By Dr. Christoph Berg

April 2004.

Our special thanks are due to Dr. Berg, commodity analyst and editor at F.O. Licht for providing this report. F.O. Licht may be contacted at:


UK Office:
80 Calverley Road,
Tunbridge Wells,
Kent, TN1 2UN,
Telephone: +44-1892-533813
Fax: +44-1892-544895


  Germany Office:
P.O. Box 1220,
23909 Ratzeburg,
Telephone: +49-4541-88920
Fax: +49-4541-82145

World Fuel Ethanol - Analysis and Outlook


There is a lot of confusion surrounding the production of and trade in ethanol. This is hardly surprising given that there are a variety of feedstocks from which it can be produced, a number of production processes and very different uses for this commodity. While these obstacles to more transparency in the ethanol market may be termed technical, there are economic ones as well. In many countries the production of ethyl alcohol is controlled by one or two companies. As publicly available figures in sensitive areas could provide foreign rivals with a competitive edge, governments often allow statistical data on trade and production to be suppressed. But there is yet another economic reason for the notorious unreliability of data on alcohol. Usually, beverage alcohol is heavy taxed which provides an incentive to smuggle or produce it illicitly which can have a significant impact on the overall supply picture.

Some basic concepts

There is semantic confusion with regard to the term ethanol. Very often the term is used as a synonym for alcoholic beverages. This is misleading, even though ethanol may be used as a raw material for the production of spirits. In order to avoid misunderstandings I would like to define ethanol as a clear, colourless, flammable oxygenated hydrocarbon, with the chemical formula C2 H5 OH. Even though the definition is fairly straightforward, there are various categories for describing a particular type of ethyl alcohol which are not mutually exclusive:

  • by feedstock
  • by composition
  • by end use

The feedstocks and therefore the processes by which ethanol can be produced are diverse. Synthetic alcohol may be derived from crude oil or gas and coal. Agricultural alcohol may be distilled from grains, molasses, fruit, sugar cane juice, cellulose and numerous other sources. Both products, fermentation and synthetic alcohol are chemically identical.

Synthetic alcohol is concentrated in the hands of a couple of mostly multi-national companies such as Sasol with operations in South Africa and Germany, SADAF of Saudi Arabia, a 50:50 joint venture between Shell of the UK and Netherlands and the Saudi Arabian Basic Industries Corporation, and BP of the UK as well as Equistar in the US.

However, on a global scale synthetic feedstocks play a minor role. In 2003, less than 5% of overall output was accounted for by synthetic feedstocks. More than 95% came from agricultural crops and given the strong interest in fuel ethanol production world-wide this share can be expected to grow in the future.

Another distinction which is of importance in the field of ethanol is the one between anhydrous and hydrous alcohol. Anhydrous alcohol is free of water and at least 99% pure. This ethanol may be used in fuel blends. Hydrous alcohol on the other hand contains some water and usually has a purity of 96%. In Brazil, this ethanol is being used as a 100% gasoline substitute in cars with dedicated engines. The distinction between anhydrous and hydrous alcohol is of relevance not only in the fuel sector but may be regarded as the basic quality distinction in the ethanol market.

The final distinction which is necessary in order to understand the dynamics of the world ethanol market is by end-use. Certainly the oldest form of use of alcohol is that of a beverage.

The most important market for ethanol as an industrial application are solvents. Solvents are primarily utilized in the production of paints and coatings, pharmaceuticals, adhesives inks and other products. Ethanol represents one of the most important oxygenated solvents in this category. Production and consumption is concentrated in the industrialized countries in Northern America, Europe and Asia. It is the only market where synthetic ethanol producers hold a significant market share.

The last usage category is fuel alcohol. As mentioned before, fuel alcohol is either used in blends, for example in gasohol or diesohol, or in its pure form. However, at present Brazil is the only country that uses ethanol as a 100% substitute for gasoline.


Chart 1 shows that the industrial alcohol market is the smallest of the three. Moreover, it is showing a rather modest rate of growth which is similar to the increase in Gross Domestic Product. Demand for distilled spirits in most developed countries is stagnating or even declining, due to increased health awareness. This is unlikely to change in the future.

The history of ethanol as a fuel dates back to the early days of the automobile. However, cheap petrol quickly replaced ethanol as the fuel of choice and it was not until the early 1980s, when the Brazilian government launched the Proálcool program, that ethanol made a come back to the market place. It may be estimated that fuel ethanol accounts for roughly 70% of world ethyl alcohol production in 2003. As can be seen from Chart 1, this share is forecast to rise to over 80% by the end of the decade. However, this projection only holds if the sometimes ambitious fuel ethanol programs which have been proposed in the last couple of years, come to fruition. Therefore, the figures presented here, represent more a potential than a hard forecast.

