Pricey Plants Pressure Development

Ethanol plant project development is an increasingly complicated process as the price of everything from concrete to heat exchangers has skyrocketed. That inflation is eating into builder profits, and it has some potential ethanol producers taking a hard look at their project's bottom line.
By Jerry W. Kram | March 06, 2007
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Early last year, EPM reported that ethanol plant construction costs had soared in 2005 to the point where a 40 MMgy ethanol plant began to run upwards of an astonishing $60 million. What was impossible to predict then is that now, 15 months later, that same plant requires an $80 million investment.

The same basic economic forces that pushed costs skyward in 2005 continued through 2006 and into 2007, starting with the high cost of construction materials. Stainless steel prices, in particular, have continued to increase by leaps and bounds. The cost of other materials, like concrete and asphalt, also climbed.

Labor costs, especially for skilled laborers such as stainless steel welders, are up. Shops that manufacture critical components—pumps, heat exchangers and distillation columns, for example—are swamped with orders. That means it takes longer to have that equipment delivered to the plant site, and these days especially, time is money. "The generally accepted length for [construction] contracts exceeds 18 months at this point," says Jeff Roskam, a former United Bio Energy executive who now runs his own firm Roskam Industries Inc. "It was 14 months in 2001 to 2003 and since that time it has gone to 18 to 24 months in some cases. That's the outside. There are some plants that are still being built in 12 months."

The current construction climate has some companies rethinking their development plans. In October, Gate Petroleum, a fuel distributor in the southeastern United States, dropped its plans to build a 50 MMgy dry-grind ethanol plant in Florida, citing higher-than-expected construction costs. Minnesota-based Agassiz Energy LLC went back to the drawing board after the first engineering company it worked with gave the company a cost estimate that was double what it expected. "That was just not financeable or doable in any sense of the word," Agassiz Energy President Don Sargeant says, adding that the company is currently in discussions with a couple of engineering firms and plans to hire a new design firm in the first half of this year.

In general, however, the industry is moving forward with new construction projects. "Have [higher costs] slowed down the industry yet? A little bit, but not terribly," says ICM Inc. President Dave Vander Griend.

Two Dimes for a Nickel
Raw materials for construction projects continued to be near or at all-time highs in 2006. Nickel, a key ingredient of stainless steel, has been in short supply for two years now. New construction and repairing the damage from hurricanes that pummeled the U.S. Gulf Coast in 2005, combined with continued rapid industrialization in India and China, have created an astonishing demand for stainless steel.

According to the U.S. Bureau of Labor Statistics' Producer Price Index, steel prices were 9 percent higher in 2006, compared with 2005, and up 59 percent since 2003. Construction material costs as a whole increased 6.7 percent from 2005 to 2006 and are up 22.6 percent from 2003.

By the time steel is fabricated into components for ethanol plants it's even more expensive. "The price of stainless (steel) is double," Vander Griend says. "Everything we build has stainless steel in it somewhere. Structural steel costs have doubled. Concrete costs have gone up significantly."

The cost of stainless steel has put some pressure on design firms to consider alternatives, says Art Wiselogel, senior manager of project development for BBI International. However, once a design has proven itself as durable and efficient, engineers have a tendency to resist tinkering with it too much. "I think you will start seeing plants built that won't necessarily use stainless steel," he continues. "But most engineers feel that to produce a superior product—a superior ethanol plant that runs consistently—stainless steel is the way to go."

Wiselogel says a few engineering companies are trying designs that use steel tanks that aren't welded but are bolted together and then lined with glass. These tanks can be assembled without specialized welders and are made out of cheaper materials. However, engineers don't know how the glass liners will hold up with use. Will the glass scratch? Will the scratches become a place for bacteria to hide and contaminate the fermentation process? "It's basically unproven," Wiselogel says. "No one has a handle on whether that will be an issue or not." With some of the designs being built today, it will take five to seven years to find out how well they work, he adds.

