Ethanol marketers: demand outlook is positive

By Kris Bevill | July 15, 2010
Posted Aug. 12, 2010

During the aftermath of the BP oil spill, there was some speculation that ethanol demand in the Gulf Coast region was increasing as a result of consumer demand. According to one local Alabama newspaper, a gasoline retailer had even installed a new E85 pump to meet demand from motorists seeking to use less oil. But several ethanol marketers told EPM that while demand is definitely up and the outlook for global demand is positive, it's unlikely that increased ethanol demand and the oil spill are related.

"There has been an uptick in ethanol demand at the Gulf as well as New York harbor, but I don't think there's any evidence that it has anything to do with the oil spill," said Mike Irmen, director of ethanol services for The Andersons Inc. The Andersons markets most of its ethanol to Midwest areas, but Irmen said he keeps tabs on market demand nationwide because all markets are somewhat inter-related. "Demand is up for a couple of reasons," he explained. "One is because it's clearly economically advantageous to blend. Ethanol is almost a dollar below the price of gasoline when you consider the 45-cent excise tax credit. So anyone that isn't blending can't compete at the pump with someone who is." Reason No. 2, he said, is due to the availability of ethanol. "There's always been demand for whatever ethanol we can produce and ethanol production today in the U.S. is higher than it's ever been. It's just a matter of price."

Green Plains Trade Group, the marketing arm of Green Plains Renewable Energy Inc., markets ethanol directly to the Gulf Coast area and also owns two ethanol blending terminals in that region. Steve Bleyl, executive vice president of ethanol marketing for the trade group, attributes increased demand to basic economics. "With the blend economics over the last two quarters, you're starting to see that everywhere they can, people want to blend," he said. Southeast markets that weren't previously blending ethanol have jumped in the game and markets that were only partially blending are now blending more, according to Bleyl.

Another indication that ethanol demand is on the rise can be found by looking at the type of gasoline being sent through the region's pipelines. Instead of the reformulated gas that has typically been used in the Southeast, Bleyl said many of the region's pipelines are now transporting conventional gasoline - a sure sign of intent to blend. "When you start seeing the Southeast market shipping conventional gasoline, that definitely shows they're looking to blend more ethanol," he said, because the 84 octane fuel needs to be blended with 10 percent ethanol to bring it up to an 87 octane rating.

KAG Logistics provides logistics services for ethanol end-users and trucks ethanol from some of the largest U.S. ethanol producers to the top consumption markets in the U.S., according to Woodie McDuffie, vice president of the business development for KAG's ethanol logistics. He said ethanol deliveries are up, but no more than expected for this time of the year. A Mississippi native, he said he believes the only way activities in the Gulf of Mexico will directly affect ethanol demand is if a large hurricane is expected and people purchase more gas than usual in order to evacuate. From his perspective, the best way to increase ethanol demand is to implement the blending increase to E15. "That would facilitate some increased capacity and increased consumption as long as the price is competitive," he said.

The E15 waiver is a vital component of increasing demand for ethanol, according to Irmen. "We're at the point where almost 90 percent of all gasoline sold has ethanol, so there isn't much further to go," he said. But even if the U.S. EPA approves the increase, he said marketers can expect a healthy delay before E15 is actually implemented across the U.S. "Because of the way the EPA is likely to approve it - only for models 2001 and later, it forces retailers to make a decision: Do I want to serve 100 percent of the marketplace and sell E10 or do I want to serve two-thirds of the market and sell E15?'," he said. "They can afford to sell E15 at a lower price and maybe pick up some more volume, but can they pick up enough volume to offset the third that they can't sell to?"

Bleyl said that while he's a proponent of the increase to E15 and feels it is crucial to the industry, he also believes that gasoline consumption estimates for 2011 prove the ethanol blend wall won't be reached next year if the blend rate is held to 10 percent. "I still think we need to get to the higher blend rates sooner than later, but we have some room," he said. In addition to new markets opening in the U.S., Bleyl said export conditions are good for U.S. ethanol producers that can produce it to meet European specifications. Irmen also said the recent weakness of U.S. prices compared to South American prices has opened up new export destinations for U.S. ethanol.