Costly Chemicals

The once abundant and relatively cheap chemicals indispensable for the production of ethanol are now hard to get and expensive. Although the rapid rise of the industry is partly to blame for this, other factors are influencing the increasing cost of these compounds including high natural gas prices, the demands of the metal industry and incresing demand for fertilizer.
By Jessica Ebert | January 10, 2008
Although sulfuric acid, caustic soda, urea and anhydrous ammonia represent a small portion of the total cost of producing a gallon of ethanol, the prices for these chemicals are rising and producers, already beleaguered by high corn and low ethanol prices, are feeling the crunch. "We're very concerned," says Walter Wendland, chief executive officer and president of Golden Grain Energy LLC. "Even though these chemicals represent a fairly small portion of the total cost of operating a plant, those 2 to 3 cents may be somebody's entire margin with high corn prices."

To operate Golden Grain Energy's 100 MMgy ethanol plant in Mason City, Iowa, for one year requires about 2,000 tons of sulfuric acid, 1,000 tons of caustic soda, 5,000 tons of urea and 600 tons of anhydrous ammonia. Although these numbers vary from plant to plant, the importance of these chemicals in the efficient production of ethanol is undeniable: sulfuric acid and caustic soda are used to clean tanks, urea is used to feed yeast in the fermentation process and anhydrous ammonia is used in the early stages of the process to balance the pH and improve the action of enzymes used in the slurry system, Wendland explains. Since 2006, prices for sulfuric acid and urea have doubled and caustic soda costs about $100 more per ton, according to Steve Grohs, regional industry manager of biofuels for Univar USA, an industrial chemical distribution company. In the case of ammonia, natural gas prices and increased fertilizer demand have nearly tripled prices since 2002. "Chemicals used to be everywhere and were dirt cheap," Grohs says. "Now there's no indication that this price escalation will change."

Prices are reported each January, April, July and October and are based on various standards used in international trade contracts such as free on board or FOB.
SOURCE: Fertecon

Prices are reported each January, April, July and October and are based on various standards used in international trade contracts such as free on board or FOB.
SOURCE: Fertecon

Prices are reported each January, April, July and October.
SOURCE: Fertecon

Production Challenges
Securing sulfuric acid is of greatest concern to those in the ethanol industry. "If there's one chemical that's going to be the Achilles' heel of the industry, it's going to be sulfuric acid," Grohs says. "I can get urea, I can get caustic. It may not be as cheap as it was two years ago but I can get it. Sulfuric acid may not be as cheap as it was two years ago but in some cases I can't get it and neither can other suppliers."

With applications ranging from fertilizer production to the processing of ores and oil refining, sulfuric acid has earned the prestige of being called the "workhorse" of all industrial chemicals. The traditional method of mining metals like zinc, copper and nickel involves a thermocatalytic process that releases a sulfurous gas, which is captured and mixed with water to produce an oily, colorless liquid—sulfuric acid. Most of the ethanol industry is supplied by this smelters acid, Grohs says. "Although a lot of sulfuric acid is produced in North America, the U.S. relies heavily on import product as well," he says. "However, the import market has all but dried up due to the global demand for sulfuric acid, and high prices being paid compared with the U.S. acid market. Those consumers that relied on the import acid are now turning back to the North American producers adding more pressure to their supply." One reason is that prices for metals are at an all-time high and sulfuric acid is used in a leaching process to extract metals from ore, imports of the chemical to the United States are being diverted to countries like Chile with leaching operations that are willing and able to pay exorbitant prices.

In addition, the fertilizer industry is one of the largest global consumers of sulfuric acid. "Demand for fertilizers is astronomical," Grohs says. "Sulfuric acid is a feedstock for a tremendous amount of fertilizer so the fertilizer guys are consuming every ton of sulfuric acid they can get their hands on." Some companies such as Texas-based Martin Midstream Partners LP have chosen to secure a sulfuric acid supply and lower fertilizer feedstock costs by building their own plant. The Martin Midstream Partners sulfuric acid plant, which came on line this past spring, is located at its Plainview, Texas, fertilizer production facility. "Despite some initial operational delays with the third-quarter startup of the sulfuric acid plant, we have been running at full capacity for more than 30 days and expect to realize our first full quarter of benefit from sulfuric acid operations in the fourth quarter," Ruben Martin, president and chief executive officer of the company announced in early November. Despite this, construction of facilities that would lessen the strain on the sulfuric acid supply are not expected to come on line in the United States anytime soon, Grohs says. Therefore, there is not really going to be any relief until the U.S. market is attractive again. "Whoever pays for the acid in '08 and '09 is going to get the acid," he says.