Ethyl alcohol as an automotive fuel can be used in two ways: First it replaces gasoline outright in dedicated internal combustion engines and secondly it is an effective "octane booster" when mixed with gasoline in blends of 5 to 30%. In this case no engine modifications are required. These blends achieve the same octane boosting or anti-knock effect as petroleum derived aromatics like benzene or metallic additives like lead. Ethanol easily blends with gasoline but not with diesel. If the diesohol blend is to obtain more than 3% ethanol special emulsifiers are needed.

Success factors

Fuel ethanol production and use is expected to rise strongly and it will go along with an ever wider geographical spread. Ten years ago, there were only a handful of countries producing ethanol. The largest was Brazil, where ethanol is produced from molasses and sugar cane juice. The US produces mostly corn alcohol and in France, sugar beets are being used. In some African countries, sugar cane was processed into fuel alcohol.

In 2003, we there were some 13 countries spread over all five continents which actually use ethyl alcohol as a fuel component. Looking into the future, the world fuel ethanol map may look like this in ten years time: the Americas are likely to be almost completely covered by fuel ethanol programs. Moreover, the green fuel will likely be established in the European Union as well as in India, Thailand, China, Australia and possibly Japan to name the largest nations.

What are the reasons for the overwhelming success of fuel ethanol? As fuel ethanol is competing with gasoline, a direct comparison between the two products is possible. Because ethanol is invariably more expensive to produce than gasoline, if actual market prices are taken account of, political objectives come into play. Ethanol has been promoted because it has a positive net energy balance, that means that the energy contained in a tonne of ethanol is greater than the energy required to produce this tonne. Moreover, it has been demonstrated that it has a less severe impact on the environment than conventional gasoline or other petroleum derived additives. As such it is also less dangerous to health. From a macro-economic point of view, it is thought to be good for the development of disadvantaged rural areas by promoting an industry which creates jobs. Furthermore it can help to reduce the dependence on oil imports and, finally, it may be regarded as a means to promote advances in biotechnology, particularly if one thinks of all the research that is going on in the biomass-to-ethanol sector.

If we look at the biofuel programs that are already in existence, there are three key success factors which must be considered:

  • First, the abundance and cheapness of feedstocks used for their production together with
  • the technology involved and last, but not least,
  • a supportive political framework.

The feedstock issue

Let's look at the feedstocks issue fuel first. According to our 2003 survey, around 61% of world ethanol production is being produced from sugar crops, be it sugar beet, sugar cane or molasses, while the remainder is being produced from grains and here maize or corn is the dominating feedstock. Feedstocks crucially determine the profitability of fuel ethanol production.

There are various ways to look at the issue. In Chart 2, the theoretical per ha ethanol yields of the three major feedstocks currently in use are plotted.




In the USA, corn (maize) is the predominant raw material for fuel ethanol production. (Chart 2) The ethanol yields per ha are the lowest by comparison. A middle position is held by sugar cane in Brazil but the highest ethanol yields per ha may be realized with sugar beets, particularly if calculations are based on the rather high yields that may be achieved in the EU's leading producer, France.

However, if we look at the factor productivity of the various ingredients (Chart 3), we can see that corn clearly takes the top spot with almost 400 litres of ethanol produced per tonne of feedstock. Sugar cane has an even lower factor productivity than sugar beet.

If we look at the gross feedstock costs per gallon of fuel ethanol produced, it is sugar cane grown in the Centre/South of Brazil which clearly leaves the rest of the competition behind (Chart 4). Note that these are gross feedstock costs that means we do not take account of the revenue stream from the sale of co-products. These may reduce the costs of feedstocks for ethanol production considerably.

We may arrive at a first conclusion concerning the role of feedstocks in biofuel production. Leaving aside biomass as a feedstock, the raw material accounts for around 70 to 80% of the overall costs of fuel ethanol. Therefore, their relative abundance plays a crucial role in getting the fuel alcohol industry started in a particular country. The highly regulated price of sugar beet in the case of the European Union may have acted as an obstacle to the emergence of a viable large-scale ethanol industry there. This may change in the future, not least because of developments in the political sphere.

Political support

Critics often ask why biofuels must be supported by the state. If fuel ethanol is such a great product, so they say, then it surely will gain market share without any government help. This argument is very much dependent on the assumption that the energy markets that we look at work perfectly. In the energy market, and in fact, in almost any market, these conditions are insufficiently met and, therefore, an active policy approach may be justified.

There is growing consensus that fuel ethanol may serve a multitude of goals that are socially desirable. At the same time, as a fuel, it is invariably more expensive to produce than for example gasoline. Or looked at it from another angle, ethanol faces an unfavourable opportunity cost structure. The opportunity costs for ethanol production from, for example sugar crops like cane or beet, is the return otherwise achievable if these feedstocks were used to produce sugar. So, if policy makers decide that ethanol is a desirable good they have to find ways to bridge the gap between the cost of ethanol and that of gasoline and they have to make ethanol production more attractive as compared to the manufacture of, say, sugar.

