By Dr. Christoph Berg
July 31st, 2001
Our special thanks are due to Dr. Berg, commodity analyst and author of F.O. Licht's International Molasses and Alcohol Report and World Ethanol Markets, Analysis and Outlook, for allowing us to publish this review online. F.O. Licht may be contacted at:
UK Office:
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Germany Office: P.O. Box 1220, 23909 Ratzeburg, Germany. Telephone: +49-4541-88920 Fax: +49-4541-82145 |
The outlook for world ethanol production in 2001 is for a
strong rebound after several years of decline. Overall output is forecast to
reach 31.4 bln litres compared with 29.9 bln in 2000 and 31.1 bln in 1999.
Nevertheless, the world total is still below the all-time high reached in 1997,
when a total of 33.0 bln litres were produced. Even though the bulk of
production still comes from Brazil and the USA, two countries with an elaborate
fuel ethanol program, there are interesting developments in other countries as
well. Some of these could result in new production centres being established
beside the traditional ones in the western hemisphere.
The most important development from a global point of view is probably the fact
that Brazil could lose its dominant role as a producer and user of ethanol over
the next couple of years. If California should indeed ban all MTBE in 2003, as
is currently required by executive order, ethanol demand will rise sharply and
the US could overtake Brazil by the year 2004, if not earlier.
Sizeable new production centres could emerge in Thailand, where the government
plans to produce up to 650 mln litres of fuel ethanol by 2003, as well as China,
where recently announced projects could raise fuel ethanol production capacity
to 1.6 mln tonnes (roughly two bln litres) a year. In addition, new synthetic
ethanol capacity could come on stream by 2005. For Europe, no such fixed
production targets exist but there are increasing indications that the
Commission is working on provisions for a Renewable Fuels Standard, securing a
rising market share for bio-fuels.
It remains to be seen whether all these new developments in the field of fuel
ethanol will help to redefine the world market. There are some quarters that
seek to establish fuel ethanol as an energy commodity, just like gasoline or
diesel. There is some likelihood that this plan will be successfully
implemented, once all these ambitious fuel ethanol programmes, which have been
announced over the last two years, are put in place. In this case, the world
market would have enough liquidity to facilitate a transparent price formation
process and, as a result, attract the interest of the players involved. In fact,
this instrument could have positive repercussions on use and production
world-wide. If the burden of fuel ethanol production is shared by a sufficient
number of producers, crop shortfalls in a specific country need not necessarily
disrupt supplies, as these could be sourced from elsewhere. Therefore,
consumption patterns could stabilise and help to increase the attractiveness of
fuel ethanol as a renewable source of energy. However, before this happens, the
new projects need to get off the ground, requiring large investments and
substantial adaptation of existing infrastructures. The challenge ahead is
enormous and it may take longer than planned to achieve the set goals. However,
one thing is certain, the outlook for fuel ethanol has never been brighter.
World Ethanol Production |
The Americas continue to be the leading ethanol producing
continent and there is no indication that this will change in the foreseeable
future. Total production in 2001 is forecast to reach 20.6 bln litres, up from
19.5 bln in 2000. This is equivalent to around 66 per cent of world output. The
world leader continues to be Brazil, where output for 2001 is forecast to
reach 11.9 bln litres compared with a revised 2000 estimate of 11.4 bln. The
downturn in production in 2000 was mainly the result of a sharply reduced cane
crop in the main growing region of the Centre/South. Alcohol prices, on the
other hand, were quite attractive. The value of cane, if used for anhydrous
alcohol production, was at par with sugar produced for the domestic and the
export markets until February 2001. After that, alcohol values on the domestic
market weakened and, as a result, the value of cane for this use also dropped.
It is not yet clear what consequences arise from this deterioration in the
economic position. Most market observers still believe that the higher cane
crop, together with the increase in the amount of anhydrous alcohol blended with
gasoline, could prompt overall production to go up. However, sharply higher
export values for sugar (particularly in the wake of the weakening Real) have
meant that millers produce as much sugar for export as possible. Given the
outlook of another world sugar deficit in 2001/02, this strategy might be
pursued by the industry for the next couple of months. This, in turn, could put
pressure on cane supplies for alcohol production.
Longer term, the fate of the Brazilian alcohol industry will mostly depend on
the development of demand for anhydrous alcohol. The production of hydrous
alcohol is expected to fall further, as scrapping rates for old ethanol-powered
vehicles are still exceeding new sales by a large margin. Even the sharp rise in
gasoline prices over the last couple of months has not changed that. If the
government wants to continue to support a large number of cars with a dedicated
alcohol engine, it will have to revive its plan for a "green" fleet.
