Costly corn stops Chinese ethanol making

“As current ethanol prices are at around $550 to $565 per tonne, companies
are losing $52 to $65 per tonne of production,” Yu Xiurong, technology director
with Jilin Tuopai Agricultural Products Development said. Yu also attributed the
losses to oversupply in the market due to excess production capacity.

The
Jilin based company, with annual production capacity of 50,000 tonnes of edible
ethanol and 20,000 tonnes of premium edible ethanol, began suspending production
in May.

China’s ethanol prices soared to $760 per tonne from $525 per ton
between 2005 and 2006, driven by export demand. However, ethanol prices fell
sharply following a cut in ethanol export tax rebates in December
2006.

China’s subsidy for ethanol mills was reduced from $270 to $170 per
tonne in the past three years. The subsidy might be eliminated in 2008,
according to an industry analyst.

Tight corn supply
In the
first five months of the year, average corn prices in China rose 23%
year-on-year, according to the National Development and Reform
Commission.

However, tightness in the current corn market is mainly
because 30% of China’s corn output is being hoarded by corn traders and only a
small amount is flowing onto the market. The normal stockpile level for this
time of the year is around 20%.

The new harvest season, starting in
July/August probably will ease the market and ethanol producers might resume
production again.

No new projects
State-run Xinhua news agency
quoted a high-level Chinese official as saying that China will not approve new
grain-based ethanol fuel projects due to grain supply concerns, and that
companies currently engaged in corn-based ethanol projects will be ordered to
gradually shift to non-grain ethanol projects.

The new government
regulations may hamper market confidence although ongoing production suspensions
will still only have a limited impact on corn prices.

The impact of
ethanol on domestic corn prices is limited, as corn consumption from ethanol
accounts for less than 10% of total fresh supply. Corn prices are mainly
affected by the demand from the livestock feeding industry, which accounts for
nearly 70% of the supply.