The US and Brazil are the world’s largest ethanol fuel producer and together contribute around 85.1% of the global fuel ethanol production (2016). They are also the major fuel ethanol consumers globally due to the prominent use of ethanol, as a substitute for gasoline in these nations.
The ethanol consumption accounts for roughly ~10% of total gasoline consumption in the US. Additionally, Brazil replaced nearly 40% gasoline requirements with sugarcane ethanol. The emergence of fuel ethanol industry both in the US and Brazil is attributed to focusing on cutting down the dependence on imported crude oil.
The ethanol is prepared through fermentation of sugar-based feedstock. The choice of feedstock depends upon ease of availability, pricing and efficacy. The fuel ethanol in the US uses corn as a feedstock while the Brazilian ethanol uses sugarcane or sugar as a feedstock due to abundant availability of these crops in the respective countries. The below diagrams highlight the manufacturing process for the corn-based ethanol and sugarcane-based ethanol.
According to the above methodology, the corn ethanol process produces fuel ethanol and by-products distiller grains and corn oil from corn. However, the sugarcane-based ethanol manufacturing plants are typically integrated sugarcane processing plants. They can use sugarcane for sugar or ethanol manufacturing. The sugar syrup and molasses (by-products of sugar manufacturing) can also be used for ethanol manufacturing. The sugar-ethanol mix is typically decided on the economic viability of these products and government regulations. Thus, the sugarcane-based ethanol manufacturing plants have the flexibility to alternate between sugar or ethanol production as per the market dynamics, while the corn-based ethanol manufacturing plants are dedicated fuel ethanol plants.
Televisory analysed data on the US-based corn ethanol companies, Cardinal Ethanol LLC (CE), Green Plains Inc. (GP) and Valero Energy Corp. (VE). Moreover, Brazil-based sugarcane ethanol firms namely SAO Martino SA (SM) and Biosev SA (BS) and Tereos International (TI). This was done to understand the key operating differences between the sugarcane and corn-based ethanol manufacturers. The CE, GP and VE are corn ethanol manufacturing companies which produce ethanol, distiller grains, corn oil and other by-products. The SM, BS and TI are integrated sugarcane processing plants which produce sugar, ethanol, electricity and other by-products.
The Avg. cost of sales per gallon ethanol sold is lower for sugarcane ethanol manufacturing companies as compared to the corn ethanol manufacturing companies. The raw material costs contribute around 60-70% of the total cost of sales for ethanol manufacturers. The lower cost structure for the sugarcane ethanol manufacturing is due to lower procurement costs of sugarcane as compared to corn. The Brazil-based sugarcane ethanol manufacturers also benefit from in-house procurement of cane sugar.
The in-house procurement of sugarcane range between 60-70% for Brazil-based sugarcane ethanol manufacturers, whereas the US-based corn ethanol manufacturers, procure 100% from open markets.
The Avg. cost of sales per gallon ethanol declined between 2012-15 due to softening commodity prices, this led to lower input prices. The corn prices and sugarcane prices declined by ~47% and ~40% respectively between 2012-15. The Avg. cost of sales per gallon ethanol sold for sugarcane ethanol manufacturers continued to decline in 2016, in line with fall in sugarcane prices. While, the Avg. cost of sales per gallon ethanol sold for corn ethanol increased in 2016, despite a continuous slump in corn prices due to a slight increase in other direct costs for the companies.
Furthermore, an interesting observation from the analysis of the data was the volumetric feedstock requirement for equivalent fuel production was higher for sugarcane-based ethanol manufacturers as compared to corn-based ethanol manufacturers.
However, the cost of feedstock per ‘000 gallons of ethanol produced is higher for corn ethanol manufacturers, despite lower feedstock requirement as compared to sugarcane ethanol manufacturers, which is due to lower prices as compared to corn.
Conversely, the difference in cost of feedstock per ‘000 gallons of ethanol produced among the US corn ethanol companies and the Brazilian sugarcane ethanol companies has been reducing over the years. The difference in cost of feedstock per ‘000 gallons of ethanol production declined steeply from ~1600 US$ (2012) to ~192 US$ (2014). This steep decline was due to ~40% decrease in corn prices during the period. The sugarcane prices also declined by ~16% during the same time, although the intensity was less than corn. The plummeting gap was the result of a decline in Brazil’s sugarcane ethanol yield as compared to stable corn ethanol produced. The Avg. feedstock requirement per ‘000 gallons of ethanol produced increased from 28.2 MT (2012) to 48.1 MT (2014) for sugarcane ethanol manufacturers, whereas the Avg. feedstock requirement per ‘000 gallons of ethanol produced remained ~9MT for corn ethanol manufacturers. The increase in Avg. feedstock requirement for sugarcane ethanol manufacturers was due to decline in ethanol yield because of reduced TRS (total recoverable sucrose content) from sugarcane. The TRS declined from 137.54 (kg/metric tonne in 2012) to 132.63 (kg/metric tonne in 2014) for Brazilian sugarcane. The cost of feedstock per ‘000 gallons for Brazilian sugarcane ethanol manufacturers decreased by ~30.3% (2015) followed by 9% increase (2016), in line with sugarcane crop TRS during the years. The cost of feedstock per ‘000 gallons of ethanol produced for the US corn ethanol manufacturers declined in 2015-16 due to falling corn prices and stable corn ethanol yield.