There are various ways to achieve that. It may be useful to distinguish between the various stages in the production and marketing process where subsidization may occur. For this end one can distinguish between input subsidies and output subsidies. Under the former category, one may summarize measures like feedstock price support (which results in prices below the going market rate), capital cost support (in the form of cheap loans and debt cancellations) and income tax concessions. On the output side most widely employed forms of support are excise tax concessions which make the product cheaper than would have been the case otherwise, so-called captive or mandated markets which ensure sufficient demand for the product, price guarantees and direct price support measures.

Subsidies in practice - Brazil

In the mid-1970s, the government of Brazil launched the National Fuel Alcohol Program or Proálcool, which aimed at increasing the share of domestically produced fuels in the country's fuel pool. Employing various forms of support, the program proved to be spectacularly successful. By 1980, ethanol had a larger market share in the transportation sector than gasoline (Chart 5).


Even though the lead has been lost since then, ethanol has managed to keep a significant market share in this segment until today. In fact, due to the high gasoline prices in the last two years, the market share of ethanol has increased further and is likely to continue to do so in 2003. Over the period from 1975 to 2002, fuel ethanol use helped to replace around 210 bln litres of gasoline, saving the country around $52 bln.

With the liberalization of hydrous alcohol prices in 1999, government intervention largely stopped. Today, authorities regulate the market through changes in the blending rate for anhydrous alcohol and occasional purchases for or sales from strategic reserves and credits for storing ethanol. At the same time, ethanol enjoys a tax advantage over gasoline.

There are calculations that put the average cost of fuel ethanol production in Brazil at around 50 cents per gallon, making the product highly competitive against gasoline. This competitiveness may be gleaned from Chart 6. Since the liberalization of the ethanol markets, fuel alcohol had a price advantage over gasoline of at least 33%.


The attractive price of ethanol from Brazil has resulted in the country becoming the largest exporter of this commodity. In 2003 exports at 770 mln litres were the second highest result in the history of the country and they are forecasts to steadily grow over the next couple of years. At present, exports are mostly in the form of beverage and industrial alcohol. However, the country is hoping that it will be the principal supplier of fuel ethanol to Japan, should this country introduce fuel alcohol mixes.


What is also obvious from Chart 7 is that Brazil's export performance has been erratic in the past. Particularly in the 1990s, Brazil was the world's largest importer of ethanol. There are at least two reasons why ethanol production in Brazil is volatile. The first, of course, is the weather. The country's cane growing region in the Centre/South may be subject to the El Nino and La Nina phenomena which usually go along with drought and below average sugar cane yields. The last time that a serious drought occurred in the region was in 2000/01 when cane production fell by around 15%.

The second reason is the fact that sugar cane serves as a raw material in two different markets. In this context, fluctuations in the production of ethanol may very well be explained with the concept of opportunity costs. To illustrate the value of cane for the various uses in Chart 8 is of importance.


The continous line shows the value of cane per kg of total recoverable sugars for the case that this cane has been processed into sugar for the domestic market. The dotted line shows the value of cane for anhydrous alcohol. For most of the time until early 2003 sugar for the domestic market was only marginally more profitable than anhydrous alcohol. That changed in late 2002, when prices on the domestic sugar market took off and thus lifted the value for sugar cane in this category. The prices of anhydrous alcohol also rose at the end of 2002, but not by the same margin. The situation eased in throughout most of 2003 but reversed again towards the end of the year. Given this opportunity cost structure a miller would have, for most of the time, preferred sugar production for the domestic market over anhydrous alcohol distilling.


However, there is a second market against which anhydrous alcohol has to compete. In Chart 9, the continous line depicts the value of cane used in the production of sugar for the export market. For most of 1999 and 2000, anhydrous alcohol production has been more profitable than the production for the world sugar market. However, in 2002, the price rise on the world sugar market as well as the repeated devaluation of the Brazilian real turned the situation around and sugar exports were more profitable than anhydrous alcohol. The returning weakness on the world sugar market towards the end of 2002 and the increasing tightness on the domestic ethanol market turned around the situation again and anhydrous alcohol production was more profitable than sugar exports. The sharp fall in alcohol prices in early 2004 meant that sugar exports were once again more profitable.

Charts like these are being constantly monitored by the milling industry in Brazil and cane is usually allocated to the most profitable end-use. Such a policy ensures that supply deficits in the various markets are being covered relatively quickly. After all, price signals are directly being translated into higher production of the commodity which is in deficit. On the other hand, it may well be that such a flexibility is an obstacle on the way to building a reputation as a reliable and consistent supplier of ethanol.

