May 18, 2010
Fitch Sees “Blend Wall” Hurting US Ethanol Profitability
Published in DTN
NEW YORK (DTN) -- Fitch Ratings says in a new report that profitability for the ethanol industry in the United States may be limited by a "blend wall," referring to the maximum volume of ethanol allowed in gasoline sold in the U.S., which is currently capped at 10 percent.
The ratings agency said in the May 13 report that the industry's profitability is currently constrained by excess ethanol distillation capacity and an inability to sell ethanol above the 10 percent content maximum ratio for non-flex fuel vehicles. (Flex-fuel vehicles can run on multiple blends up to an 85 percent content ratio in gasoline.)
The report says high unemployment across the U.S. has helped to reduce demand for gasoline because many people aren't driving as much, and, as a result, the "blend wall" is approaching more quickly than previously expected.
The Fitch report quotes data from the Energy Information Administration showing a cumulative drop of more than 360,000 bpd in gasoline demand compared to 2007 levels.
Meanwhile, on supply, the report quotes data from the Renewable Fuels Association showing that there are approximately 12.8 billion gallons of annual U.S. ethanol operating capacity. Nearly 700 million gallons of capacity are idle, and an additional 1.3 billion gallons of capacity are under construction or expansion.
This compares with the 2010 mandate from the Energy Independence and Security Act of 2007 of 12.0 billion gallons of conventional biofuel, mostly from corn, up from 10.5 billion gallons in 2009.
Thus, there is overcapacity at this point, which has been exacerbated recently by more production coming on line, says the report.
"If more capacity comes on line, the overcapacity will get worse," adds the report. "As the U.S. ethanol industry approaches the 10 percent blend wall, higher blend rates or more vigorous growth in gasoline demand will be needed to achieve the industry growth outlined by EISA."
Fitch says that year-over-year growth from conventional biofuel has slowed over the past few years and is expected to slow further as the industry levels off at 15 billion gallons per year of conventional biofuels for the 2015−2022 period.
Current overcapacity concerns could be alleviated if the Environmental Protection Agency approves higher ethanol blend rates and if gasoline consumption increases, says the report. An increase from E10 to E15 would raise the blend wall and increase allowed blending volumes in the industry. An interim step such as E11 or E12 would also be positive for industry's profitability.
Growth Energy and other pro-ethanol groups last year petitioned the EPA for an E15 waiver. EPA Administrator Lisa Jackson said in December 2009 that she would wait for all tests on vehicles using higher ethanol blends to be completed before making a decision this summer.
Fitch says a waiver for mid-level blends, such as E11 and E12, is also under consideration by the EPA.
The report notes that ....
