March 1, 2007


FEELING FUELISH?The fast-growing ethanol market could lose some of its luster for producers and distributors of stainless steel.


President George W. Bush’s State of the Union pledge to boost the supply of renewable and alternative fuels seven-fold, to 35 billion gallons by 2017, cheered not just ethanol producers, but also stainless steel suppliers whose growth last year was largely sparked by the boom in ethanol plants.

But even with the ethanol industry already set to double its capacity, there are new questions whether higher prices for corn, sagging fuel prices and higher stainless prices will make these plants as profitable as they are cracked up to be.

The 2 1/2-year bull energy market, which peaked at $78 for a barrel of crude oil last summer, spurred dozens of new ethanol plant announcements. A plant typically uses 900 tons to 1,000 tons of stainless steel plate, mostly for fermenting and storage tanks.

“There was booming activity in 2006, and this year will be as strong,” says Charles Turack, vice president and general manager for coil products for the North American unit of Finland’s Outokumpu Oyj, which produces stainless steel plate at its mill in Newcastle, Indiana, and imports coil from Sweden and Finland.

Turack estimates that the ethanol boom accounted for 50,000 tons, or 16% of the stainless market’s growth in 2006.

Stainless consumption through the first 10 months of last year, the most recent data available, rose 14% to 2.2 million tons, data from the Washington, D.C.-based Specialty Steel Industry of North America shows. The plate market represents 11% of stainless consumption, Turack estimates.

At the start of 2007, there were 113 operating ethanol biorefineries, 77 under construction and seven under expansion, data from the Washington, D.C.-based Renewable Fuels Association shows. If all the plants under construction are completed, ethanol capacity will more than double to 11.6 billion gallons a year by 2009 from 5.4 billion gallons currently. A gallon of ethanol is equivalent to a gallon of conventional gasoline. Ethanol usually is mixed as 10% of fuel sold at the pump, although the industry is moving to higher ethanol blends.


The economics of building an ethanol plant are changing quickly. Higher prices for feedstock corn and sagging ethanol prices already are squeezing refinery margins. That also will limit the returns on a new plant, says Mark Flannery, global head of Energy Research for New York-based Credit Suisse.

Additionally, the stocks of publicly traded ethanol producers have been hammered. Shares of Aventine Renewable Energy Holdings Inc., in Pekin, Illinois, earlier this year were down about 35% from a recent high of more than $25 at the end of November. Shares of Brookings, South Dakota-based VeraSun Energy, which went public in 2006 at $30, were down by more than 40% earlier this year.

Corn prices have shot up to $3.50 a bushel from $2.50 in July 2006, and futures on the Chicago Board of Trade are trading near $4 through 2008. At the same time, the average price for ethanol has fallen to nearly $2 a gallon from around $4 in the summer of 2006 as the fuel has become more widely available.

As a result, the gross operating margin for ethanol production (also known as the crush spread) has fallen to 60 cents a gallon from a peak of $3 a gallon in mid-2006, Flannery wrote in a January report. Projected return on invested capital in a new plant has fallen to an estimated 5% to 13% compared with 34% to 40% during the summer of 2006.

The result is some plants under consideration will either be deferred or canceled—particularly if ethanol prices fail to pick up ahead of the summer driving season, Flannery wrote.

With corn at $4.60 to $4.75 a bushel, some projects won’t break even, says Eric Mork, director of domestic business development for ICM Inc., a Colwich, Kansas, engineering concern that builds ethanol plants. An oil price of $40 to $45 would be a stress point for producers.

“The margins are still there to justify moving forward, but banks are looking closely at the economics,” he says.

Another problem is that the price of stainless doubled last year, mostly as a result of tight nickel supplies. If the high cost of stainless doubles the cost of construction, more projects will be put on hold, says William Sales, senior vice president, nonferrous, for Reliance Steel & Aluminum Co. in Los Angeles.

The common alloy stainless grades 304 and 316 are used most frequently for ethanol plants. Accounting for nickel surcharges, the base price of 304 doubled to $2.10 a pound as of January from $1.04 a year earlier. Companies are beginning to substitute alloys with lower nickel content that are just as corrosion-resistant, such as 201 and the company’s proprietary 2003 alloys, says Dan Greenfield, a spokesman for specialty metals producer Allegheny Technologies Inc., based in Pittsburgh.


A number of service centers that carry stainless steel plate have benefited from the ethanol boom. Turack says a typical project will be supplied 80% by a mill and 20% by service centers.

Service centers typically don’t carry enough stainless steel inventory to build an entire ethanol plant, but they participate by cutting and processing the plate, filling in additional metal off the shelf and supplying metal for maintenance after the plant is completed, Sales says. A service center could source the full amount of metal for an ethanol plant as long as it had enough lead time, he adds.

While the big orders are always welcome, service centers aren’t likely to expand inventory to cater to this market—stocks of stainless products at the end of December were at an all-time high of 6.2 months supply, or five months on a seasonally adjusted basis, at 904,100 tons, MSCI data shows.

The stainless market has softened a bit. First-quarter mill lead times declined to about six to seven weeks from 12 to 14 weeks six months earlier. The tight nickel situation has contributed to a stainless price higher than demand would otherwise warrant, Sales says.


There is still good reason to be bullish about the market for alternative fuels. The price of energy—while down from recent highs—was still nearly 60% higher earlier this year than it was two years ago. Bush, in his State of the Union, rolled out a plan to reduce dependency on foreign oil, which includes 20% reduced gasoline consumption in 10 years through improved fuel efficiency and expanded use of renewable fuels.

The government encourages expanded use of alternative fuels by mandating benchmarks that must be met by regional gasoline blenders. Blenders receive an excise tax exemption if they meet the goals.

States have their own mandates. For example, Iowa law mandates that renewable fuels must represent 25% of the fuel sold in the state by 2020.

While the rising price of corn squeezes ethanol producers, the fuel can be produced from wood chips, grasses and paper pulp. This cellulosic ethanol is costly to produce, but fibrous material such as corn stalk is being introduced to the production process increasingly, says Rick Tolman, CEO of the National Corn Growers Association in St. Louis. “It’s an evolutionary process.”

So will ethanol continue to be a bonanza for stainless steel? There’s still a lot of momentum behind new plants, and dependency on foreign oil is an issue that isn’t going away. But shifting economics means fewer plants are likely to be built near term—putting a break on last year’s hot demand for stainless.