Of course there are remedies for both factors which influence the level of production. The weather factor can be minimized by spreading sugar cane plantations all over the country. This is being done right now. Brazil is a vast country. Production shortfalls in one part can usually be compensated for by increases in other. The structural volatility factor may be contained by decoupling ethanol from sugar production. This could be facilitated by the construction of dedicated plants that produce ethanol for export. Another way of ensuring sufficient supplies for the export market would be long term contracts for large volumes which allow for significant economies of scale at the plant. This, in turn, could compensate for a possibly lower profitability when compared with sugar.

The United States

The second largest exporter of ethanol in 2003 were the United States. Ethanol producers in the US distilled a record quantity of more than 10.6 bln litres in 2003, mostly derived from corn.


At the federal level there is a tax incentive in place which aims at promoting fuel ethanol production. Additionally, a number of ethanol producing states have introduced incentives of their own. The various tax incentives have certainly helped the ethanol industry in the US to get off the ground. However, the real boost came with the introduction of mandated or captive markets in the early 1990s. The Clean Air Act mandated the use of cleaner burning fuels in the dirtiest US cities. In order to achieve that the legislation enforces the addition of oxygen to gasoline. For a long time petrol derived MTBE has been the oxygenate of choice but this is likely to change now and this explains the amazing growth in recent years. Starting in January 2004, California, the largest US state, hasl banned MTBE from its fuel pool as did the states of New York and Connecticut. This opened the way for ethanol. There are several other  US states that plan to ban MTBE.

However, policy makers and industry representatives increasingly come to the conclusion that the reformulated gasoline program enacted under the clean air legislation is not sustainable in the long run. For example,

  • The petroleum industry can meet clean air standards without oxygen so there actually is no need for oxygenates like ethanol any longer.
  • After the ban of MTBE, ethanol would have a monopoly position which many refiners fiercely oppose.
  • Moreover, as mentioned before, there are several logistical problems attached to ethanol which could increase the price of fuel.
  • And finally, advances in auto technology devalue oxygenates. Modern car engines are producing less and less pollution.
USA: Fuel Ethanol Balance (1000 barrels)
Net imports
E' Stocks
Stocks/Use (%)
Source: EIA. F.O. Licht

All these concerns have resulted in the creation of the renewable fuels standard (RFS). Under this piece of legislation, renewable fuels are to grow to almost 20 bln litres by 2012. The program allows refiners to meet requirements through a credit and trading program. At the same time the oxygen requirements of the federal reformulated gasoline program would be abolished and MTBE would be banned. In order to put ethanol on a broader feedstock base there are special promotion programs for biomass ethanol.


The prospects for the ethanol industry in Canada improved substantially after the government in Ottawa has pledged financial support to the tune of CAD$100 mln for the sector in the framework of its Kyoto commitments. Under the plan, E-10 blends are to achieve a 35% market penetration by 2010, a figure that in today's terms represents 1.33 bln litres per year. With a CO2 reduction of 40% for grain ethanol, this equates to the replacement of 532 mln litres of gasoline or 1.33 megatonnes of CO2, just over one-half of one per cent of the 240 megatonnes of GHGs Canada is committed to achieve.

Canada - Details of the Ethanol Grant
Grant (mln CAD)
Total Investment  (mln CAD)
additional capacity 
(mln litres)
Commercial Alcohols
Husky Oil
Husky Oil
NorAmera BioEnergy
Okanagan Biofuels
Seaway Grain Processors
Suncor Energy


At present, Ontario is the only sizeable fuel ethanol producing province in the country but this could soon change. Following the July 15, 2002 passage of Saskatchewan's Ethanol Fuel Act mandating the use of ethanol, the government in Regina announced in October a set of phased-in, ethanol-blending rules for gasoline distributors. Phase-one of the government's new blending regulations is set to come into force July 1, 2004. At that time, a 2.5% minimum bulk average of ethanol will have to be maintained across a distributor's entire provincial gasoline network. Three months later, the provincial average rises to 5% and on April 1, 2005, it rises to 7.5%. The ethanol mandate has sparked an investment boom and so far plans for a total of 400 mln litres of new capacity have been announced. Besides the mandate the provincial government has granted a CAD0.15 per litre tax break for ethanol manufactured in Saskatchewan. Moreover, distributors are required to source up to 30% of their ethanol from small producers, defined as under 25 mln litres per year.

Manitoba is also looking at ethanol considering a mandate for E-10 blends. A subsidy of CAD0.025 per litre could cost the province CAD30 mln a year. So far projects for up to 100 mln litres are on the drawing board. Manitoba is home to the country’s first fuel ethanol plant: Husky Energy (formerly Mohawk Oil) has been producing green fuels at its 12.5 mln litre distillery for the last 25 years.