The situation for urea is similar although somewhat less severe: most of the urea used in the United States is imported and prices have never been higher but the supply is not so tight. "You can get urea," Grohs says. "You just have to pay for it." Urea is made from anhydrous ammonia, which itself is a product of the conversion of natural gas into hydrogen. A series of chemical reactions transforms this gaseous hydrogen into ammonia. Although natural gas prices in the United States have been fairly stable after reaching an all-time high following Hurricanes Katrina and Rita in 2005, the cost of natural gas in the states is still significantly more expensive than in the Middle East or eastern Europe.

But the price of natural gas is not the major driver for high nitrogen costs, says Mark Morrissey, chief executive officer of United Services Association, an Iowa-based chemical procurement and risk management service for the agriculture industry. "I would say the cost of natural gas is one factor in determining the price of anhydrous ammonia but I wouldn't say that it is the major factor today." A few years ago the latter was true but since then, "we have moved from a supply-cost driven valuation to a demand-driven valuation," Morrissey says. "It's crop acres. It is corn acres jumping 15 million acres in one growing season. This jump in demand has put a lot of strain on supply."

A significant portion of the blame for this strain can be placed on the shoulders of the ethanol industry. In addition, in the past few years, a lot of the stateside production of anhydrous ammonia has shut down, due to ongoing increases in natural gas costs. "At that time, the production economics here were rising much more than elsewhere in the world," Morrissey explains. However, in the past 12 months, he says, natural gas prices are starting to reach a kind of equilibrium. "We see gas prices moderating here stateside, and elsewhere in the world we're seeing natural gas prices increase," Morrissey says. Regardless, the United States is dependent on imports to meet its nitrogen diet and there is little in the way of new construction of nitrogen plants on the drawing board.

Although the story behind the pinch in caustic soda supplies is not as bleak as that of sulfuric acid, urea or anhydrous ammonia, it's still unique and significant. Caustic is a byproduct of the synthesis of chlorine gas, which is consumed in large part by the plastics industry for the production of polyvinyl chloride plastic (PVC). The PVC market follows the commercial building market. When the housing market is soft, the demand for PVC drops and likewise, chlorine production falls. As a result the availability of caustic soda dips as well, Grohs explains. "Again it's controlled by another industry," he says. "We simply get what's available to us based on that industry's fluctuations in demand."

In addition, U.S. exports of caustic soda are surpassing imports mainly in response to the weak U.S. dollar. With lower production rates here in the states, that makes the market "balanced to tight," he explains.

High chemical prices and limited supplies have put many ethanol producers on the hunt for alternatives to these compounds. For example, through September 2007, imports of caustic were down 22 percent while exports were up 28 percent. "We're all trying to find alternatives but the alternatives still come at a higher price," Wendland says.

Grohs on the other hand recommends that producers be proactive about determining where their chemical supplies are coming from. "If some plants align themselves with the right distributors then they should be OK, but they need to look at this more seriously than they did in the past," he says. "Supply is of great importance. If you don't have supply, pricing doesn't really matter. Focus on supply and what your particular network of supply is doing."

Dependence Conundrum
Perhaps as disturbing as the price of these chemicals is the notion that in an effort to wean the country off the sweet milk of one commodity, that dependence has been transferred to others. "We're doing our best to reduce dependence on foreign oil but in a way we're still dependent," Wendland says.

In addition, what once seemed to be a mutual interaction between the farmer and ethanol producer is now becoming a competitive one. "What you have here are two industries that are kind of cannibalizing themselves," Grohs says. "In a weird way they're competing with each other for the same products. The ethanol guys need the sulfuric acid but so do the fertilizer guys so they can make fertilizer for the farmers growing the corn. Ethanol guys need the urea but so do the farmers. It's going to be very interesting to see what happens in 2008 because at this point there's really no sign of any of this escalation in pricing or supply shortages changing."

Jessica Ebert is an Ethanol Producer Magazine staff writer. Reach her at [email protected] or (701) 738-4962