This fleet could comprise taxis, official cars or busses. However, so far the
government seems to be reluctant to commit itself to this question.
Anhydrous alcohol production on the other hand is likely to grow further, as
long as the government maintains its blending provisions. At the moment, there
is no indication that there will be a change in strategy. Even though the share
of alcohol in the fuel mix in the transportation sector has been declining over
the last couple of years, it still represents a substantial chunk of overall
supplies. Brazil may become increasingly independent of gasoline imports but
ethanol has made a valuable contribution to the development of the country's
agro-industry. Moreover, the addition of alcohol seems to have supported the
combat against air pollution in such mega-cities as Sao Paulo. Most analysts
believe that anhydrous alcohol production will more and more crowd out hydrous
alcohol in the fuel market, until the latter is completely phased out within a
decade. On the other hand, all these long-term studies do not project a strong
increase in overall alcohol production.
Brazil - The Value of Cane for Various Uses |
This is why it can be anticipated that the USA will overtake Brazil in
the near future. After the decision by the Bush administration to deny
California an oxygenate waiver, fuel ethanol production in the United States is
expected to grow strongly. According to the Renewable Fuels Association, by the
end of 2003, US ethanol production capacity will reach 3.5 bln gallons (13.25
bln litres) a year, 1.5 bln gallons more than in 2001.
At present, California uses 3.8 bln gallons of MTBE, compared with 4.5 bln used
in the whole of the US. MTBE, like ethanol, is an oxygenate, which helps
reformulated gasoline to burn more cleanly. Under federal law, in urban areas
with the worst pollution - like many Californian cities - RFG must contain at
least two per cent oxygen by weight. This requirement applies to about 70 per
cent of the gasoline sold in California.
The switchover to ethanol could prove to be a logistical nightmare. Apart from
all the efforts by the ethanol industry to prove that it can produce the
quantity required, the question of how the product will be transported to
customers in California is still largely unresolved. Ethanol is a solvent and
has an affinity for water. Therefore it is not suitable for transport in
pipelines (the most cost-effective means of transport). Instead, there are two
alternatives, namely either by truck and railcar directly to terminals in
California, or by barge to the US Gulf coast and then via tanker vessels to the
Californian coast.
USA - Fuel Ethanol vs. MTBE |
It is not only the chemical properties which make the pipeline option unviable.
Liquids that move through pipelines flow from one terminal to another in 800,000
gallon-quantities. There is not one ethanol plant big enough to make it
worthwhile to ship by pipeline. Major ethanol companies have also begun to
acquire storage facilities at the Los Angeles ports to handle ethanol that will
go down the Missouri and Mississippi rivers by barge and then by ship through
the Panama Canal. Railroads will also face limitations because of unloading
facilities. Up to now, pipelines have been the main mode of transporting
petroleum to California, and therefore the state is short of above-ground
facilities to unload, store and distribute ethanol. According to industry
sources, California is likely to use 61 railcar loads of ethanol a day. These
would be delivered in 110 car trains, but so far the state does not have the
facilities to handle these trains.
However, there is serious opposition to the ethanol option. MTBE producers fear
loss of market share and revenue and refiners are concerned about the technical
challenge ethanol may pose for their infrastructure. There is even criticism
from environmentalist quarters, which charge that the increased use of ethanol
could increase the state's smog level during hot summer months. The critics
charge that while ethanol is successfully reducing carbon dioxide and carbon
monoxide emissions, recent studies have shown that it could increase emissions
of nitrogen oxides and volatile organic compounds (VOC), two leading components
of smog.
According to Governor Gray Davies, the decision to introduce ethanol in
California on a large scale will mean that the citizens in the state will pay at
least two to three cents/gallon more for gas, or $450 mln/year after 2003, when
the rule is set to go into effect. California consumes about 14.5 bln gallons of
gasoline a year, more than any other state. So far, there are only two ethanol
producers in California, Cucamonga and Corona. Cucamonga produces ethanol from
beer waste, while the Corona plant uses cheese waste. Combined, these two plants
produce only about four mln gallons of ethanol a year, somewhat more than half a
per cent of prospective needs.