The European Union

Fuel ethanol production in the European Union has not really taken off yet. However, it may do so in the next couple of years. The main drivers will be two biofuel directives by the European Commission. The first directive, which is promotional in nature, has been approved in May 2003. Member states will now have to try to achieve a 2% share of renewables by the end of 2005 and a 5.75% share by end 2010. As a basis for reference, the energy content of all gasoline for transport placed on the market will be used.

EU Tax breaks for the use of fuel alcohol, percentage and amount, time scale and characteristics.
10 year for every plant
To provide new economic opportunities for less developed regions and to boost new environmental (bio)technology.
Tax break used to be linked to the production of ETBE, but as of 1/1/04 also for direct blending.
Programme never notified to the European Commission.
Relief can be adjusted yearly.
Strict conditions on kind of ethanol to be used.
Both ETBE and direct blending possible.
Programme approved by European Commission.
In line with environmental friendly image.
No ETBE used, only direct blending of E85.
Programme approved by European Commission.
Relief can be adjusted yearly.
To boost rural economy.
Since 1/1/2004 both ETBE and direct blending possible.
Special European Regulation.
Will end this year.
Government is convinced that through other means targets can be realised.
Tax exemption approved by the European Commission.
Industry considers incentive too low to start investments.
There is money, but no programme.
Wants to start on 1/1/05.
No clarity yet on kind of incentive.
Decision expected before end of April.
Mandatory targets.

March 2004

The second directive relevant for biofuels is the one on taxation of energy products. This one will most likely be adopted before the end of 2003. Under this directive member states will be able to exempt biofuels, such as ethanol, from the tax on mineral oil products.


As one can see from Chart 11, presently there are three fuel ethanol producers in the EU, namely Sweden, Spain and France. France has for a long time dominated the market but Spain now produces somewhat more. Nevertheless, if we compare the status-quo with what must be achieved under the directive it is obvious that member states must undertake tremendous efforts to reach the set goals (Chart 12).


However, under the current directives there are several loopholes. Therefore, this graph shows the maximum potential and not what is likely to be achieved. However, the Commission has the authority to change the ‘indicative’ targets into ‘mandatory’ ones if it regards the reason brought forward for non-compliance as not sufficient.

Finally, it may not be excluded that the European Union will require some imports in order to sustain the program. In the past the EU has been a net exporter, mostly of wine alcohol, which was processed in the Caribbean and then used as motor fuel in the United States. However, this wine alcohol is now increasingly being used on the domestic market in biofuel applications. Therefore, the EU's surplus will disappear in the future and the Community is likely to become a net importer.


India's transport sector is growing rapidly and presently accounts for over half of the country's oil consumption whilst the country has to import a large part of its oil needs. Hastening interest in an ethanol program was the country's sugar glut (part of which the industry is now exporting to the world market) and burgeoning supplies of molasses. The sugar industry lobbied the government to embrace a bio-ethanol programme for several years. The industry emphasised that producing fuel ethanol would absorb the sugar surplus and help the country's distillery sector, which is presently burdened with huge overcapacity, and also allow value adding to by-products, particularly molasses.

India's Minister for Petroleum and Natural Gas gave his approval in December 2001 to a proposal to launch pilot projects to test the feasibility of blending ethanol with gasoline. Mid-March 2002 the government decided to allow the sale of E-5 across the country. On 13 September, 2002, India's government mandated that nine states and four federally ruled areas will have to sell E-5 by law from 1 January 2003. In response India's sugar producers reportedly planned to build 20 ethanol plants before the end of the year in addition to 10 plants already constructed. Most of the plants were being constructed in Uttar Pradesh, Maharashtra and Tamil Nadu, the key sugar producing states and will chiefly use cane sugar molasses as a feedstock.

Estimated annual ethanol needs for a E-5 blend is 0.37 bln litres. A 10% blend increases the need to 0.72 bln litres. This is against installed annual production capacity of 2.7 bln litres/year and annual consumption of 1.5 bln litres. These figures have to be treated with some caution. The chemical industry, fearing higher ethanol prices as a result of the fuel alcohol programme, usually estimates the surplus to be much lower or even non-existent. The sugar industry, on the other hand, estimates capacity at 3.2 bln litres inflating the surplus.

The success of ethanol in India will depend to a significant degree on pricing. The sugar industry originally claimed that it could provide ethanol at 19 Rupees per litre ($0.38/litre), which is at a lower cost than the product it would substitute, MTBE, which costs 24-26 rupees per litre ($0.49-0.53/litre). The oil industry however is seeking parity between ethanol and the price of gasoline on an ex-refinery or import basis. In April 2002 the government announced a Rs0.75 excise duty exemption. Implementation of the excise duty for ethanol which, however, was delayed however until February 2003, because the chemical industry opposed it, fearing higher prices and shortages of alcohol.

