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Ethanol stocks high, prices static

Ethanol prices in Europe have been static in the first part of 2008 as high stock levels have reduced spot trading activity.

Stock levels were built up over the fourth quarter 2007 and in early January 2008 as European traders took advantage of the arbitrage economics and shipped large volumes of ethanol from Brazil in to Rotterdam.

Those traders bringing in ethanol had hoped to see an increase in ethanol consumption on the back of a rise in the mandatory volume of biofuels in Germany.

Under German law, gasoline blenders are obliged to produce a minimum of 1.2% of bio-petrol, which in Germany is met through the direct blending of ethanol.

More recently this has led to the over-supply of ETBE, which has reduced prices and in the short-term over supply was expected to dominate market fundamentals.

This mandatory level rose to 2% for 2008, but as yet this increase has yet to lead to a significant increase in ethanol consumption

In addition to direct blending in to petrol ethanol is also used in producing ETBE which is an octane booster and is a biological equivalent of MTBE.

ETBE is produced using ethanol while MTBE is produced using methanol and producers will switch between the two products based in part on the cost of ethanol and methanol.

Over Q4 2007 methanol prices soared to over Eur520 per metric ton, while ethanol prices remained steady at Eur540 per cubic meter.

The high price of methanol led to an increase in the production of ETBE, which in turn has helped to ease the downward effect that high stock levels may have had in the absence of direct blending.

More recently this has led to the over-supply of ETBE, which has reduced prices and in the short-term over supply was expected to dominate market fundamentals.

Despite the recent fall in ETBE prices, it still remains expensive in comparison to MTBE at over $1000/mt and is still pricing almost $100/mt lower.

The higher price of ETBE is also discouraging gasoline blenders from increasing blending of ETBE to meet their biofuel mandates at the moment. (Listen to a related podcast for more information on the EU's biofuel mandate.)

There remains the option of storing ETBE in order to benefit from higher premiums expected in the summer, although the limited volume of ETBE storage is a restricting factor.

Looking forward, the new ethanol crop out of Brazil is expected to be 480-490 million cubes over the 2008-2009 period which would represent an increase of approximately 50 million cubes.

However, there is a possibility that a large proportion of this increase in sugar cane production will be diverted from the ethanol market and to the sugar market where prices have been very strong on the back of growing appetite in China.

In addition, strong domestic demand in Brazil is expected to eat in to the additional sugar cane production.

As such the increase in the sugar cane crop is not expected to result in an increase in ethanol available for export with means prices in Europe are unlikely to feel any downward pressure.

Created: February 15, 2008

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