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The Fatal Flaw In The Ethanol Industry

The Fatal Flaw In The Ethanol Industry

The ethanol industry is extremely…

Oil Crash Could Destroy Global Biofuels Market

Oil Crash Could Destroy Global Biofuels Market

This month’s unprecedented oil crash…

Alex Kimani

Alex Kimani

Alex Kimani is a veteran finance writer, investor, engineer and researcher for Safehaven.com. 

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Hand Sanitizer Boom Could Save The Ethanol Industry

With widespread layoffs and furloughs hitting post-World War II records and a global economy deep in the throes of a recession, the economic devastation wrought by the Covid-19 pandemic is only rivaled by the Great Depression. Yet, some businesses have been thriving during this upheaval, while others have had to reinvent themselves thanks to dramatic shifts in consumer behavior.

POET LLC, the world’s largest ethanol manufacturer producing about two billion gallons of the product per year, has made a pretty drastic business transition after retooling and pivoting into hand sanitizers instead. POET has re-engineered its systems to make pharmaceutical-grade hand sanitizers after ethanol prices cratered following weak gasoline demand. 

Source: EIA

Ethanol Prices (USD per Gallon)

Source: CNN Money

Second Act POET runs more than two dozen ethanol plants in the U.S. but has been forced to close down three plants. It is running the remaining plants at half capacity and has laid off 10% of its workforce. 

Pivoting into hand sanitizers is not as dramatic as, say, auto companies such as Ford, GM, and Tesla repurposing their car factories to make ventilators. Nevertheless, POET CEO Jeff Broin says the conversion from an ethanol manufacturer to one making hand sanitizers comes with some pretty significant costs. 

First off, the ethanol requires further distillation in order to meet pharmaceutical-grade standards. Then, it is mixed with other ingredients to make hand sanitizers. Further, the new product requires different bottling facilities than what the company uses for its ethanol products.

Broin says his company intends to stay in the hand sanitizer business even after fuel demand recovers and sees the new segment eventually providing as much as 5% of its income.

Related: The Major Problem With Shutting Down Oil Wells
Ethanol is primarily used as a biofuel in the U.S., with 14.4 billion gallons of fuel ethanol consumed in 2018 according to EIA data. Many states in the U.S. have mandates for blending bioethanol into vehicle fuels, with most requiring a blend of 10% to 15% ethanol with gasoline. The global lockdown, however, has virtually crippled the fuel sector, with U.S. gasoline demand falling from ~9.3 million barrels/day before the crisis to ~5.3 mb/d in April, leading to a similar dramatic collapse in ethanol consumption.

About 40% of the country’s corn goes into ethanol production--a controversial practice that has been blamed for, among other things, pushing up food prices for the poor and doing nothing for the environment:

“Biofuels have direct, fuel?cycle GHG emissions that are typically 30–90% lower than those for gasoline or diesel fuels. However, since for some biofuels indirect emissions—including from land use change—can lead to greater total emissions than when using petroleum products, policy support needs to be considered on a case by case basis.”

Ethanol Stocks Recover

Ethanol makers like POET, though, might not remain in the doldrums for long.

Gasoline demand is beginning to show signs of a comeback, something that has helped ethanol futures and stocks of ethanol makers to rebound from their multi-year lows from a month ago.

The share prices of ethanol producers The Andersons (NASDAQ:ANDE),  REX American Resources (NYSE:REX), Pacific Ethanol (NASDAQ:PEIX) and Green Plains, Inc. (NASDAQ:GPRE) have staged an impressive recovery over the past 30 days amid expectations that ethanol demand will register a V-shaped recovery.

However, it will probably be a few months, at the very least, for the industry to get back in shape.

Ethanol stockpiles were closing in on all-time highs even before the pandemic struck due to recent overproduction, with the severe demand disruption only serving to exacerbate the situation. Ethanol production has been declining in recent weeks despite a modest rebound in U.S. gasoline production, mainly due to widespread idling of production capacity. Related: What’s Behind The Sudden Rally In Natural Gas?

Source: EIA

Despite the current challenges, the long-term ethanol outlook appears bright thanks to the fuel mandate, which incentivizes ethanol blending. 

Ethanol normally sells at a premium to gasoline due to the revised Renewable Fuel Standard [RFS2] mandate that requires the blending of ethanol with gasoline. This premium usually increases when gasoline prices dip to ensure that the mandate is met.

In the short-term, though, the ethanol industry will continue to be at the mercy of the broader gasoline outlook.

By Alex Kimani for Oilprice.com

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