However, pricing appears to becoming a stumbling block and in June 2003 India's Petroleum Ministry announced that it would appoint a Tariff Commission to fix an appropriate price for ethanol sourced from sugar mills. Ethanol pricing in India is also complicated by differences in excise duty and sales tax across states and the central government is trying to rationalize ethanol sales tax across the country. More significantly perhaps, there are still substantial differences in the profitability of potable alcohol as against fuel alcohol and in several states. Consequently, insufficient fuel alcohol is being produced to meet demand. Other states have yet to set up sufficient production capacity. Analysts expect that there is a deficit of around 150 mln litres under the current geographic base to the fuel ethanol program; a deficit that will grow once the mandated blending requirement is extended to all states in India. Consequently, there may be a short-term market for imported Brazilian ethanol.


Thailand's interest in establishing a large-scale bio-ethanol industry using feedstock such as cassava, sugar cane and rice, was manifested in September 2000, and reflects the nation's rising import bill for oil (the country is 90% reliant on imports) and high-energy prices which were adversely impacting the economy at that time. At the same time low prices for commodities such as sugar and cassava were a matter of concern for the government.

The Thai government moved swiftly in supporting the ethanol opportunity with the oil import bill as the swaying reason for pursuing the bio-ethanol programme. More recently, the role of ethanol in replacing MTBE has been offered as another justification for the ethanol program. The National Ethanol Development Committee has estimated that if 10% ethanol were blended with petrol or diesel, to replace MTBE, about 2 mln litres of ethanol would be required on a daily basis.

In order to encourage manufacturers to develop and market gasohol the Finance Ministry will waive the excise tax on gasohol as well as contributions to the State Oil Fund and Energy Conservation Fund. Furthermore to encourage investment in new capacity, promotion privileges are to be given by the Board of Investment. Tax privileges will be granted including duty exemptions on machinery imports and an eight-year corporate tax holiday. The Industry Ministry calculates the gasoline/ethanol blend would be 0.7-1.0 Baht/litre (US$0.01-0.02/litre) cheaper than conventional gasoline.

Late in 2001, eight private companies were granted licences by Thailand's Ministry of Industry to build ethanol production plants. The plants had a capacity to produce 1.5 mln litres of ethanol a day, or an annual capacity of around 0.495 bln litres. Four plants would use molasses as a feedstock and the others would use cavassa (tapioca). Five of the plants were expected to start production late in 2002 with a combined annual output of 114 mln litres. However, progress in constructing the plants has faltered. By mid 2003, only one distillery had advanced to construction stage and many had not submitted feasibility plans.


China is now home to the world's largest fuel ethanol plant. The Jilin Tianhe Ethanol Distillery has an initial capacity of 600,000 tonnes a year or 2.5 mln litres per day. Potential final capacity can be raised to 800,000 tonnes per year. Ground breaking took place in September 2001 and by late 2003 the first trials had started.

In November 2002 construction on a plant designed to produce 300,000 tonnes of fuel ethanol annually started in Nanyang, Henan province. The project, built by the Tianguan Ethanol Chemical Group Co., Ltd. (TICG), is expected to cost $155 mln and take two years to complete. Combined with the company's existing facility, TICG's total fuel ethanol capacity would reach 500,000 tonnes a year.

Fuel ethanol has already been in trial use in China for some time. From 2001, Zhengzhou, Luoyang and Nanyang in Henan as well as Harbin and Zhaodong in Heilongjiang province have been experimenting with using ethanol as a vehicle fuel. China is promoting ethanol-based fuel on a pilot basis in five cities in its central and north-eastern regions, a move designed to create a new market for its surplus grain and to reduce oil consumption. The promotion of ethanol as a fuel has been approved by the State Planning and Trade Commission and the State Development and Planning Commission.


The sugar industry in Australia first identified development of a cane-based fuel ethanol sector in the year 2000 at a time of significant financial hardship. The production of fuel ethanol was identified within some sections of the industry as one potential course to broaden the financial base and improve the sector's financial returns. The proponents argued that a fuel ethanol industry could be established without building a new infrastructure, as distilleries could be annexed to existing sugar mills. Calls for assistance to plan a viable and sustainable ethanol industry heightened in 2002 as a consequence of a return to low international prices for sugar.