Canada is also in the process of greatly expanding its ethanol production
capacity. The total for 2001 is forecast to reach 238 mln litres, unchanged from
last year, but more than twice the amount produced in 1997. For 2002, the
Canadian Renewable Fuels Association (CRFA) forecasts a rise to 358 mln litres,
as several new projects are expected to start operating by then. For example,
the Seaway Valley Farmers Energy Cooperative is building a C$48 mln ethanol
production facility in Cornwall. The plant, scheduled to open in 2002, is
expected to have an annual capacity of more than 60 mln litres. Likewise, a
C$100 mln plant in Varennes is expected to start producing in 2002. Commercial
Alcohols will operate the 120 mln litre-facility. Longer term, output could rise
to as much as 750 mln litres, boosted by the government's Action Plan 2000 on
Climate Change. The government supports the ethanol industry with a C$0.10 per
litre-exemption on federal excise taxes for the ethanol portion of blended
fuels. The regular excise tax on gasoline is currently standing at C$0.147 per
litre. Canadians very much welcome the green fuel as recent polls show. Nearly
80 per cent of Ontarians would be willing to use ethanol in their cars,
Oracepoll Research found out.
World Fuel Ethanol Production |
Unlike their counter-parts in the US, Brazil or Canada the
EU lacks a coherent biofuel strategy which, many believe, is a major reason for
the industry remaining well below its true potential. However, even though
bioethanol plays a smaller role than in the Americas, it is likely to grow with
several projects under way.
Spain is said to become the largest bioethanol producer in the EU by
2004, when the third and largest plant will come on stream in Salamanca. So far,
one bioethanol plant is up and running in Cartagena with a total capacity of one
mln hl a year. A second one is to start operations in the first quarter of 2002
in Galicia. Production capacity there is 1.26 mln hl. Finally, the Salamanca
plant will have a production capacity of two mln hl. This plant will use biomass
as feedstock and, if successful, would be the largest ethanol plant employing
such a production process world-wide.
In France, the prospects for bioethanol production have dimmed, at least
in the short term. While the Farm Ministry in September 2000 raised the
production ceilings for ETBE by an extra 115,000 tonnes, the decision by a
European court has challenged the current practice of support. Up to now,
biofuel plants in France were granted tax exemptions on the grounds that these
were pilot projects that developed more environmentally friendly fuels. However,
the court said the plants benefiting from the lower rates were operating
established processes, and that the aid was thus for economic and industrial
rather than technological purposes. In this case, lower duties could only have
been approved by unanimous ministerial agreement, it said. However, the industry
is confident that the dispute will be settled soon and that the sector will be
allowed to grow further.
Production in Germany could rise slightly in 2001, due to higher output
in the fermentation sector. In the wake of the reform of the German
Branntweinmonopol, some industrial distilleries (molasses based) could opt out
of the current market regulation, taking advantage of rather favourable
transition rules. Figures so far suggest that fermentation alcohol production
could rise by some 100,000 hl.
In Italy, production will fall due to the exit of a market major in the
molasses alcohol sector, as well as lower wine alcohol production.
Production in central and eastern Europe is expected to grow only marginally.
The Russian alcohol market is the largest in Europe, even though its size
is vague because of the big black market. According to official figures, total
alcohol output in 2000 reached around 800 mln litres, the largest part of which
was beverage alcohol. For 2001, an increase is forecast in beverage alcohol
production, after the sector had suffered from various tax increases implemented
in 2000. In Ukraine, the government is trying to put the industry on a
sounder footing. A fuel alcohol program was implemented in summer 2000, but so
far production has remained below expectations. This is forecast to change in
2001. At the same time, first data for 2001 suggest that beverage and industrial
alcohol production may rise, with the total to May being up by around 25 per
cent year-on-year. Total beverage alcohol production in 2000 was around 190 mln
litres, the country's industry association UkrSpirt said.
Ethanol production in Africa is concentrated on the
southern tip of the continent, with the Republic of South Africa
accounting for approximately 70 per cent of the total. The largest player is
SASOL, producing industrial alcohol from coal and gas, with a capacity of around
220,000 tonnes a year. All of this is captively used to make ethyl acetate, high
purity ethanol and a small volume for fuel. Production of high purity ethanol
has been growing in recent years, with the total in 2001 forecast to reach
126,000 tonnes, against 97,000 tonnes in 2000.
Besides synthetic alcohol, South Africa also produces increasing amounts of
fermentation ethanol, with molasses being the major feedstock. Illovo's Merebank
facility is forecast to reach its capacity limits in 2001 of 40 mln litres
compared with 38 mln in 2000. In early 2001, leading trade houses Alcodis and
Alcotra, Belgium, acquired NCP Alcohols of South Africa for Rand 70 mln. NCP
produced 24,000 tonnes of alcohol in 2000, and is presently preparing to double
that quantity. The alcohol is mainly destined for export markets in Africa, Asia
and America.
One of the most interesting import markets in Africa in recent years was Nigeria.
