Planned UK Biofuel Plant Seen Risky as Wheat Soars
Date: 30-Nov-07
Country: UK
Author: David Brough
The companies will invest 200 million pounds (US$414.4 million) in the wheat-based plant in Hull, which will produce around 420 million litres of bioethanol annually from late 2009.
"The fundamentals are there for a profitable business for the Hull plant. It's possibly not a bad investment," said biofuels analyst Robert Outram at London-based consultancy Frost and Sullivan.
But Christoph Berg, a biofuels expert at German analyst Licht, said the investors might put their plans on hold if prices of the wheat feedstock continued to soar, making the economics look less attractive.
UK feed wheat prices hit record highs of around 200 pounds a tonne in September 2007 driven by supply shortages.
London May futures jumped 2.33 percent on Thursday to 176.00 pounds after US wheat prices surged on news that Argentina temporarily closed its wheat exports registry.
Berg said that, despite worries over wheat prices, the market for bioethanol was likely to grow because of new mandates in Europe to increase blends of biofuels mixed with petrol at a time of rocketing oil prices.
Mark Carr, CEO of British Sugar, a unit of Associated British Foods, told Reuters on the sidelines of a sugar conference this week that wheat prices are likely to fall from their recent all-time highs.
Furthermore, the bioethanol plant will hedge its price risks by producing DDGS (dried distillers grains with solubles), a high nutrient feed valued by the livestock industry.
"The feed markets will always be ready for co-products of the ethanol industry," Berg said. "It's a risk hedge," he added, noting links between wheat and DDGS prices.
Carr said the outlook for oil prices remained strong, further boosting prospects for demand for green energy.
Analysts said areas planted to wheat in Europe were likely to rise in response to surging prices, and this could eventually drag prices down.
British Sugar would also likely hedge its exposure to wheat on the futures market, analysts added.
British Sugar last week officially opened Britain's first bioethanol plant, hailed by officials as a major turning point in the reduction of carbon emissions in the UK transport system.
The plant in Wissington, eastern England, started operations in September and now produces 70 million litres of ethanol biofuel a year from locally grown sugar beet.
Unlike wheat, sugar prices are depressed, due to a massive global supply glut driven by leading producers Brazil and India.
Outram said British Sugar's business risks for the Wissington bioethanol plant were minimal because it was using sugar beet that was surplus to EU quotas. Previously, British Sugar exported its beet surplus.
Analysts said a further risk was that Brazil, the world's top sugar exporter, could eventually flood Europe with bioethanol made from its cane sugar, thereby depressing prices in Europe for British Sugar's bioethanol.
However, they noted high international shipping freight costs and growing demand in Brazil for flex-fuel vehicles, which can be powered by a combination of petrol and bioethanol.
(Reporting by David Brough; Editing by Chris Johnson)