Ethanol Profits May Be Losing Steam
Monday, November 05, 2007PAUL KANGAS: Archer Daniels Midland, the nation's largest ethanol producer, reports earnings tomorrow. Last quarter, its ethanol profits fell almost 18 percent. And with ethanol prices down sharply, many analysts say ADM's ethanol group could be in for a repeat performance. That drop in ethanol prices has prompted some producers to put the brakes on construction of new facilities. But as Diane Eastabrook reports, some experts say these growing pains may be healthy for the ethanol industry.
DIANE EASTABROOK, NIGHTLY BUSINESS REPORT CORRESPONDENT: Chet Perry, president and CEO of Itec Refining and Marketing, thinks he has the ingredients for a lucrative ethanol plant. His firm bought 85 acres of land in prime Illinois corn country for a facility. The site has access to highways, railroads and water, plus the community of Princeton granted Itec tax abatements for 10 years. But Perry says one missing ingredient has put the plant on hold.
CHET PERRY, PRES. & CEO, ITEC REFINING & MARKETING CO.: The missing ingredient right now is the economy. We have to find a way to bring the construction costs of ethanol plants down.
EASTABROOK: Itec's project isn't the only proposed U.S. ethanol facility in limbo. Projects by big producers including Aventine and Verasun have also been shelved for now. High stainless steel prices to build new facilities are part of the problem. An ethanol glut is another. Thirty new ethanol plants came on line this past year, boosting production by 50 percent. As a result, wholesale ethanol prices have been freefalling since spring. If prices don't recover soon, Morningstar energy analyst Michael Tian thinks another 75 plants currently under construction could be temporarily halted or scrapped altogether.
MICHAEL TIAN, ENERGY ANALYST, MORNINGSTAR: A lot of them are pretty much speculative ventures that got started up in the boom days in 2006 and now things are turning south and sources of financing and what not are drying up, so people are not going to be able to finish them.
EASTABROOK: High corn prices -- the main ingredient for ethanol -- are another concern. Demand for corn has sent prices up more than a dollar a bushel in the past year, squeezing profit margins. At the Chicago Board of Trade, futures prices for corn show no sign of retreating. But trader Matt Zeman thinks ethanol producers will be able to absorb those higher corn prices. He's convinced rising oil prices will make ethanol an attractive fuel alternative and that could ignite demand.
MATT ZEMAN, TRADER, LASALLE FUTURES GROUP: Right now prices are obviously well off the high point, but I think they are going to stabilize somewhere in this area, and I would expect in the coming years to see them rise again.
EASTABROOK: That kind of optimism has Perry confident that Itec's ethanol plant will be built next year.
PERRY: We are anticipating that we'll be breaking ground at the end of first quarter or the beginning of second quarter.
EASTABROOK: Analysts say this recent bump in the road for ethanol may actually be good for the industry in the long run. They think it could drive some marginal ethanol producers out of business and that could bring stability to prices and the industry in general. Diane Eastabrook, NIGHTLY BUSINESS REPORT, Princeton, Illinois.
