Trevor Manuel, South Africa's Finance Minister
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Who's fuelling who?
Vic de Klerk
Posted: Fri, 10 Mar 2006

[miningmx.com] -- POLITICIANS ARE SUDDENLY keen to jump on the biotechnology bandwagon. President George W Bush recently made a strong call to make the United States independent of imported fuel, giving considerable prominence to ethanol. In South Africa, Finance Minister Trevor Manuel announced a rebate to encourage local biodiesel.

But isn't all this just hot air? Technology has not advanced sufficiently to make bio-fuel sustainable or economically viable. In fact, as matters now stand, the production of ethanol as an alternative fuel uses more energy than it can hope to produce. That means that all the announcements about this alternative source of power should be taken with a pinch of salt.

However, that doesn't prevent politicians and wily businessmen from putting it forward as the solution to the world's energy crisis. While Ethanol Africa, the SA company planning to build a maize-to-ethanol plant at Bothaville, is keen to convert the country's maize to fuel, Bush feels that the US can develop a technique using different kinds of plant material - such as certain grasses and wood - within six years.

The US Department of Agriculture (USDA) conducted comprehensive research in 2004 on the production of ethanol from agricultural products in particular and found that in many countries, including the US, ethanol is used as a fuel additive. In the US, the world's largest producer of ethanol (about 4,5m gallons/year), the price is subsidised.

With regard to the products that can be used, and in which countries ethanol can viably be manufactured, the USDA says it's mostly in those with surplus agricultural commodities, with considerable natural resources, that are known for high concentrations of exhausts gases and are highly dependent on imported oil.

Examples are grain and oilseed in the US, sugar cane and oilseed in Brazil, sugar beet and wine in Europe and grain in China. The focus in all these countries is to convert surplus agricultural products with limited export value into ethanol.

SA's effort, if it transpires, arises from farmers dissatisfied with the current maize price. Already the approach is wrong. SA doesn't have a great surplus of yellow maize, the product that will be used in Bothaville. Yellow maize is currently trading at R960/t on Safex. The SA Grain Information Service calculates that yellow maize can currently be imported through Durban at R945/t, while only R639/t will be realised for maize exported through Durban.

The Safex price - which, if transport costs are included, is still higher than that at which broiler producers Astral and Rainbow can import maize - doesn't tell that there's a surplus in SA.

In the US, 95% of the facilities producing ethanol use maize and are apparently profitable. But there are two important differences. First, their farmers are subsidised, as are refineries that use ethanol. SA is far from that arrangement. So claims by Ethanol Africa that its seven proposed production facilities in SA's current maize-producing regions and an eighth in the Eastern Cape (where maize has never been produced) could boost the maize price are rather optimistic.

A comparison of the production claims by Ethanol Africa and the USDA's findings shows that the SA company is overestimating the amount of ethanol that could be produced from 1t of maize. It expects 480 litres. In its survey of 78 plants, the USDA found an average of 394 litres/t being produced.

The USDA also found that the cash production costs, unlike the cost of maize, at a relatively small plant like the one at Bothaville could be as much as US$0,30/litre.

The value of the fixed waste products, largely low-grade cattle feed, is at most about 25% of the value of the maize used as input costs. Ethanol Africa's figures agree with that.

The production cost of ethanol from 1t of yellow maize, if Ethanol Africa's recycling figures are used, is approximately as follows:

If the considerably lower USDA recycling figure is used, the cost per litre is around 350c. The current basic price of petrol in SA is 280c/litre. Tax at 116c pushes it past the comparable price to a wholesale price of 396c/litre. For example, if Government decided to levy no tax on ethanol, 396c is the best price the producer could get.

That's almost starting to look like something. The 297c calculated on the recycling figures Ethanol Africa is claiming aren't much more than the 280c we're now paying for imported petrol.
SA's effort, it transpires, arises from farmers dissatisfied with the current maize price
Not so fast, the refineries will immediately warn. The energy value of ethanol is only 72% of that of petrol produced from crude oil. With 280c as the basic petrol price, ethanol must be available at 200c/litre to make it comparable so that fuel wholesalers will be prepared to add 10% of it to ordinary petrol.

Problems of scale and SA's cost of transport are also problems facing the planned small plant at Bothaville. Its planned production of about 190m litres/year compares with plants in the US now producing 2 000m litres/ year.

One could also wonder whether maize could be a net producer of fuel. The average dry land production of maize in Bothaville is around 4t/ha/year. In the US, it's already far more than 10t/ha/year. Nevertheless, the USDA says that every one British thermal unit (the international standard at which energy is measured) used to plant maize and later converted into ethanol only creates 1,3 BTU. Though positive, it's not really a good proportion.

