Viewpoint: Ethanol export barriers hit margins

US ethanol producers expect continued pressure from negative margins in 2019 as the industry struggles to export surplus fuel amid static domestic demand.

Ethanol consumption in the US is expected to average 950,000 b/d in 2019, unchanged from the US Energy Information Administration's (EIA) 2018 forecast.

Ethanol crush margins at end 2018 are hovering near the lowest levels since March 2013, ending at -31¢/USG on 17 December. Margins averaged -14¢/bushel in November 2018, down from 52¢/bushel in the same month last year. Forward curve margins do not improve until March 2019 as corn values remain strong out of harvest season.

The sharp drop in margins came as US production rates held steady for most of the year, despite deteriorating commercial relations between the US and China. China was a growing international market for the US blendstock. But the Chinese government imposed a 70pc retaliatory tariff on US ethanol in June 2018, which essentially ended exports of the fuel to China.

Ethanol exports from the US averaged 122,000 b/d prior to the tariff going into effect, according to the US Department of Agriculture. Now shipments average about 94,000 b/d. Recently, US ethanol has entered China through shipments rerouted to Malaysia before reaching China.

The industry has pushed to diversify its international outlets, sending a record number of shipments to India in October as the country seeks to meet the 10pc blending mandate set by its government. South Korea, the Philippines and the Netherlands have also received a record level of US ethanol shipments in the second half of 2018.

As the industry struggles to find new export markets, output rates have averaged about 1.05mn b/d year to date, according to weekly data from the EIA. That is up by 200,000 b/d, or 2pc, compared with 2017. In the same period, national inventories have averaged 22.68mn bl, an increase of 658,000 bl, or 3pc, year over year.

But the negative margins have begun to weigh on the industry with output rates falling slightly in recent weeks as major producers such as Green Plains (GPRE) shut or idle plants. GPRE has also sold about 20pc of its capacity to Valero, making the refiner the largest producer of ethanol in the country and further consolidating production.

Policy is not expected to shore up ethanol demand in 2019, despite rulemaking by the Environmental Protection Agency (EPA) toward allowing the sale of 15pc ethanol gasoline blends after intense industry lobbying and a directive from US President Donald Trump. US air quality laws block the sale of evaporation-prone fuels such as E15 in major markets to limit haze between May and September.

But any decision by the agency to provide a waiver for E15 fuel will likely face a court challenge, and the EPA has said in the past it lacked the authority to offer a waiver for the fuel.

Even with an E15 waiver, the investment retail fuel stations must make in infrastructure to be able to sell E15 will likely limit growth. Only about 1,500 retail stores offer E15 in 29 states, according to the US Department of Energy. The department estimates 50pc of gasoline stations are branded by either oil companies or refiners, which could limit how willing retailers are to add E15 fuel to their pumps.