However, the base design for most ethanol plants is already efficient, experts say. Finding more efficient designs won't be cheap. "You're not going to see the price of plants go down," Vander Griend says. "You want to add efficiencies? That again costs more money. You want high-efficiency windows in your house? They're not cheaper than low-efficiency windows. So if you want to gain some efficiencies within your plant, all of those come with costs."

Given that, Vander Griend says it's always difficult to approach a producer suddenly faced with higher construction costs and ask them if they want even higher costs. "We on the manufacturing side are doing everything we can to minimize the pain and discomfort to the owners and builders, but most of the increases are plain and simple out of our control," he says.

Take a Number
"Hurry up and wait" is the mantra for new entrants into the ethanol industry. Ethanol projects that used to take just a year to construct from groundbreaking to start-up can now take 18 months to two years. "The major reason for that is longer lead times needed for equipment," Wiselogel explains. "These fabrication shops are being overwhelmed with orders, not only from the ethanol industry. They got behind after Katrina, building pumps and pieces of equipment damaged for a lot of the refineries in Louisiana. So basically these guys are taking much longer to fill those orders just because they're backlogged."

Vander Griend agrees. "Plants are taking longer to build because we're waiting longer on the delivery of components," he says. "What used to get delivered in 12 weeks is now 20 weeks. Fermentation tank manufacturing used to be 16 weeks, and it's now 32 weeks. That really spreads out your construction time."

One way project developers are working around these delays is to order their equipment in advance, Wiselogel says. If a company has the money on hand—and the necessary agreements and documentation finalized with its engineering, construction and procurement contractors—it can get in line for the needed equipment before the project reaches financial close.

Vander Griend says he used to be able to order some components about the same time as he started dirt work at a site. Now he feels it's necessary to order those components three to four months before any dirt is moved to be as efficient as possible during construction.

Roskam echoes that sentiment. "There are only a few suppliers of key components," he says. "The process equipment [for ethanol plants], heat exchangers and pumps are very specific to manufacturers and model numbers. I think it's very fair to say that those would be the tight spots in the project delivery system."

Katrina has also pulled skilled workers from the Midwest, where a majority of the new ethanol plants are being built, to the Gulf Coast. That's led to higher labor costs and worker shortages on ethanol projects. Stainless steel welders who assemble tanks on-site are in particularly short supply. "Getting field-erected tanks and welders who are skilled enough to build stainless steel tanks are the second big reason for delays," Wiselogel says. "Oftentimes the field-erected tanks are the limiting factor in when an ethanol plant gets built. You can get as much done as you can beforehand, but ultimately you need to have those tanks erected before you can progress any further on the project."

Along with the drain on material and labor, heavy construction equipment, such as cranes, are also in short supply, Roskam says. When the recovery from a disaster like Hurricane Katrina pulls that equipment away from the general market, other projects are bound to experience delays.

Vander Griend says the increase in plant costs has put the squeeze on construction companies. He estimates that the inflation for materials and components to build an ethanol plant has been close to 2 percent a month in 2006. "It has been difficult for us because for plants we had priced and quoted, by the time you went in and bought the materials for them, your estimates were all undervalued," he says. "It's hurt the construction companies as much as it's hurt the consumer. With these wildly increasing costs, you just can't prepare for them all. Our margins for building an ethanol plant have gotten worse for two years in a row."

Change is Good?
If the current situation signals a slowdown for the ethanol industry, it may not necessarily be bad for the industry as a whole. "Overall, it's probably good for the industry, in my view" Roskam says. "The rapid expansion is creating fear about raw material supplies that may or may not be true. The markets lack clarity of information about the timing of the plants coming on line, and all they see is a really big number of plants."

If the industry slows its growth for a while, corn production and markets will have some time to catch up and adjust to the new reality, and some of the price volatility that made headlines in 2006 will have a chance to settle down. "So overall, I don't think [a slowdown in plant construction] is a problem, Roskam says. "I think it's probably OK."

Jerry W. Kram is an Ethanol Producer Magazine staff writer. Reach him or (701) 746-8385.