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Ethanol from maize off the boil
Vic de Klerk
Posted: Fri, 06 Oct 2006
[miningmx.com] -- WITH the price of crude oil having fallen to below US$60/barrel, it looks as if the great enthusiasm among investors for vegetable ethanol, especially in the US, is cooling.
Perhaps diluting is a better word. Last week, one blue-eyed newcomer, Hawkeye Holdings, decided - due to a lack of interest - to postpone its listing in which new money would be sought for the manufacture of ethanol from maize.
Elsewhere on the US market, investors who were very excited about the shares when the oil price reached $80/barrel now find that the share prices of ethanol producers are falling sharply.
Even the price of Pacific Ethanol, the small miracle that Microsoft's Bill Gates selected as a new investment, has fallen sharply over the past few months from $45 to $15/share, about the same price of about two years ago before Gates discovered it.
Earlier this year, ethanol was seen as a popular alternative when the oil price doggedly kept rising. US legislation in the interests of cleaner fuel also requires that as much as 10% ethanol must be mixed with ordinary crude oil-based fuel over the next 10 years. Of course, that creates an enormous demand for ethanol, which is manufactured largely from yellow maize in the US.
Meanwhile, the price of crude oil fell sharply to a price, at the time of writing, of just over $60/barrel. Of course, that also dragged the prices of other fuels down. For example, the price of ethanol in the US has already fallen from more than $3 to just under $2/gallon.
At the same time, the price of yellow maize in the US is rising and the profit margin of prospective producers of ethanol is shrinking. No wonder their share prices are still falling sharply, while others are finding that the supply of money on Wall Street for ethanol is suddenly drying up.
Investors in South Africa should also remember that the US is a strange place. Rather than producing ethanol themselves, they could easily import it from Brazil, where sugar cane is currently being used to produce a world surplus of ethanol.
Sugar cane is also more effective than yellow maize. It provides six units of energy for every one unit of energy from crude oil. However, yellow maize into ethanol produces only about 1.3 units of energy for each unit of crude oil that it uses.
Click on image to enlarge
However, the problem for Brazil is agricultural subsidies and tax. Ethanol from sugar cane is an agricultural product and therefore bears import duty of $0.64/gallon. The US has no import duty on crude oil, therefore ethanol derived from agricultural products will always have difficulties competing in the US market. However, the Americans pay a subsidy of $0.50/gallon for ethanol produced in the US.
Prospective South African producers - such as Ethanol Africa, which are apparently already erecting their first plant at Bothaville - will therefore prefer to focus on the local market to sell their product profitably. European and US tariff protections for agricultural products are simply too complex to try to export there.
The basic price of petrol in South Africa has already fallen from nearly 400c to just over 300c/litre. That's why the retail price of petrol has fallen so nicely over the past two months. The so-called basic price is before the tax of 116c/litre and all the distribution costs and the profits of the various stakeholders.
Prospective investors in ethanol should keep that basic price in mind and use it as the norm at which production in South Africa would be profitable. Even if an optimistic assumption is made that 400 litres of ethanol can be produced from a ton of yellow maize, which currently costs R1,200, and that by-products such as feed will cover all the other costs, the profit margin, if any, would be slim.
The plans to produce biodiesel from sunflower and perhaps soya beans at Naboom-spruit in Limpopo should also be approached cautiously by investors.
When sunflowers and soya beans are pressed, the product is almost the same as cooking oil that's readily available on the shelves of your supermarket. Note that this cooking oil can in fact be imported more cheaply from countries like Brazil, where soya beans are produced on a large scale.
The biodiesel plant at Naboomspruit doesn't press sunflowers or soya beans. Ordinary commercial cooking oil is used at considerable cost in the plant, duplicates of which can now be bought.
After mixing in a few additives to increase its ignition level a product that can be used in diesel engines is obtained. However, most motor vehicle manufacturers warn that the standard guarantee on their engines becomes invalid if diesel of a poor quality is used.
The additives to increase the ignition level of cooking oil are, of course, highly flammable and could easily explode. So check that your insurance is in order before you decide to set up a plant in your garage.
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