This article has been originally published in F. O. Lichts’ World Ethanol & Biofuels Report, 15 (19).

Global ethanol output growth could accelerate next year as the Brazilian crop will rebound and sugar may lose some of its attractiveness for the milling industry there. This would contrast with a rather lacklustre performance this year as the continued weakness in Brazil could more than compensate for the strength in other regions.

This year will continue to be dominated by starch-based ethanol as the world grain markets continue to be well supplied. However, there are indications that the sugar market will return to surplus next year which would give a boost to the competitiveness to Southern hemisphere producers in general and Brazil in particular.

With regards to policy, it can be said that uncertainty has returned. In the US, the Trump Administration has so far failed to signal that it fully stands behind the existing programs for the sector. In Brazil, the government is preparing a new biofuel scheme (BioRenova) that would fundamentally change the structure of support. In the EU, an increasing number of national governments have come to the conclusion that they won’t be able to reach CO2 emission targets without the help of E-10. At the same time the EU Commission still talks about phasing out 1G biofuels without offering any clue how the resulting gap could be bridged.

All in all, this year's output could be around 117 bln litres for all types of ethanol, slightly up on the year. Fuel ethanol production remains the main driver with a share of 98.3 bln litres, a gain of 0.9 bln when compared with the revised numbers for 2016.

For next year it is expected that growth will return with fuel ethanol production seen rising to 100 bln litres while the production of all grades could rise to 119 bln.

The Americas

Following another huge corn crop the USA produced a record volume of ethanol in 2016. The outlook for 2017 is for an increase of around one billion litres. This will halve to around 0.5 bln litres next year as waning support from the corn market may combine with weaker demand growth.

Growing demand at home is not a given, though. Ethanol lobby groups in Washington are keen to secure at least the status quo of the Renewable Fuels Standard under which 15 bln gallons of ethanol must be consumed in 2017. Confronted with an army of ethanol sceptics in key positions in the new government, the ethanol industry has rested its hopes on the inertia of the legislative process. At the moment, there is little to suggest that the RFS will be dismantled. What’s more: even the initiative to change the point of obligation for the generation of RINs seems to have gone nowhere. However, this does not mean that the risk for the RFS has gone away even though it may not be on the top of the Trump agenda.

Meanwhile the Renewable Fuels Association takes heart from the fact that the market share of fuel ethanol in gasoline in calendar year 2016 rose above the blend wall (E-10) due to an increased use of higher blends.

The RFA pegged the consumption of mid-level blends (fuel ethanol share 20-50%) and flex fuels (5183%) at a range from 450 mln to 1.7 bln gallons, depending on the assumptions over the use of E-0 and the actual ethanol shares in the higher blends.

RFA's analysis was based on data from the Energy Information Administration (EIA), the Environmental Protection Agency and the American Petroleum Institute.

The EIA had calculated an average blending share of 10.04% vol. for 2016, up from 9.91% in 2015 and 9.83% in 2014.

This is certainly a success that can be built upon but progress will be only gradual. Nevertheless, the data suggest that what has been termed by EPA as the ‘soft spots of resistance’ are probed and exploited.

The export markets have proven to be of great help to work off the domestic surplus. Here, the loss of the Chinese market and the higher barriers to entry in Brazil are clouding prospects for 2017 and beyond.

The main hope for the industry is that sales to India will continue to pick up as country is not in the position to cater for all domestic needs in the face of poor cane molasses supplies. At the same time, any uptick in world oil prices would give a boost to ethanol’s competitiveness in those places where it is used as a gasoline extender.

Longer term, the industry will also have to keep an eye on developments in California, the country’s biggest ethanol consumer by far. Here the Air Resources Board is proposing to cut the carbon intensity of the transportation fuels pool by 18% by 2030, up from 10% in 2020. This would, more or less, close the market to corn ethanol. At the same time, new opportunities would arise for advanced biofuels, including cane ethanol from Brazil.

In the initial scoping plan discussion draft, released in December, CARB’s 18% CI scenario assumes an LCFS credit price of $80 per ton in 2030 and 980 mln gallons of advanced biofuels in the transportation sector, including cellulosic ethanol. These assumptions are significantly higher than the 10% scenario, which assumes an LCFS credit price of $10 per tonne in 2030 and 580 mln gallons of advanced biofuels in the transportation sector, including cellulosic ethanol.

