Export Strategies Simmer

Right now, meeting the growing demand for ethanol at home is priority No. 1 for U.S. producers, and knowing if and when domestic consumption will level out is a guessing game. But when production does eventually outpace demand—yes, history says that will happen—there will be producers and marketers jumping on market opportunities abroad. The question today, then, is not whether ethanol export markets will arise, but whether American suppliers will have a significant part in them.
By Nicholas Zeman | May 01, 2006
As U.S. ethanol producers scramble this spring to meet surging domestic demand for their product, it would seem unwise—perhaps even irresponsible—for marketers to strike up deals with ethanol takers abroad. The nation's progressive 7.5 billion-gallon renewable fuels standard (RFS) coupled with the termination of the federal oxygenate requirement, and the oil industry's rush to kick MTBE before its legal basis for using it crumbles in early May, made the domestic ethanol market almost too tight for comfort at press time in early April.

That's the situation now, spring 2006, and current market dynamics do not necessarily project future opportunities and challenges for this still-youthful industry. Ethanol plants on the East and West Coasts are being developed (and/or proposed) like never before, and some of them may be particularly well positioned to be exporters. In fact, even as the industry is consumed with its domestic obligations, several existing and would-be producers confirmed to EPM in late March that the potential to export ethanol, while a "back-burner" idea today, is a serious component of their long-term strategy.

Companies like U.S. EnviroFuels LLC, for example, a firm trying to develop an ethanol plant in Tampa, Fla., is basing its business plan, in part, on capitalizing on global demand for ethanol. The company's president, Brad Krohn, says the proposed facility—slated to be built at the Port of Tampa—would be able to leverage itself in the global supply chain. While Krohn believes most of the company's product would be absorbed domestically in the near-term, he says it is essential that the facility be able to take advantage of exports via ocean-going vessels, rather than being landlocked and restricted to road and rail.

Across the country in Washington, Moses Lake Ethanol (previously known as Pacific Rim Ethanol), a company proposing to build a 100 MMgy ethanol plant in the town of its namesake, is also including exportation in its strategic plan. Douglas Siddoway, corporate finance attorney for the Spokane law firm that represents the would-be producer, says the project's access to the Port of Seattle and the Port of Portland would be ideal for large ethanol shipments via the Pacific Ocean. "There will be a point when the level of production in this industry [reaches a level that encourages exports], Siddoway says. "So the ethanol produced here may end up on ships going abroad. Energy consumption is going up, and China and India—which are major importers of petroleum—will have to find alternative fuels to keep their economic engines going."

Indeed, China, India, Japan, European Union member states and several other nations with renewable fuels programs, are expected to struggle to meet their needs or, in several cases, their Kyoto Protocol obligations. As a result of both environmental objectives and ballooning energy consumption, the ethanol market is becoming truly global. Japan, for instance, is looking for long-term ethanol supply agreements of significant quantities. The nation has already struck deals with Brazilian producers and may aggressively seek suppliers of the renewable fuel elsewhere. Krohn believes that if Japan and other countries committed to Kyoto come calling, his company and others will be ready. For that to happen, of course, the economics have to be right, and the trade barriers must be minimal, he says.

Experts believe U.S. ethanol producers will start to aggressively pursue export markets when they see the proverbial "writing on the wall" that indicates a trend toward overproduction is near, which could happen rather suddenly. However, others say it is more likely that U.S. ethanol will be shipped abroad because of high international demand for the renewable fuel—not necessarily because of a weakened domestic market. Mike Kauhfer of Novahol Corp., a firm proposing to build ethanol plants in Alaska and on the West Coast, says the situation is inextricably linked to the world's oil consumption. "If you believe in [the concept of peak oil] … and that oil and natural gas [supplies] over the next 20 to 30 years will be unpredictable—and that alternative fuels [will continue to fill the void]—it is unlikely that the market will be too small or that there will be overproduction at all," says Kauhfer, adding that he believes U.S. ethanol production is trailing domestic demand at the moment.