Thus, over the past 5 years, the cost of feedstock per ‘000 gallons of corn ethanol produced nearly halved and became competitive with sugarcane ethanol feedstock costs. In 2012, the cost of feedstock was 2.7 times for corn ethanol manufacturers as compared to sugarcane ethanol manufacturers, which came down 1.24 times in 2016. In addition, with the saturation of domestic ethanol market in the US and high demand levels in Brazil, the lower cost structure helped corn ethanol manufacturers to become competitive in relation to sugarcane ethanol manufacturers and explore the international markets.
The corn ethanol in the US is majorly used as an additive to gasoline. Thus, to incentivise corn ethanol consumption, the govt. passed the Renewable Fuel Standard 2 (RFS2) under the Energy Independence and Security Act of 2007 (EISA). This mandated renewable fuel consumption volume to gradually rise to 36 billion by 2022 with an upper cap on corn ethanol consumption to increase up to 15 billion from 2008 to 2015 and remain constant thereafter. Although these measures did not incentivise corn ethanol manufacturers directly, it did create a healthy demand for corn ethanol in the US market. Additionally, since corn ethanol is used as a gasoline additive, its demand is directly proportional to gasoline consumption. The corn ethanol prices also imitated gasoline prices. Similarly, sugarcane ethanol is also used as a substitute for gasoline as well as an additive to gasoline, hence, sugarcane ethanol prices have also been following the crude oil prices. The Brazilian government did not provide any direct incentives to ethanol manufacturers, while it does set the blending mandate. This is decided by international sugar prices, in the case of favourable sugar prices the government reduces the blending mandate in order to reduce the ethanol demand and vice versa. The demand for ethanol fuel (used as direct fuel instead of gasoline) depends upon market forces as a customer’s choice of fuel depends upon price variance between gasoline and ethanol. The corn ethanol and sugarcane ethanol prices declined over the past 5 years due to softening of crude oil prices. The corn ethanol prices showed mild recovery in market prices amidst anticipated rise in crude oil prices by the end of 2016. The crude oil prices started picking up since December 2016 because of the production cut by the OPEC, this led to ~19% increase in crude oil prices from November 2016 to February 2017. Furthermore, as the crude oil prices are expected to recover in 2017 supported by the production from the OPEC, the corn and sugarcane prices are also projected to register improvement.
The fuel ethanol prices are largely decided by market forces, demand scenario and pricing of crude oil as stated above. On the other hand, the input prices, agri-commodities are also decided by independent agencies. Thus, the companies operate in a commodity environment with minimal control over input and selling prices. In the case of sugarcane ethanol manufacturers, the input price volatility is somewhat mitigated because of in-house sugarcane farming.
In addition, the Avg. gross profit for corn ethanol manufacturers improved to ~23% (2014) from 4.8% (2012) despite a 6% decline in realizations due to a sharp 40% decrease in corn prices in the period. The Avg. gross profitability for corn ethanol manufacturers declined between 2014 to 2016 because of ~29% decrease in Avg. corn ethanol realization. This was a 13% decline in the cost of sales per gallon ethanol sold (due to 15% decline in corn prices) during the same period.
The Avg. gross profit for the sugarcane ethanol manufacturers declined from 10.2% (2012) to 3.6% (2013) due to ~31% decrease in Avg. realization per gallon ethanol sold as compared to ~25% decline in Avg. cost of sales per gallon ethanol sold (owing to ~38% decline in sugarcane prices). However, the Avg. gross profit increased between 2013-16 for sugarcane ethanol manufacturers due to a sharper decline in input prices in relation to Avg. realizations. The Avg. cost of sales per gallon ethanol sold declined by ~46.8% vis-a’-vis 22% decline in Avg. selling price per gallon of ethanol sold during 2013-16.
Presently, the corn ethanol is priced slightly higher than the sugarcane ethanol largely driven by stagnant domestic demand and lower crude oil prices which make the former competitive against the latter in the export market. However, the profitability of corn ethanol manufacturers has been severely hit as compared to the sugarcane ethanol manufacturers which are operating at a healthy profitability rate due to the inherent difference in the feedstock prices. The current price levels are expected to make corn ethanol a competitive offering in the Brazilian market. The ethanol demand from the nation is expected to increase in 2017 backed by weak Brazilian real and steady sugar prices in the international market which makes sugar an attractive option for sugarcane processors as compared to ethanol. Although in the case of an increase in demand from export market coupled with strengthening crude oil prices, the corn fuel ethanol prices are likely to rise in 2017, this will help it to regain the profitability levels. The Brazilian ethanol prices are also expected to recover in 2017 due to lower availability of fuel ethanol. However, a sharper increase in the corn ethanol prices as compared to sugarcane ethanol prices may render it unviable in the export market. The corn ethanol manufacturers need to achieve optimal pricing level while sustaining the profitability, in order to be competitive with sugarcane ethanol manufacturers in the international markets in long term.