 were built during this 24-month span.

However, by mid-2007, some members of the industry were already contemplating that the boom was over and the ethanol construction phase was nearing an end. After July 2007, as the earliest effects of the looming recession were being felt, new construction projects dropped to numbers that would have been normal in 2003 or 2004. But compared to the amazing expansion that was seen between 2005 and 2007, the number of new projects in the pipeline seemed dismal. In 2008, companies began constructing new plants in only four months of the year. The final three new construction projects were announced in August 2008.

This steep decline in new projects was reflected in layoffs at some of the nation's largest design/build firms. In 2008, ICM Inc. let go more than 175 employees. At the time of the layoffs, Dave Vander Griend, president and CEO of ICM, blamed the economic crisis, rather than a lack of demand, for his company's decision to downsize. "Our customers continue to face difficult challenges in obtaining the working capital they need to finance the design and construction of biorefineries," he said. "Although we continue to have strong interest from customers for new projects, simply put, the Wall Street crisis prevents them from proceeding at present." Looking at the big picture, ICM still sees a role for new construction, but it will take time. "We believe market conditions will improve," Vander Griend says, "but it will take time for investor confidence to recover."

2010 Construction Outlook
Matt Sederstrom, vice president of marketing and project development for Fagen Inc. believes there is still potential for growth in some areas. "We think there'll be more [corn-based ethanol plants] built. There are good spots that need great plants. And we're ready to build great plants in those good spots." But good spots are not going to be easy to come by. The conventional wisdom today is that most of the best sites are gone, with only second- and third-tier sites available to those looking to build.

A company spokesman at one of the design/build firms admits, "We're all struggling on the new construction side of things." He went on to say that many industry observers are looking for the next generation of ethanol plants to begin building but there are significant challenges. "Cellulosic technologies are not economical at commercial scale, yet. I don't think [this industry] can sit on its hands until problems with the science are worked out."

Conventional wisdom is that it will be five to 10 years before second-generation ethanol production is in full swing. This timeline could represent a dilemma for builders who have hitched their wagons to the ethanol industry. If new corn-based ethanol projects are stalled out, what will construction firms do in the meantime?

Fagen remains optimistic about the eventual correction in the economics of ethanol. According to Sederstrom, "We're optimistic that conditions will return and that the industry will become more efficient at running their facilities. That's the mode everyone is in right now, which doesn't leave a lot of opportunities for Fagen Inc." Sederstrom says Fagen does not currently make its business in retrofitting existing ethanol plants. If, however, the ethanol blend rate in fuel is increased to 15 percent, there would be significant incentives to build again in the ethanol industry. Sederstrom believes, among other issues, this could provide a substantial inducement to build. "We're looking forward to the return of construction levels like we've seen, pending the return of a positive lending environment."

If there is new construction in the ethanol industry moving forward, Fagen wants to be a part of it, but right now the picture isn't so clear. "If there are opportunities for construction we're going to take part in that," Sederstrom says.

A Path Forward
Some builders don't see much of a future for corn ethanol plants in the next few years. When asked if first-generation ethanol plant construction had flat-lined, one builder's answer was a simple, "Yep." Another source predicts that the number of new plants built will be less than five. "A few plants will be built in the next few years, but it's going to be one or two, not a dozen." Another builder blames the economy for the current situation and says it is the reason for the complete halt on construction as a whole.

One solution for ethanol plant constructors may be in the emerging field of biomass utilization and optimization. According to an ethanol plant builder who declined to be identified for this article, "We're going to see a lot of construction in the biofuels industry that is not ethanol. We're trying to shift our focus to other renewable opportunities." He went on to say, "We're not seeing a lot of new large-scale ethanol projects that are ready for construction."

Builders are actively looking for opportunities to move into the realm of the next generation of ethanol plants. According to one source, "There's a lot of testing and proving that's going into scaling up [cellulosic] designs." The feeling is, if there are plants to be built, then drawing off their experience, ethanol plant builders want to be a part of this new growth. For now, all eyes are on Washington D.C. and the blend wall.

If E15 is approved and mandated, there could be an uptick in construction, but some see this is a bit of a phantom as well. According to one source, "E15 doesn't mean we'll have to build another 50 plants to make all that ethanol. A lot of plants are able to produce at 10 percent or more above their nameplate, and some, like a Poet (LLC) or Valero (Energy Corp.), may go after those gains in efficiency."
According to the source, if a company such as Poet, which already produces roughly 1.45 billion gallons of ethanol annually, built a plant or two, it would help increase their overall nameplate capacity. But increasing production by 10 percent across the board would have the same effect as building a 150 MMgy facility without the headaches of site selection, permitting and construction costs. Simply put, there is an incentive to do more with less. EP

Craig A. Johnson is the contributions editor of Ethanol Producer Magazine. Reach him at (701) 738-4946 or cjohnson@bbiinternational.com.