[biofuelwatch] Biofuel demand fell in 2011, but outlook bright

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(Reuters LONDON | Fri May 4, 2012) - Global biofuel demand fell in 2011 due to the impact of government requirements and greater incentives in food markets, but usage is set to grow driven by new technologies, commodities house Czarnikow said on Friday.

"After a decade of expansion, bio-ethanol usage fell in 2011," Czarnikow said in a statement.

"This comes despite a rise in crude oil prices that should make renewable alternatives competitive: So why the fall?

"The reasons are both economic and rational. Demand is led by a mix of mandates and market incentives."

Flexible market factors, notably sharp increases in food prices, had been a key driver of the falling bio-ethanol demand.

"As food prices outpace energy prices, cane has been re-allocated to food production - a trend seen in Brazil since 2009," Czarnikow said.

"This has pushed up the price of bio-ethanol, and dampened discretionary use. A smaller cane crop also led to an ethanol shortfall in 2011, forcing Brazil to import U.S. supplies."

This marks the biggest shift in the market: Brazil's shrinking cane harvests, and cheaper U.S. corn ethanol, are transforming the trade dynamic between the two countries.

Corn ethanol is now the cheapest bio-ethanol on the market.

"Despite the fall in bio-ethanol usage in 2011, the potential for bio fuels continues to grow as price trends and policy combine to encourage growth in the market," Henry Toller, analyst at Czarnikow, said.

U.S. renewable energy policy is also encouraging second-generation bio fuels derived from non-food sources.

New technologies such as the emergence of cellulosic ethanol, using non-edible plant material, will contribute to growth in usage of the biofuel, Czarnikow said.

California is trying to implement policy to incentivise use of cane-based ethanol, because it emits less carbon than corn.

Slower than called for emergence of cellulosic ethanol production may also boost demand for Brazilian cane ethanol.

U.S. 2012 production is expected to achieve just 2 percent of the country's original target (1.9 billion litres.)

CRUDE PRICE CONUNDRUM

The change in crude prices has impacted on ethanol, but not as might be expected, Czarnikow said.

"Over the long term, higher crude prices make bio fuels more viable. Short term, the reverse has happened, as rising crude has reduced overall fuel consumption in the U.S., and hence consumption of ethanol via the country's mandated fuel mix ("E10", or 10 percent ethanol)," it said.

"That mandated mix means there is no additional scope for growth."

Changing the blend ratio for U.S. fuel could change this, Czarnikow said.

"But changing the mix may also impact on vehicle warranties. Not to mention the complication of having to add new pumps at petrol stations."

The potential for bio fuels continues to grow, as the correlations between food and energy prices, and policy combine to encourage demand.

Short term, in the U.S., price dynamics have outpaced technology, making it harder for the world's biggest market to absorb additional bio-ethanol, Czarnikow said.

"But for U.S. exporters, Brazil remains a promising market, amid falling cane production and a shortage of domestic ethanol," Czarnikow said.

Exporters may also find new markets in the Middle East, where there is patchy refinery coverage, and other gasoline-deficient regions.

http://uk.reuters.com/article/2012/05/04/uk-ethanol-outlook-czarnikow-idUKBRE8430LX20120504



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