The country stopped producing ethanol in 2001, after cheap world market imports
and a difficult domestic feedstock situation had undermined the viability of the
domestic sector. The total market volume in Nigeria is estimated at around 90
mln litres, the largest part of which is now supplied by South Africa, Brazil
and Spain. In the meantime, Nosak Agencies Limited, an ethanol importer, is
planning to build an alcohol plant in the country. The facility will use
molasses from a sugar refinery which was built in the port of Lagos, and is
owned by business magnate Dangote. The plant is to use an estimated 150 tonnes
of molasses a day, which would imply a production capacity of around 45,000
litres per day.
China is one of the latest
countries to announce a comprehensive fuel ethanol program. In late 2000 it was
announced that the country plans to build a fuel ethanol plant in the province
of Jilin. The facility is designed for an annual production of 800,000 tonnes of
fuel alcohol, and operations are to start by the end of 2002. The plant will
produce anhydrous alcohol from corn. Earlier, a beverage ethanol plant in
Heilongjiang was refitted so that it could produce fuel ethanol with a capacity
of 100,000 tonnes a year. In addition, the Henan Tianguan Group started to
produce fuel ethanol at a 200,000 tonne facility in March. Finally, a 500,000
tonne plant has been announced for the cane growing province of Guangdong. All
plants combined would raise fuel ethanol production capacity to 1.6 mln tonnes.
China sees fuel ethanol as an opportunity to utilise its structural grain
surpluses more efficiently and to reduce the amount of oil imports. At present,
China consumes about 36 mln tonnes of gasoline a year.
In Thailand the fuel ethanol program, announced with much fanfare in late
2000, is getting under way. Local and international investors are looking at the
possibility of building plants with an overall capacity of 2 mln litres per day,
with sugar cane and tapioca being used as feedstocks. As in the case of China,
Thailand aims to reduce its oil import bill and to create new outlets for farm
produce. So far, two oil companies have started distributing fuel ethanol
blends, but have run into difficulties sourcing sufficient quantities of
feedstocks. Fuel ethanol blends are sold at prices which are somewhat lower than
those for premium gasoline and demand has been brisk, industry sources said.
India is the third country in the region which has started to produce
anhydrous alcohol for fuel purposes. At present there are three pilot plants
operating in the country producing ethanol for sale in fuel blends containing
around five per cent alcohol. India is heavily dependent on oil imports with the
total forecast at around 75 mln tonnes in 2001 valued at $17.5 bln. At the same
time, the ethanol industry in India is suffering from oversupply, with total
capacity now put at 3.2 bln litres, while actual production is around 1.8 bln.
However, the argument is not as straightforward as it may seem. The country's
large alco-chemical industry fears that production of fuel ethanol could raise
prices of molasses, thus increasing production costs for them as well. The
industry predicts that many facilities could face bankruptcy as a result of
higher feedstock costs. However, so far the government seems to be determined to
push ahead with the scheme.
World Ethanol Production (1000hl) |
|||||
Country |
2001 |
2000 |
1999 |
1998 |
1997 |
France |
8 000 |
8 120 |
7 540 |
7 788 |
7 671 |
Germany |
2 950 |
2 850 |
3 400 |
3 640 |
3 750 |
Italy |
1 900 |
2 056 |
2 009 |
2 251 |
2 297 |
Spain |
2 250 |
1 450 |
1 250 |
1 400 |
1 360 |
UK |
4 300 |
4 350 |
4 100 |
4 220 |
4 100 |
Other EU |
2 221 |
1 871 |
1 853 |
1 876 |
2 020 |
EU |
21 621 |
20 697 |
20 152 |
21 175 |
21 198 |
Czech Republic |
900 |
900 |
900 |
1 050 |
1 090 |
Hungary |
510 |
553 |
481 |
494 |
531 |
Poland |
1 580 |
1 600 |
1 700 |
2 080 |
2 400 |
Russia |
11 700 |
11 500 |
12 800 |
12 000 |
11 800 |
Ukraine |
2 200 |
1 960 |
1 740 |
1 560 |
2 470 |
Other Europe |
3 023 |
3 032 |
2 952 |
3 045 |
3 587 |
Europe |
41 534 |
40 242 |
40 725 |
41 404 |
43 076 |
Argentina |
1 530 |
1 710 |
1 735 |
1 766 |
1 610 |
Brazil |
119 000 |
114 000 |
129 821 |
141 221 |
154 934 |
Canada |
2 380 |
2 380 |
2 000 |
1 500 |
1 500 |
Cuba |
850 |
840 |
800 |
795 |
1 100 |
Ecuador |
627 |
375 |
321 |
313 |
263 |
Guatemala |
600 |
600 |
450 |
450 |
500 |
Mexico |
701 |
671 |
