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US ethanol industry, exports to drive the growth with saturation in the domestic market

The ethanol produced from biomass is used in various industries such as pharmaceuticals, cosmetics, beverages, fuel additive, etc. In the past few decades and especially in the last ten years it has emerged as an alternative source of clean fuel across the world due to its favourable blending qualities with gasoline. This includes a high octane number, high oxygenation, lower GHG emissions and cheaper costs. At present over 85% of the ethanol produced globally is consumed as a fuel. The US is the world’s largest producer of ethanol fuel accounting for around 58% (followed by Brazil accounting for 27%) of the global ethanol production. It is also a major consumer and consumed 50% of the global ethanol in 2015.    

Ethanol can be produced from a variety of biomasses; however, the US produce ethanol from “corn” due to the abundant availability of the crop. Ethanol manufacturing industry has existed in the US for long albeit at a smaller scale until the late 90s. Although, with the US government’s focus on promoting clean fuel usage and reducing dependency on fossil fuels, the ethanol manufacturing industry in the US scaled up significantly in the new millennium.     

The US started focusing on cleaner fuels with the passage of Clean Air Act (CAA) in 1970, this aimed at regulating air emissions from mobile and stationary sources. The CAA promoted use of oxygenates in fuel to reduce carbon monoxide emissions, under the act, the addition of lead (metal) as oxygenate and octane booster to fuel was phased out and alternative oxygenates such as MTBE (Methyl tertiary Butyl Ether), ethanol, tertiary amyl methyl ether (TAME), ethyl tertiary butyl ether (ETBE) and ethanol was promoted. The CAA was further amended in 1990 to emphasise the use of oxygenates. The MTBE gained preference over ethanol in the US due to its low-cost and ease of transportation. However, towards the late 90s cases of MTBE leakage in groundwater surfaced. This led to a gradual replacement of MTBE with fuel ethanol, thereby leading to increased production of ethanol in 2000-04.

In 2005, the fuels ethanol manufacturing industry in the US received a major boost with the introduction of Renewable Fuel Standard (RFS) under the Energy Policy Act in a bid to reduce Green House Gas (GHG) emission and dependence on imports of fossil fuels. In the same year, the US import dependency was 60% of its domestic fuel consumption. The RFS mandated the transportation fuel in the US to be blended with a minimum volume of renewable fuels based on the projected transportation fuel consumption every year. It set out a standard volume consumption for a variety of renewable fuel categories namely biomass-based diesel, cellulosic biofuel (to be produced from cellulose, hemicellulose or lignin), advanced biofuel (from renewable biofuel except for corn starch) and conventional biofuel (mostly from corn starch). 

Accordingly, the RFS mandated the use of 4 billion gallons of biofuel in 2006, which was to gradually increase to 7.5 billion gallons by 2012. Furthermore, the US government continued to provide blending tax credit to oil refiners to promote fuel ethanol consumption, particularly to the ones operating since 1978. Consequently, the fuel ethanol demand and consumption in the US surged significantly in 2006-07, with a market share of ethanol (calculated as a percentage of total gasoline consumption) increasing from 2.9% (2005) to 4.8% (2007). This increase in demand and insufficient domestic ethanol production capacity led to a sharp jump in ethanol prices in 2006. The prices declined in 2007 with the commissioning of new capacities sufficient to meet statutory blending requirements as per the RFS.

The US ethanol industry was heading towards stabilisation, but it got another boost in 2007 with the amendment of RFS as Renewable Fuel Standard 2 (RFS2) under the Energy Independence and Security Act of 2007 (EISA), wherein the mandated renewable fuel consumption volume was substantially increased to 8 billion gallons in 2008 and is to gradually rise to 36 billion gallons by 2022. In the realm of renewable fuel consumption, the corn starch ethanol was mandated to increase 15 billion
gallons from 2008-15 and was to remain constant after the period. 

The fuel ethanol consumption in the US almost doubled and ethanol’s market share increased from 4.8% (2007) to 8.7% (2010). The volumetric consumption increased at a healthy CAGR of 22.8% between 2007-10, despite moderation in gasoline consumption during the period and the global economic slowdown. Ethanol prices increased in 2008 again due to a sudden spurt in ethanol demand as per RFS 2 mandate, but gradually declined and stabilised in 2009-10 as ethanol production levels reached near the statutory corn-starch ethanol blend wall. 

The US ethanol demand (in volume terms) was stagnant during 2010-12 on account of the decline in gasoline consumption. However, ethanol’s market share was rising despite stable domestic demand and increased significantly in 2011 buoyed by healthy export demand especially from Brazil, the world’s second largest ethanol consumer and exporter. The country produces ethanol from sugarcane and is self-reliant. But, due to drought conditions in 2011, the nation’s sugarcane crop was severely impacted and domestic ethanol production was lower than the consumption demand, thereby opening up the export opportunity for the US. The ethanol prices in the US increased sharply in 2011 supported by healthy export demand even though there was an oversupply situation in the domestic market. In addition, abolishment of the blender’s tax credit in 2011 was another factor which contributed to ethanol prices.

In the successive years, fuel ethanol consumption in the US grew at moderate CAGR of 2% over 2011-2015. This was slightly higher than the growth in domestic gasoline consumption at a CAGR of 1.2% during the same period.

Subsequently, ethanol prices declined during the phase and imitated crude oil price. The average ethanol price of USD 1.55/gallon in the marketing year 2016 was even lower than without blender’s tax credit ethanol price of USD 1.62/gallon in 2005. Although as the gasoline prices started recovering from March 2016, there has been a corresponding improvement in fuel ethanol prices. Besides the crude oil prices improved from January 2017 on the back of production cut by the OPEC countries, the gasoline prices are also expected to recover further leading to a recovery in fuel ethanol prices.

The ethanol’s market share eventually surpassed mandatory 10% blending wall in 2015 and the US fuel import dependency reduced to 24% of the total domestic transportation fuel consumption. However, ethanol production in the US grew at a CAGR of 3.85% during 2012-15 on account of increasing export demand. 

The domestic fuel ethanol demand in the US has reached a saturation point and is expected to remain at similar levels in future as the federal government has mandated an upper cap on consumption of corn ethanol at 15 billion gallons/year under RFS2 to promote the development of alternative renewable fuel sources. Although, ethanol prices are expected to improve in the marketing year 2017 on the back of improvement in gasoline prices. This is expected to mirror an increase in crude oil prices post cut in production by the OPEC countries. Prior to this, ethanol prices have improved from 1.47$/gallon (Dec. 15-Feb. 16) to 1.59$/gallon (Jun. 16-Aug. 16).

The potential growth market for the fuel corn ethanol producers in the US lies in exploring the market for exports. Brazil’s ethanol export has been declining over the past couple of years pertaining to demand growth outpacing production growth. This opens up significant trade opportunities for the American ethanol producers. The traditional fuel ethanol export market for the US is Canada and the European Union. The exports to the EU nevertheless declined substantially from 2012 due to the imposition of five-year punitive tariff against the US ethanol to curb competition for the EU ethanol producers. However, with growing awareness and impetus on heightened use of biofuels by the governments of Asian and African countries, ethanol demand is increasing from these regions, whereas supply remains constrained. The US produces ethanol at the lowest cost, the price sensitive Asian and African region offers ample opportunity for growth to the US ethanol industry in the near and medium future. 

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