Just to compare: in 2016 California used 1.4 bln gallons of corn ethanol. Much of that could be lost unless the GHG savings in its production process can be dramatically improved. At the moment, there is little to suggest that this will happen.

In Brazil, the 2017/18 (Apr/Mar) cane harvest has been off to a slower start than last year. Just like last year opinions over the size of the Centre/South crop differ widely but most analysts expect a lower cane crush for a variety of reasons.

The outlook for ethanol remains bleak as sugar is still the more profitable end-use for cane. At the same time demand for the fuel at the pump has not yet started to stabilize after tax perks expired earlier in the year.

There is consensus that ethanol production will continue to fall this year but could recover in 2018/19.

For 2017/18 the forecasts range from a decline of less than 500 mln to up to 1.8 bln litres. We currently expect production for the whole of the country to be around 26 bln litres, down from 27 bln last season. Consumption is likely to retreat as well but at a much slower pace than last year. This would be mainly because of the firmer crude oil prices which could help to give a lift to the competitiveness of hydrous ethanol at the pump. At the same time, Brazil will come out of the recent recession and this could support gasoline consumption.

Exports will decline in 2017/18 as well and the total could be just above 1.1 bln litres against close to 1.5 bln last season.

The size of imports will decisively depend on stance of the government to an import tax that had been proposed by the Agriculture Ministry to protect distillers in the North Northeast.

Our forecast is based on the assumption that the duty will not be imposed as there is considerable opposition not only in the government but also in the ethanol industry itself. The big milling groups in the Centre/South (Copersucar, Raizen) were among the main beneficiaries of the open arbitrage between US and Brazilian ethanol markets.

In Canada, the continent's third largest user and producer, the industry continues to stagnate. This is hardly surprising given the tough competition it faces in the form of US ethanol which can be imported duty-free.

In 2016 the country took 1.2 bln litres making it one of the largest import markets for ethanol worldwide. Almost all of this comes from the US representing more than 40% of the total local market. Nevertheless, last year was remarkable in so far as it marked the first decline since 2009. This is unlikely to be the beginning of a new trend. The main driver behind the decline were lower gasoline price which made higher ethanol blends uneconomic. Imports in Q1 2017 were already up again and the total for the year could easily reach 1.3 bln litres.

Europe - Policy battle is heating up again

In 2015 Europe's Renewable Energy Directive and Fuel Quality Directive were amended to address emissions associated with indirect land use change (ILUC), limiting crop-based biofuels to 7% of the final transport energy in 2020. The remaining 3.0% have to be met with advanced biofuels such as waste-based product second-generation ethanol and drop-in fuels in the diesel segment.

In 2016 the Commission laid out its ideas for the years post 2020. As part of the Clean Energy Package the share of crop-based biofuel must not exceed 3.8% cal. by 2030 while the minimum share of advanced biofuels has to rise from 1.5% in 2021 to 6.8% in 2030. It must be kept in mind that this is a proposal which has to make its way through the Parliament and the Council before it can become official policy. If history is any guide the process will make it highly probable that the final targets for crop-based biofuels will be higher than in the Commission text.

Therefore, most of 2017 will see an intense wrangling over the pros and cons of biofuels. Market fundamentals will certainly help the argument of the pro camp as prices for both sugar and grains are at modest levels so that there won’t be any new ammunition for the repeatedly debunked ‘Food vs. Fuel’ myth.

From an environmental point of view recent data suggest that CO2 savings of ethanol reach an average 64% in the EU. This underlines that ethanol is an effective tool to meet ever more stringent emission targets in road transport.

Given the ongoing concern over the true environmental impact of diesel engines there is reason to assume that gasoline powered vehicle might get a new lease of life. This could prove to be supportive for ethanol even in the short term.

At the same time the restructuring in the industry is continuing. In March, Abengoa announced that it had sold for EUR140 mln its four remaining fuel ethanol plants in Europe to venture capital fund Trilantic Europe.