562 |
531 |
532 |
USA |
75 800 |
70 500 |
66 050 |
64 500 |
58 860 |
Other Americas |
4 180 |
4 042 |
3 867 |
3 828 |
3 770 |
Americas |
205 668 |
195 118 |
205 606 |
214 904 |
223 069 |
China |
30 900 |
29 700 |
28 600 |
28 000 |
26 900 |
India |
17 800 |
17 200 |
16 900 |
16 881 |
16 470 |
Indonesia |
1 650 |
1 600 |
1 500 |
1 650 |
1 740 |
Japan |
1 360 |
1 100 |
1 040 |
1 020 |
1 040 |
Saudi-Arabia |
3 900 |
4 100 |
3 900 |
3 700 |
3 900 |
Thailand |
1 500 |
1 000 |
3 200 |
2 650 |
3 750 |
Other Asia |
2 485 |
2 613 |
2 653 |
2 820 |
2 763 |
Asia |
59 595 |
57 313 |
57 793 |
56 721 |
56 563 |
Australia |
1 540 |
1 200 |
1 000 |
900 |
850 |
New Zealand |
174 |
195 |
176 |
190 |
178 |
Other Oceania |
80 |
80 |
80 |
80 |
80 |
Oceania |
1 794 |
1 475 |
1 256 |
1 170 |
1 108 |
Malawi |
120 |
120 |
122 |
119 |
154 |
South African CU |
3 852 |
3 800 |
3 900 |
4 100 |
4 300 |
Zimbabwe |
293 |
257 |
263 |
221 |
252 |
Othe Africa |
1 059 |
1 036 |
1 048 |
991 |
1 089 |
Africa |
5 324 |
5 213 |
5 333 |
5 431 |
5 795 |
World |
313 915 |
299 361 |
310 713 |
319 630 |
329 611 |
The "fuel ethanolization" of the world alcohol
industry is set to continue. If all recently announced ethanol projects are
implemented, total fuel ethanol production world-wide could grow to 31 bln
litres by 2006 against somewhat below 20 bln in 2001. As a result, the share of
fuel ethanol in 2005 could jump to almost 70 per cent compared with around 63 in
2001. Such a change is likely to have far reaching implications for the world
alcohol sector. At a national level, such a growth can only be facilitated if
plant sizes increase tremendously. This, in turn, would have repercussions on
the feedstock market as well, where infrastructural adaptations would have to
take place. At the same time, distribution systems would have to change. In
countries where fuel ethanol receives financial assistance from the state (in
the form of tax incentives or direct subsidies, etc.), fuel ethanol plants are
likely to crowd out those producers that traditionally supply the industrial or
beverage sector. This is so because fuel ethanol producers can fully utilise
economies of scale and are also able to cross-subsidise production for other
markets. The USA is a good example of what to expect if fuel ethanol production
takes off on a large scale. Today, fuel ethanol producers also dominate the
beverage and industrial markets. However, the structure of the distilling
industries in other countries is different and therefore the development path
needs not necessarily be the same. However, the forces at work will be the same
and something similar can therefore be expected.
At an international level, the increased production and utilisation of fuel
ethanol will make necessary an international exchange mechanism, which can help
to stabilise the market in times of regional production shortfalls. This will be
a very difficult operation. After all, fuel ethanol production in most countries
is being subsidised in order to support domestic farmers. If large scale imports
occurred, foreign farmers and ethanol industries would benefit from these
support mechanisms. Nevertheless, an international exchange will be the only way
to firmly establish large-scale fuel ethanol programmes in any one country.
Biofuels are produced from renewable resources, supplies of which are dependent
on the weather. This is a fundamental difference to non-renewables, such as oil
and gas. As a result, the level of production cannot be fully controlled by
mankind. On the other hand, being produced from agricultural crops, fuel ethanol
production need not be concentrated in a handful of countries, as is the case in
the oil sector. Therefore, it is unlikely that a typical importer/exporter
relationship will develop. Instead, international trade will occur in order to
compensate for temporary production shortfalls and, as such, will remain at a
rather limited level relative to world production. There could be some countries
that will start to regularly import fuel ethanol in order to make the fuel sold
on the domestic market, more environmentally friendly. However, these countries
will remain the exception. Fuel ethanol, besides its environmental value, is and
will remain first and foremost an instrument to support farmers. It is they, who
in the first place, will profit from fuel ethanol programs and it is they who
primarily lobby for the production and the utilisation of fuel ethanol.