Australia: Proposed new excise levels from 2008 (cents per litre).
Excise rates for:
Standard petrol
Ethanol LPG, LNG

The Federal Government early in 2000 moved to exempt ethanol from fuel excise of around AUD0.38/litre (US$0.21). Moreover, it set an objective that fuel ethanol and biodiesel produced in Australia from renewable sources will contribute at least 350 mln litres (or one per cent) of the total fuel supply by 2010 (progress towards the objective will be reviewed in 2006), as against 40 mln litres of mostly grain-based ethanol produced presently. It also supported two ethanol projects (via capital subsidies) in the context of its policy response to curbing greenhouse gas emissions (Greenhouse Gas Abatement Program). One is based at a sugar mill in North Queensland, which  intends to use molasses and sweet sorghum as feedstocks. The other was an ethanol blending facility in Brisbane at BP's Bulwer Island refinery, which, commencing May 2002, produced a 10% ethanol/gasoline blend. However, the company ceased producing the blend (February 2003) because of consumer fears over the possible danger to car engines. Even so, another oil major, Caltex Australia, started a 6-month ethanol blend trail (E-10) in May 2003 in the city of Cairns, using ethanol from sugar cane, to test the extent to which consumers would shift to the blend.

In September 2002, the government shifted the way it was supporting the nation's ethanol industry. The fuel excise exemption (amounting to around AUD0.38/litre) was ended and instead an ethanol production subsidy at the same rate for ethanol used in petrol was implemented for one year. Importantly the change in support policy raises the cost of importing ethanol, thereby strengthening the level of assistance to the local industry. In March 2004, the government acted to extend the subsidy for ethanol producers to June 30, 2011. At the same time it set a 10% limit on the blending of ethanol with petrol in conjunction with mandatory labelling of ethanol blends.

Together with the six year continuation of the ethanol subsidy, a AUD50 mln support package approved in August 2003 have considerably brightened the prospects for the establishment of a substantial cane-based fuel ethanol industry.

Peru and other Latin America

In summer 2002, the Peruvian government announced that the country plans to become a leading ethanol exporter. Under the so-called Mega-project the country plans to construct a pipeline from the central jungle in the north of Peru to the port of Bajovar. Under the project up to 20 distilleries will be built which all plan to use sugar cane juice as a raw material. The overall investment costs are estimated at around $200 mln.


Peru is planning that by December 2004 it will begin exporting the first lots of ethanol to California. Under the first stage of the project, some 100 mln litres will be exported by 2005, rising to 1.2 bln by 2010. In order to sustain the project, the country plans to introduce up to 240,000 ha of sugar cane in jungle areas, now home to the production of much of Peru's coca leaf. This is used to make cocaine of which Peru is the world's second biggest producer. The government hopes that coca farmers will see that sugar cane growing is a much more profitable enterprise.

In September 2001, the Colombian government approved a law which will make mandatory from 2006 the use of 10% ethanol in fuel in cities with populations larger than 500,000 inhabitants. According to the Ministry of Agriculture, this program will require the cultivation of an additional 150,000 ha of sugar cane. This compares with the present area under cane for sugar production of around 200,000 ha. Another 230,000 ha under cane are used for the production of non-centrifugal sugar, in Colombia's case panela. In order to supply the domestic market nine new ethanol plants have to be built from scratch in order to achieve the required production capacity of around 1 bln litres a year. In order to attract sufficient investment, the country will completely exempt ethanol from the tax on gasoline which would result in a significant price advantage of the green fuel. At present it may not be gauged whether or not the investment drive in Colombia will result in any surplus capacity.

The Association of Central American Countries is also looking at the possibility to increasingly produce fuel alcohol. Total output by 2010 is expected to reach around 500 mln litres, which would allow for a 10% ethanol blend in gasoline. However, the association is also looking at diversifying its export markets. At the moment, Costa Rica, Jamaica and El Salvador are exporting fuel ethanol to the United States under the Caribbean Basin Economic Recovery Act. Under this scheme the countries mentioned may import raw alcohol and re-export it duty-free to the United States.

World ethanol trade flows now...

How will all this translate into world ethanol trade flows? It may be useful to shortly take a look at the last 15 years of fuel ethanol trade in order to be able to assess the fundamental change which might be expected in the future. Fuel ethanol trade in the 1990s and in the early years of the new millennium was a rather minimalistic affair. There was a regular trade flow of wine alcohol from the European Union to the countries of the Caribbean where this product was refined and then shipped on to the United States as motor fuel. The second trade flow which lasted for a couple of years only in the mid-1990s consisted of synthetic alcohol and methanol from South Africa to Brazil. Moreover, Brazil imported considerable amounts of corn alcohol from the United States to bolster its domestic supplies. As has been mentioned earlier, in the mid-1990s the Brazilian sugar millers found the economics of sugar production much more profitable than that of ethanol. As a result, they had to import large quantities of alcohol to cover domestic needs.

