Previous Photo:xeni, Creative Commons, Flickr
It is apparent that fears of overcapacity in the ethanol sector are worsening, stalling the progress of major US ethanol players such as Aventine Renewable Energy (AVR), VeraSun (VSE), and US Bioenergy (USBE). An April 27 report issued by Lehman Brothers (LEH) indicated that supply could start to outstrip demand as early as 2H07. And without a strong infrastructure to pipe the ethanol to the required destinations, the supply build-up will only continue.
Meanwhile, the share prices of the aforementioned biofuels pure-plays continue to languish as investors seem to be dissuaded by the prospects of the sector. In a February 2007 post on ethanol, we had mentioned that the ethanol industry has approached an inflection point – and it seems it will be like that for awhile.
Photo:mrobenalt, Creative Commons, Flickr
For the sector as a whole, that may not be a bad thing, as conventional wisdom says that too much supply will drive down the retail costs. This will reduce the price of ethanol at the pump, thus making it more attractive for the end user. In turn, this could provide the jump start that the ethanol industry badly needs. If ethanol is going to be the fuel of choice for the transportation sector, its virtues need to be spread to the far reaches of the globe. People need to continuously be informed why ethanol can be a viable long-term remedy to the planet-destroying system that we currently employ. Positioning it as a cheaper alternative is one way to do that.
Given the current market indicators, it appears that the burden could be shifting within the supply chain, from the consumer to the producer. We may see ethanol producers’ margins become squeezed over the near term as selling prices come down and the cost of revenue remains elevated (in accordance with corn prices). In turn, this may accelerate the commercialization period for ethanol made from cellulosic biomass, which is where the long-term sustainability of the sector is likely to be found. Indeed, there hasn’t been much progress in this area since our last posting, but the sooner this inflection point is corrected, the sooner the next incremental step can be taken. Something likely has to give, and it is looking like the producers could start to feel the heat.
There are already murmurs on Wall Street about consolidation within the solar sector. I wouldn’t be surprised if we see that start to happen within the ethanol sector in the next 12 months. This would free up the necessary cash for the required R&D expenditures to advance cellulosic technologies. More equity raises would simply depress valuations further.
I still have strong faith that we can reduce, and then eliminate, our dependence on imported oil. To say otherwise is simply defeatist thinking. And I still say that biofuels can provide a turnkey solution for that. Still, it is not going to happen in the foreseeable future. As a whole, biofuels stocks provide a good long-term play…but your money is better invested elsewhere for the time being.
Disclaimer: I do not give investment advice. Do your own research. Do not rely on anything in this weblog to make investment decisions. I only talk about investment opportunities that I think are interesting and worth looking at. Consult an investment professional familiar with your specific financial situation before buying or selling any security.
Disclosure: I do not own any of the stocks above and likely will not within the next year. The car I own runs on standard petroleum-based gasoline, but when it is time to go car shopping again within the next 3-4 years, I am optimistic that the E85 blend of fuel will be widely enough available for me to purchase such a vehicle.