China Ethanol Bounces Back

Falling corn prices and a modest rebound in oil prices have brought China's fuel ethanol industry back from the brink of collapse. The industry has never lived up to its hype in China, but now some are calling for a big expansion as Chinese officials look for ways to use up "problem grain" stuffed in government warehouses.

The Chinese ethanol industry's recovery is symbolized by COFCO Biochemical (Anhui)'s reported 12-million yuan profit for the first half of 2016, a huge reversal from its 323 million yuan loss last year.

2015 was a dark period for the Chinese ethanol industry. It faced a perfect storm of declining prices, rising raw material costs, and vanishing subsidies. The price of ethanol in China is fixed at 91.1% of the price of gasoline, so declining oil prices in 2014-15 drove down the price of ethanol. In other countries, the price of corn--the main raw material for ethanol in China--fell along with fuel prices. But the Chinese industry had rigidly-high raw material costs due to the Chinese government's floor price for corn. The Chinese government started phasing out subsidies for ethanol producers several years ago--during a period of high fuel prices--and subsidies were eliminated entirely this year.

During 2016, the ethanol industry got some relief. Petroleum prices rebounded somewhat. Raw material prices fell as the Chinese government cut the support price for corn last fall and announced that there will be no support price for the 2016/17 harvest. Corn prices peaked at over 2300 yuan per metric ton in 2015.  According to a recent survey of northeastern corn markets, the Jilin ethanol plant is now paying 1450 yuan/metric ton for corn, and many observers expect the price to fall further as the marketing season progresses.

China is the third-largest ethanol producer in the world, but is far behind the leaders--the United States and Brazil. China produced 2.16 million metric tons (mmt) of fuel ethanol and 1.25 mmt of biodiesel during 2014, according to a "white paper on industrial biotechnology" prepared by China's Academy of Science last year.

Eleven Chinese provinces have pilot programs either for the entire province or for regions within the provinces. With automotive emissions contributing to serious air pollution, and China's commitment to greatly increase renewable fuels consumption at last year's Paris Accords, there is even greater impetus to expand ethanol production.

An article in China Energy News a year ago said that China's target for fuel ethanol production in a five-year plan for renewable energy is 10 million metric tons for 2020. This article said current production is 2.3 million metric tons. According to the chairman of Henan Tianguan Group--another fuel ethanol producer--China has invested 20 billion yuan in the industry since 2002. However, the industry has "faced a lot of problems" since it started, according to a COFCO engineer.

China's ethanol production has a history of falling short of targets. The 2.3 mmt output is less than half the 5-mmt target for 2015 in the 12th five-year plan. In 2010, ethanol output was 1.72 mmt, which fell short of the 11th five-year plan target of 2 mmt by a smaller margin.

According to the white paper, the Chinese ethanol industry has "gradually moved in the direction of non-grain crops and cellulosic materials for raw materials and actively promotes demonstration and pilot projects." Sweet sorghum grown on saline land seemed like a panacea, but vast quantities of stalks have to be gathered and processed in a short time window before the sugar breaks down. Large amounts of seed are needed, and it takes 1-2 years for the plants to grow. The next great hope was cassava-based ethanol, but the Chinese processors had to import 80% of the cassava they used. Thailand clamped down on cassava exports which raised the cost and burst the bubble for another "win-win" industry. Cellulosic projects in Shandong and Heilongjiang are said to be on the cusp of commercial viability but they are relatively small. Bio-energy is viewed as one of the uses for the huge volume of crop straw and stalks that farmers customarily burn in the fields. Farmers are being threatened with penalties and arrest if they burn straw this year, but the cost of gathering it up (with big machines) and trucking it away (more fuel consumed) exceeds its economic value.

The white paper said biodiesel capacity is 3-3.5 mmt, but biodiesel "cannot meet the huge demand, due to limited supply of raw materials and insufficient utilization of facilities."

China's ethanol is still produced mainly from grain. It takes 3.1 tons of corn to produce a ton of fuel ethanol, so the current ethanol output of 2.3 mmt implies that about 7 mmt of grain is used for ethanol. The 10-mmt target for 2020 implies 31 mmt of grain would be used, if it were met using grain as raw material.

Biofuel advocates estimate that China has 20 million metric tons of grain that cannot be safely consumed by humans or livestock. This "problem grain" includes moldy corn, fungus-infected wheat, and rice tainted by poisonous cadmium. The COFCO engineer insists that the only use for this grain is to make ethanol.

Ethanol production expands during grain gluts. China's first ethanol plants were built in 2000 when China previously had a massive grain stockpile. U.S. ethanol production ramped up during that period of low grain prices. By 2007, Chinese authorities were spooked by spiking grain prices, called a halt to grain-based ethanol expansion, and announced a plan to phase out subsidies for ethanol by 2015. When explaining their new food security plan, officials in China have often cited the use of grain for ethanol production in the United States as a reason why China cannot rely on imports for its food security.

In 2016, with corn again in excess supply, some "experts" are calling for more corn to be used for ethanol production to use up China's "lake of corn." This dovetails nicely with the Paris Accord to use more renewable energy and pressure to clean up the skies over China's smog-choked cities.

Perhaps it's no coincidence that China's antidumping investigation on imported U.S. distillers dried grains--the by-product of ethanol production--began last year when the Chinese ethanol industry was struggling with huge losses. Ethanol manufacturers filed the complaint with China's commerce ministry and are the main beneficiaries of antidumping duties. Limiting imports will relieve downward pressure on the price of domestic DDGS, boosting their bottom line.