... and in the future

How could the world trade in fuel ethanol look in the future? Let us start with the Americas. Latin America is likely to continue to lead the world in fuel ethanol production. This may be explained with the high yields in sugar cane production and the fact that many of these economies are agriculturally based. Several projects in Latin America such as Peru, Colombia or the Central American states were already mentioned. We may see large trade flows from South America to North America in general and California in particular. Another trade flow may be directed at the Asian/Pacific region and here Japan and possibly South Korea could take a top position. Moreover, there is the possibility of a developing export flow from South America to the European Union. As has been mentioned earlier, the European Union could develop into a net importing country if the Commission's directives are implemented. Several countries in Latin America enjoy duty-fee access to the European market and they would be in a prime position to act as suppliers. A third trade flow in the Americas will consist of raw alcohol from Brazil to the Caribbean and onwards to the United States. This sort of trade is likely to continue as long as Brazil does not enjoy duty free access to the US under the Free Trade Area of the Americas.

Southern Africa is another potential supplier to the world market also because of relatively high sugar cane yields and some under-utilized areas. Several South African countries also enjoy duty-free access to the European Union and therefore, some quantities may go there. Another potential export market for distillers in sub-Saharan Africa could be the Far East. In Asia, India, Thailand and Australia may emerge as smaller to medium sized exporters with South Korea and Japan on the importing side.

It has to be emphasised that this is a future scenario and it cannot be expected this structure to emerge before the end of this decade. However, if all the ambitious goals which have been formulated in the various biofuel programs around the world are implemented then there is tremendous scope for growth, not only on the domestic market but also on the export markets.


In Chart 14 the growth in fuel ethanol trade under very optimistic assumptions is forecast. Most optimistic seems to be that Japan would indeed source all its ethanol requirements from the world market first in order to produce E-5 and, at the end of the Kyoto period, even E-10.

For the US we assumed that the RFS would go through and that the country would source about 5% of its demand from overseas. The strong growth in requirements in Europe would mean that there nations would have to source at least 5% of their requirements from imports. Other countries that might need fuel ethanol from the world market comprise, among others, China, South Korea and Taiwan.


In order to put this development into perspective it might be useful to compare it with what would have normally been traded on the world ethanol market assuming an optimistic rate of growth of 3%. It is obvious that with the emergence of fuel ethanol on the market the total would immediately be equivalent to a third of world ethanol trade. By 2009, it would be double the trade volume in industrial and beverage applications.

This is quite a task even if we assume that not the complete volume may be reached. However, as a possibility this forecast provides a benchmark against which strategies in the export countries as well as in the importing nations will have to be matched.


Of course, such a strong increase in import requirements would have to be preceded by an increase in output. Indeed there are several projects under way which could facilitate such a development. From Chart 16 it may be gleaned that most of the growth will happen in the United States under the renewable fuels standard. Growth would also be strong in Brazil, mostly because of the promises in the export market. The EU will be the third largest producer of fuel ethanol by 2005 and the rates of growth would be considerably above those seen in Brazil and the United States.


Fuel ethanol will not go away in the foreseeable future. On the contrary, world production is set to continue to grow vigorously at least up to 2012. There are various fuel ethanol projects in the pipelines around the world and, even though their implementation may be delayed, there is enough momentum in the political arena to push them through. Political support is there and in many instances the industry and the authorities are very close to reaching an agreement over a viable framework of support for fuel ethanol.

World trade is likely to grow as well but the rate of growth will depend on several factors. First of all, the sugar and alcohol economics as has been illustrated in the case of Brazil. Unless the strong link between sugar and alcohol production can be severed an additional element of volatility will be present in the equation. The same applies to the corn and corn products market in the United States, even though this relationship is not very obvious at present because of the depressed state of the corn sweeteners market.

Before significant increases in ethanol exports can be expected, new investments in the origins will have to be made. It cannot be expected that the sugar and alcohol industries in the origins will be able to make these investments all by themselves. Instead, a new partnership between the producers and the importers will have to be created in order to provide the significant funds which are required to facilitate this growth.

Moreover, a viable trading system would have to be established. A futures market in particular would be required in order to provide the possibility to hedge against price fluctuations. There cannot be any doubt that the big futures markets in London or New York would be willing to create such a contract as long as it can be assured that there would be sufficient liquidity in the market to make it sustainable.

Finally, the problem of subsidized production and exports would have to be resolved. At the moment, the fact that fuel ethanol is being subsidized almost anywhere in the world provides a powerful justification for high import tariffs in order to neutralize these subsidies. In fact, potential producers in the European Union argue strongly in favour of high import tariffs so that the fledgling industry in the Community can establish itself. However, if this notion forms the basis for future policy making there is every reason to be pessimistic about the prospective development of world trade. Without an effective system of international exchange fuel ethanol supplies are bound to be volatile resulting in fluctuating prices and consumer uncertainty.

Despite these controversies the outlook for fuel ethanol is bright and strong rates of growth in both production and trade can be expected for the next several years.

   Back to Distilleries and Fuel-Ethanol Online Network