Fundamentally bullish on cellulosic ethanol

The multinationals may be looking at Brazil, but I am fundamentally bullish about homegrown, U.S. made cellulosic ethanol.
By Susanne Retka Schill | November 12, 2012

Cobalt Technologies is the latest company to announce its second generation technology will be developed in Brazil.  The final piece in the n-butanol technology developer’s financing came with a commitment from global agribusiness Bunge. The first step, of course, is a demonstration scale facility to further refine the process, which will be built in Brazil. The agreement says a Bunge sugarcane facility will be considered for a co-located n-butanol facility in the future. The CEO told me the demo may be built at a Bunge facility, but that will depend upon which of the several candidate locations best fits the needs for their demo plant.

That got me to thinking about the string of stories I’ve done of late about companies actively developing projects in Brazil. BP Biofuels canceled its Florida project, but says it will continue to develop its cellulosic technology. No cellulosic projects have been announced in Brazil, but the BP media spokesman pointed out it will continue its biobutanol joint venture, its UK project (a wheat-based ethanol facility with multiple partners) and its work in Brazil. They have several ethanol plants in Brazil. I’m willing to bet that they’re first deployment of cellulosic technology will be there.

I’ve also written in the past months about Blue Sugars (formerly KL Energy) and their work with Brazil oil company Petrobras to develop their technology for use in Petrobras’ ethanol production facilities, targeting bagasse as the feedstock. Then there’s Royal Dutch Shell, which ended its research support of two North American cellulosic technology  developers: Iogen Energy and Codexis. Iogen cancelled its plans for cellulosic facility in Canada’s prairie provinces. The technology is ready to go, though, and not long after, there were announcements of Raizen Group beginning engineering on a project in Brazil. Raizen is a joint venture between Shell and Cosan SA.

There’s two things to notice in the pattern. The obvious is the focus on Brazil. Not far behind is that the deep-pocket backers are giant global businesses, mostly Big Oil. I think Bunge could be characterized as Big Grain.

The conclusion is that if you are not married to the U.S. and you are definitely interested in developing cellulosic ethanol, the place to go is Brazil. After all, Brazil has embraced ethanol. It’s minimum allowable ethanol blend by law is 18 percent, although it has more often been 25 percent. In the last couple of years it was lowered to around 20 percent, due to a shortage of ethanol.

Contrast that with the U.S. environment where ethanol has hit the blend wall as nearly every gallon of gasoline is blended to E10. Gasoline demand is expected to remain relatively stagnant, so E10 blending isn’t expected to expand much. E15 and E85 needs to expand dramatically to make room for more ethanol. Corn ethanol capacity already exceeds the blend wall. Brazil’s short cane crop a year or two ago provided a pressure valve. The U.S. exported record amounts of ethanol to Brazil to help meet its ethanol demand. Ethanol stocks have climbed, however, this past year, although the record levels of nearly a year ago have backed off. With the blend wall definitely here, where will cellulosic ethanol find a market in the U.S.?

Looking at that sort of reality, it’s not surprising at all that multinational corporations are shifting their cellulosic ethanol developments to Brazil. Yes, the U.S. may be the biggest ethanol market, but at least for the time being, market growth will be quite slow. Brazil is a much more promising market for additional ethanol supplies.

The issue underscores the importance of the corn ethanol base in the U.S., however. The vast majority of corn ethanol plants are owned by U.S.-based, U.S.-focused companies. A healthy majority are owned by Midwestern, agriculturally based investors, farmers and small town business people. They invested in corn ethanol when the impetus was to find a use for the mountains of surplus corn, with the explicit goal of raising corn prices to improve the rural economy. They are in it for the long haul. They know the nature of commodities is price volatility and small surpluses creating tight or negative margins. Ask any corn farmer. They aren’t going to move to Brazil and they will continue to fight for ways to build market share for ethanol in the U.S.

Cellulosic ethanol will get developed in the U.S. One of the areas will be in forested regions where the furniture and paper industries are in decline, in large part because the factories were moved to China and other low-cost places. Another big feedstock supply for cellulosic projects will be municipal solid waste. The age of landfilling mountains of carbonaceous material will soon be replaced by turning that waste into energy. There will be places where energy crops will work well, but the biggest agriculture-based feedstock will be in corn ethanol plants’ back door – corn stover.

Yes. The multinationals may be looking at Brazil, but I am fundamentally bullish about homegrown, U.S. made cellulosic ethanol.