The views from across the globe on world biofuel production are mixed despite some growth, according to
Standard & Poor’s Ratings Services’ report
Global Ethanol Production: Rising Output, High Capital Spending, Uncertain Earnings.
“The increasing correlation between fuel and food prices that are moving ever higher has thrown the debate on biofuels' sustainability into the spotlight," said Standard & Poor's credit analyst Michael Seewald.
At the same time, biofuels, and especially the mainly grain- or sugar-based gasoline additive ethanol, have become a preferred way to diversify for global agricultural-based companies, Seewald says. Since 2000, rising gas and oil prices and the call for renewable energy sources by many world governments as a solution to carbon emissions have triggered widespread government support to extend biofuel production.
According to International Energy Agency estimates, global biofuel production capacity will have doubled by 2012, compared with 2006 levels. The U.S., Brazil, and Europe are the top three producers worldwide, with respective market shares of about 40%, 30%, and 10%.
“The credit outlook for ethanol producers varies across regions and business models, according the local production environment,” Seewald says. “Where ethanol production is just one diversification source for large agribusiness processors, the rating impact tends to be neutral to negative. Smaller pure-play ethanol producers, however, face high business and financial risks due to the volatile dynamics in this market.”
He adds that politics could become a risk factor for the industry, if the food versus fuel debate sways public opinion, which is currently positive.
Seewald says Brazil’s sugar cane-based ethanol industry has retained its competitive advantages so far. Europe's wheat- and sugar-beet based production is still in its infancy. Whether the European biofuel market will confront issues of overcapacity resembling those in the U.S. remains to be seen.
High input prices and the first signs of decreasing political support have escalated the investment risk for companies that have diversified into biofuel production. Agribusiness companies carry inherently higher-risk business profiles compared with those in other consumer goods sectors, due to their commodity orientation and resulting earnings volatility.
“In addition, building biofuel production capacity is capital intensive and typically entails long start-up periods.” Seewald says. “This spending temporarily weighs on companies' indebtedness, financial flexibility, and free cash flow generation.”
–John A. Sullivan, News Editor, Oil and Gas Investor, www.OilandGasInvestor.com, jsullivan@hartenergy.com