We'd like to see a similar calculation for SA if the considerably lower return per ton of maize/ha is used. Perhaps we'll soon be stuck with a lot of maize farmers and an ethanol plant that uses more imported energy than it produces.

Philip Bouwer, of Sterling Waterfront Securities, the company that owns 50% of Ethanol Africa, says the balance of shares in the company will be placed with a number of large-scale farmers, a black empowerment group and, in part, with a European ethanol distributor. That last connection becomes very important should Ethanol Africa need to export its product if distributors in SA refuse to mix it with their fuel.
We'll be stuck with maize farmers and an ethanol plant that uses more energy than it produces
Shares aren't yet being offered to the public but will be later, presumably in 2007 or 2008, when Ethanol Africa applies for a JSE listing. We look forward to browsing through its prospectus.

But a lot of water must flow under the bridge first. It's clear that unless the production of ethanol is subsidised, it will be difficult to use it as an alternative fuel. In addition, farmers must think twice before they believe it's the salvation they're looking for.

In the US it was found that the ethanol price is directly related to the price of fuel and that there's no correlation with the price of maize or its by-products. Farmers who jump on the ethanol bandwagon must know that the price of their maize will in future be directly linked to the price of crude oil. The maize price doesn't determine the ethanol price.

The contribution it makes to cleaner air makes ethanol a good alternative to petrol. However, it's not an efficient source of energy. Much technological development has to be done first. Meanwhile, there's not much likelihood of the world's oil reserves drying up soon.

Challenges for producers

The marketing of ethanol made from yellow maize, sugar cane or even surplus wine presents many problems for prospective producers. The wholesale price of petrol in SA is made up from the price of crude oil, shipping and refining components, which currently amount to 280c/litre. Maize or sugar ethanol can't compete against that.

The tax on petrol is currently 116c, which, together with the basic price, pushes the wholesale price up to 396c. Ethanol could perhaps just start competing if the price of yellow maize were to remain around R950/t and the ethanol manufacturers were to succeed in selling their solid waste, largely animal feed, at a very good price.

In the United States ethanol is sold as petrol in two ways. Its so-called E85 contains 85% ethanol and 15% ordinary petroleum fuel. That requires a special petrol pump and also a specially adapted car engine. SA is unlikely to follow that route. To make up for the poorer fuel consumption of E85, the pump price would also have to be cheaper.

The alternative in the US - the so-called E10 fuel - is where 10% ethanol is added to ordinary fuel. However, there would be quite a few complications in SA. Government can't introduce legislation making it compulsory to add 10% ethanol. That would place SA's fuel industry and consumers at the mercy of ethanol and therefore maize producers. Any maize shortage in SA, which occurs regularly when there's a drought, would make compulsory mixing of 10% ethanol impossible.

It's not practical to have the 10% fluctuating up and down as maize becomes available. Every change would mean an adjustment to a car's engine, which would be quite impractical. Mixing 10% ethanol would therefore have to be on a voluntary basis and for that SA's fuel distributors would need much encouragement ? which could only come from the Treasury.

The argument that only yellow maize (used for animal feed in SA) would be used to produce ethanol and would therefore not compete against white maize (the staple diet of the poorer sector of SA's population) doesn't hold water either.

The production of both kinds of maize is easily interchangeable on farms. But if the ethanol producers succeeded in getting the price and demand for yellow maize to increase, they'd simply switch to yellow maize.

So if, by lifting the 116c tax on ordinary fuel, SA indirectly stimulates the use of ethanol so much that there's a shortage and then an increase in the price of yellow maize, the price of white maize would also rise. Its well-intentioned subsidy could also easily increase the price of white maize meal, which wouldn't be good for SA's poor.

Another problem that could result from a possible subsidy of ethanol from yellow maize is tariff protection. Ethanol production in the US already holds the risk - or is it a promise? - that the price of yellow maize in that country could increase. That means an automatic increase in the tariff protection of imported maize to SA.

In brief, if the subsidising of ethanol pushes up the price of yellow maize, consumers such as broiler producers would be fully entitled to ask that the duty on imported maize be lifted. Consumers could even go a step further and demand the lifting of duty on imported chickens just because the State, by means of the subsidy, has increased the price of one of the links in the supply chain of chickens.

It wouldn't be practical to think that we could export ethanol profitably from SA to Europe or to any country where agriculture is subsidised, even on farms that are much more productive than SA's large areas of marginal agricultural land.