U. S. ethanol industry could face more bankruptcies

More U. S. ethanol distillers may be forced to seek bankruptcy protection if they fail to keep costs down as the industry gets squeezed by oil refiners and gyrating corn costs alike.

VeraSun Energy Corp., the largest publicly traded U. S. ethanol company with 14 distilleries across eight states, said Oct. 31 it was seeking bankruptcy protection. The South Dakota-based company took a beating after locking in costly contracts for corn, the main feedstock for making the alternative motor fuel in the United States.

Another ethanol company, Gateway Ethanol LLC, declared bankruptcy early last month, and several other small players did so late last year amid a stubborn supply glut of the fuel.

“The short answer is yes,” Raymond James analyst Pavel Molchanov said when asked if he expected to see more bankruptcy filings in the ethanol industry. “There may well be further bankruptcies depending on how long the current downturn in the ethanol market lasts.”

U. S. capacity to make ethanol has jumped 60 per cent as the government has set blending mandates and given producers incentives in an effort to begin to wean the country off foreign oil.

Capacity is already higher than the government’s mandate of 11.1 billion gallons for next year.

How the ethanol industry fares in the next few months could help determine whether the next U. S. president will expand mandates and incentives for ethanol or remove them and let the industry survive or fall on its own.

In the meantime, Wall Street is watching the money it has invested in ethanol companies dry up.

Shares of Aventine Renewable Holdings Inc., which closed Nov. 3 at $2 on the New York Stock Exchange, have lost 85 per cent of their value since hitting a 52-week high of $13.65 in December. Pacific Ethanol shares are down 90 per cent since their year high of $9.88 in December.

Little control

A key challenge for the industry is that distillers of renewable fuel have “little or no control” over the cost of their major input, corn, or the price at which they can sell ethanol to oil refiners, said Joseph Gomes, an analyst at Oppenheimer & Co. in New York.

The fuel makes up only about six per cent of the overall gasoline supply.

Corn prices shot to nearly $8 per bushel over the summer and have since dropped to nearly half that. Gasoline costs, on the other hand, have tumbled as crude fell from a high near $147 a barrel in July to about $64.

The other large publicly traded U. S. ethanol companies, Aventine and Pacific Ethanol, can survive this year’s dismal profit margins by getting costs in control, said Gomes.

He said if companies delay the opening of new plants, profit margins could begin to improve. Aventine, for example, pushed back the opening of its Aurora West plant in Nebraska until the second quarter of 2009 instead of the first quarter.

Companies will also have to hedge corn costs and manage liquidity better, he said.

Not everyone agreed that the health of the industry was in danger. Dan Basse, president of AgResources Co. in Chicago, said mandates to blend ethanol were not going away any time soon, and distillers were getting the best margins they’ve had all year as corn costs drop.

Jeff Broin, the chief executive of privately held Poet, the largest U. S. ethanol company, said in an interview that many ethanol producers can profit “indefinitely” even if crude oil prices fell to $40 to $50 a barrel.

Another ethanol industry executive who did not want to be named said that as oil refiners begin to find it economical to use ethanol in their default blend of gasoline they will take more of an interest in keeping ethanol companies healthy.

In addition, as the credit crunch cancels plans for new plants, demand could quickly come back into equilibrium with supply.

“In the longer term, the future of the industry should remain pretty bright,” said Gomes. “The question is, can all these companies get to the longer term?”

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