In fact, the U.S. ethanol industry is volatile by its nature, and in recent history, there have been periods of shortages (usually aligned with high ethanol prices) and periods of surpluses (usually aligned with low ethanol prices). The market has a tendency to balance itself, though, and the extent and duration of these fluctuations in the future may ultimately determine the viability of export strategies. Rick Tolman, executive vice president of the National Corn Growers Association, tells EPM, "There will be short-term opportunities for both imports and exports. Right now, we're importing from Brazil. … It may be that in the past we've exported to Brazil."

Brazil, in fact, is the biggest player in the ethanol export game. Some have suggested that the United States will continue to trail in the international biofuels market if it remains too narrowly focused on fulfilling domestic demand. Industry observer Laslow Paszner of British Columbia-based Paszner Technologies says U.S. producers should not disregard Brazil's intense sugarcane and ethanol production—and its lead in the global trade of ethanol. He believes Brazil has an "obvious plan for geopolitical domination" of the international ethanol market. "Brazil now claims a competitive edge in ethanol as in sugar production, further strengthening the cost correlation between sugar and ethanol," Paszner tells EPM. "This [might make] Brazil the global price leader of ethanol, by being the lowest-cost producer with the highest production capacity in the world." Paszner's statement should be qualified with the fact that the United States just overtook the South American producer as the world's highest capacity producer.

Terry Ruse of future producer Agri-Ethanol in North Carolina, however, says the Brazil factor means little to current ethanol producers in the United States. "We have been behind Brazil [in low-cost production and export activity] for quite some time, so that isn't any concern," he says, adding that the RFS and the phaseout of MTBE has placed a huge market responsibility on U.S. producers. He says, quite frankly, that competing for international markets right now is a far-fetched proposition.
Taking it a step further, Tolman says that because ethanol production and use is contributing to greater U.S. energy security, producers "still have a big role to play" before export markets are pursued. In fact, most industry experts agree that the domestic ethanol market has so much growth potential that export opportunities might remain irrelevant for quite some time. "While we are short in the United States, and we anticipate being short generally for the foreseeable future, it just wouldn't make sense for us to look at being a supplier outside of the [country] in my opinion," Tolman says.

Kauhfer agrees that exports are not a realistic consideration for Novahol at the moment, but he also predicts major overseas markets for the renewable fuel developing in the near future. He says the involvement and success of American producers will depend on the regulatory and economic environments both here and abroad. "We don't have specific plans right now for exporting our products, but given the right price and the right situation, I can't imagine why we wouldn't," he says.
Krohn expressed a similar view in regards to the potential of the Florida plant his company is proposing to build. "This is a ‘flex-transportation' project that is located right on the water, so we have the ability to move raw materials—primarily feedstocks—by both ocean vessel and rail, as well as the finished product by ocean vessel, rail or truck," he explains. "There is a significant advantage of being on the water …"

Ethanol and distillers grains aside, there may be another export the U.S. ethanol industry will start cashing in on: process technology. "We would have more interest in licensing the technology involved in the production process—and we do have interest from overseas," Kauhfer says. "That's not us making ethanol and shipping it out. That's us taking our technology to another part of the world, where they [could] produce it and use it locally."

Interestingly, Tolman says the corn already exported by the United States could be used for ethanol production in other nations, meaning that America could perhaps become an exporter of not just ethanol, distillers grains and process technology, but a production feedstock as well. These and other factors are sure to play out in the near future as the emerging global market for renewable fuels gains momentum, capital investment and political support. "We don't have a lot of history [with exporting ethanol]," Tolman says. "There's going to be a lot of interesting kinds of trade going on until [the industry] matures a little bit and we see who's in a surplus and who's in a shortage, and which trade patterns become apparent."

Nicholas Zeman is an Ethanol Producer Magazine staff writer. Reach him at nzeman@bbibiofuels.com or (701) 746-8385.