HOUSTON (ICIS News) - The US biofuels industry is expected to undergo consolidation in 2009, with many of ethanol and biodiesel plants either closing or being absorbed by a few larger players who will dominate the market.

The US has 171 biodiesel refineries with estimated capacity at more than 2.4bn gal/year, well ahead of the 6m gal/year mandated by the US government for 2009.

With domestic renewable fuel infrastructure relatively underdeveloped and Europe taking an increasingly aggressive stance against US biodiesel imports, many analysts consider the US market oversupplied.

Demand for US biodiesel in the domestic and overseas markets will be muted through the first quarter of 2009. The EU, traditionally the destination of about 70% of US biodiesel, is investigating allegations of dumping by subsidised US biodiesel sellers and has taken steps to reduce imports.

At home, the rapid decline in crude oil values - from $147/bbl in July to the $40s/bbl in December - has squeezed profit margins for biodiesel producers who compete against the petro-fuel.  In both arenas, the global recession also has contributed to a considerable softening in demand.

Some biodiesel industry representatives continue to argue that soy-based biofuels have little influence on food markets supply and pricing. However, commercial suppliers are increasingly looking toward such “second-generation” feedstocks as jatropha seeds and algae. Both of these potential fuel sources yield more oil than conventional feedstocks and exist outside the “fuel vs food” sphere.

Market analysts and producers consider algae an especially promising feedstock, as it can be grown virtually anywhere and, by some estimates, can yield 2,000 times more oil than soybean feedstocks. A commercially viable algae-based biodiesel process is still considered at least five years away, however.

On the ethanol side, consolidation and mothballing were poised to be the buzzwords for 2009, market sources said. The vulnerability of the US ethanol industry came under the spotlight in October, when VeraSun Energy, the country’s second-largest producer, filed for bankruptcy, citing shrinking liquidity. VeraSun was only one of at least six producers that have halted production or sought bankruptcy protection in the fourth quarter of 2008.

According to sources, some 16 US ethanol mills were off line in the last two months due to deteriorating market conditions, including tighter credit and a sharp decline in fuel ethanol prices. The units account for about 1.5bn gal/year in capacity, market sources said.

The US has 172 ethanol mills with capacity estimated at 10.5bn gal/year, according to the Renewable Fuels Association (RFA). Market participants said several more bankruptcies were expected in 2009.

One industrial ethanol producer said the pressure on ethanol margins was significant for mills running without major debts, let alone for the new units that started out highly leveraged.

The industry will go through a transition period and the number of US producers will drop, one analyst said, predicting that the transition would likely last 2-4 years. The analyst said investors would also hit the brakes on new projects, snapping the sharp increase in capacity that the US industry saw in the last two years.

On the industrial ethanol side, the outlook for the industry mirrored the weakness of the general economy. US industrial ethanol demand is likely to drop by 10% in 2009 amid reduced consumption in key end-markets such as the housing and automotive sectors, one producer said.

Demand for industrial ethanol has also dropped for any product where disposable income is involved, the source said, adding that staple markets, like cleaners and detergents, were weakening.

Beverage ethanol stood out as the shinning star for industry this year. US demand for beverage ethanol rose by 7-8% in 2008 due largely to a displacement from imported, ultra-premium grade product to domestically made premium grade.

However, the weak US economy is also expected to weigh on the beverage side in 2009, erasing any prospect for continued growth. Beverage ethanol also involves disposable income and consumption will eventually begin to level off, one market participant said. 

See also article: Creating a Global Biofuels Industry will be Difficult.

By Ben Lefebvre and William Lemos