The package comprises Abengoa Bioenergy France, Biocarburantes de Castilla y León, Bioetanol Galicia, Ecocarburantes Españoles and Ecoagrícola, which own the Cartagena, La Coruña, Salamanca and Lacq.

Trilantic Europe manages about EUR1.5 bln and is specialized in investment operations in Europe.

The plants have a combined production capacity of 800 mln litres a year and their original price tag was EUR550 mln. The distilleries in Salamanca and Galicia were shut down temporarily last year. Currently, only Salamanca is out of operation.

Asia

Output in Asia can be expected to continue grow again next year after two years of stagnation.

The industry in China is upbeat after the government introduced import taxes for ethanol imported from the US and Brazil. This has greatly raised the competitiveness of the local industry.  While fuel ethanol is expected to benefit the most from the move this year, the non-fuel sector will be the engine of growth in 2018.

In 2017, the blend rate for ethanolgasoline is forecast at 2.5%, only little changed on the year. The lack of competitive imports may result in fuel ethanol use to stagnate next year while overall gasoline consumption is forecast to continue rising.

In 2016, Jiangsu and Hebei provinces and the city of Guangdong adopted an E-10 blending mandate. China has launched pilot zones in 11 provinces and 40 municipalities, including Heilongjiang, Jilin, Liaoning, Inner Mongolia, Henan, Anhui, Shandong, Zhejiang, Guangzhou, Guangxi, and Hainan for mandatory ethanol blended gasoline use. New demand from corn processing companies, as well as the feed and ethanol industries, will be vital to help China start cutting the 250 mln tonnes of corn reserves built up under stockpiling policies, or more than the country can consume in a year.

India is the region's No.2 producer and there is a good chance that output will rise in 2018, after the sharp drop this year. This would be the result of a rebound in sugar and molasses production.

Only 780 mln litres of fuel ethanol were offered and contracted for the 2016/17blending obligation period (Dec/Nov). Originally, oil marketing companies (OMCs) had been seeking 2.8 bln litres. The weak performance was the result of a lower sugar supply as well as higher prices for molasses. Additionally, the government in autumn 2016 re-introduced the excise duty on fuel ethanol amounting to INR5 per litre. At the same time it decided to reduce the procurement price for fuel ethanol by around INR3 per litre. Both measures resulted in a combined 20% reduction in the fuel ethanol price for distillers.

Thai ethanol production is likely to grow only slowly this year. The low price of oil and a lack of molasses on the local market make the operation of the Thai fuel ethanol program rather costly. Nevertheless Bangkok seems to be determined to push forward with the roll-out of higher ethanol blends.

Under the government's renewable energy plan for the years up to 2036, the consumption of biofuels is forecast to grow faster than the overall market for alternative energy sources.

In particular, the 2017 Alternative Energy Plan foresees a daily fuel ethanol production of 11.3 mln litres in 2036 against 3.67 mln in 2016.

Faster growth can be expected to return in 2018 when the sugarcane crop will be ampler than it was in 2016/17.

Pakistan is likely to produce a little bit more in 2017 following a better molasses crop. Currently the industry benefits from the lack of supplies from Brazil in Asia. This is likely to continue throughout most of 2017. For 2018 ethanol production is forecast to stagnate as molasses supplies will not grow that much.

The Philippines will continue to ramp up production but the country will remain dependent on imports to feed its fuel ethanol program. Fuel ethanol production in 2017 is forecast to rise to 250 mln litres but actual output may actually remain below this level.

Outlook

The world ethanol industry may return to a growth path next year after a consolidation phase in 2017. The main driver will be Brazil where a better cane crop may coincide with lower sugar prices to boost production after two years of declines.

Growth in the US will continue but at a much slower pace than this year. This will be mainly because of a less dynamic domestic market.

Firmer oil prices are likely to support the ethanol industry but their impact is likely to be limited. After all there remains considerable resistance in the market as the responsiveness of the US fracking industry remains a crucial factor.

This underlines the fact that policy continues to play a vital role for the success of the industry. If political support is lacking the progress of the industry will solely depend on the relative prices of sugar or corn against crude oil. This would introduce a highly volatile element into the equation.

For more insight into the world of ethanol and biofuels, book your ticket to F. O. Lichts’ 20^th World Ethanol and Biofuels conference now.