Philippines bioethanol imbalance led by competition from sugar

Structural shortages and other imbalances in the Philippines' bioethanol market have sparked a pricing debate among its participants, with local producers appearing to have gotten, the shorter end of the stick.
Four years after the passing of the Biofuels Act of 2006, a law enacted for the purpose of developing and utilizing indigenous renewable and sustainably-sourced clean energy sources to reduce dependence on imported oil and to increase rural employment and income, the Philippines is currently, in its planned year of full implementation of the law, not producing a single liter of the bioethanol.
That is because the feedstock for bioethanol in the country, primarily sugarcane and molasses, have all been sucked into sugar production, where profit margins are far greater.
Structurally, the Philippines is already severely short of bioethanol, but there is nationwide mandate for the consumption of the blendstock in gasoline. Secondly, it is priced 40-50% less than its more developed and profitable cousin -- sugar -- that is in turn, due to an astounding imbalance in the import tariffs imposed on both products.

Since the second-half of 2010, the Philippines has been importing all its bioethanol requirements due to a production halt at local plants and inherent structural shortages, despite an enforced mandate which requires bioethanol-blended gasoline to comprise at least 5% of the total amount of gasoline sold in the country, that will go up to 10% over 2011-2012.
In order to meet the E5 mandate, the country requires 200 million liters/year of bioethanol, and 400 million liters/year in order to meet the full implementation of the E10 mandate, while up to the last quarter of 2010, its local production was only 40 million liters/year.
Yet, the Philippines is currently importing all its bioethanol requirements, due to a production halt at local plants and its inherent structural shortages.
The Philippines has three undenatured anhydrous bioethanol producers. The first is San Carlos Bioenergy, which owns a 30 million liters/year, sugarcane-based, fuel-grade bioethanol plant at Negros. The second is Leyte Agri Corporation, which owns a 10 million liters/year bioethanol facility at Leyte and Roxhol Bioenergy, which owns a 30 million liters/year facility at Negros Occidental.
But all three plants are currently not in operation as while a permit is issued by the government to bioethanol producers mandating that their production be used solely for the purpose of gasoline blending, their feedstock is not regulated.
Due to a delayed 2010 harvest on the back of El Nino, scarcity of sugar supplies caused prices to spike, resulting in the supply of bioethanol feedstock -- sugarcane, molasses and cassava -- being diverted to sugar production. Also for this reason, the Philippines had turned from a net exporter of sugar to an importer last year, industry sources added.
Sugar prices closed 2010 at a 30-year high, due to a smaller-than-forecast harvest in Brazil, on the back of the La Nina phenomenon. The ICE March futures contract closed at 32.12 cents/lb on December 31, 2010.
In addition, the United Nations Food and Agriculture Organization's food price index at the end of last year shot up to a fresh record high at 215 since its implementation 20 years ago. The food price index is an international basket taking into account the export prices of wheat, corn, dairy produce, meat, sugar and oil.
PRODUCERS LOBBY FOR TARIFF/MARGIN-LINKED FORMULA
Sugar prices are at a 40-50% premium to anhydrous bioethanol prices, and the main reason for that is because of high import tariffs of sugar, market participants said.
As a measure to safeguard its own local industry, the import duty on sugar is 38% while for bioethanol, it is only 1%.
This has created an acute price distortion for bioethanol which competes with sugar for feedstock. When the prices of sugar rose to new highs in 2009-10, the production of bioethanol accordingly fell to highly unprofitable levels.
DISTORTIONS FROM SUGAR TO NORMALIZE BY 2015
Under the Association of Southeast Asian Nations free trade agreement, tariffs on sugar imports will undergo a phased reduction from 45% in 2010 to 38% in 2011, 28% in 2012, 18% in 2013, 10% in 2014 to 0-5% in 2015.
As such, bioethanol and sugar prices are heading towards a convergence. From now until 2015, the artificial inflation on sugar prices in the Philippines will recede, while bioethanol import tariffs are likely to remain the same or be increased.
"Sugar prices are expected to go down this year too as Thailand estimates it will have a record harvest in 2011," said Rosemarie S. Gumera, Manager of the Planning & Policy Department of the Philippines' Sugar Regulatory Administration and member of the National Biofuels Board.
For this reason, more discussions for bioethanol projects in the Philippines have been sparked.
"The eventual aim of the Biofuels Act is to encourage the expansion of local production for the purpose of fuel so that it will not touch the allocation of land or resources for the sugar industry," said Gumera.
Ironically, lower sugar prices may not be all happy news for bioethanol producers either.
"Sugar is 50% of our cost," said Bantug. "If sugar prices go down, it changes ethanol pricing as well. It can also create a volatile situation socially for the farmers and industry, so we are in support of higher ethanol import tariffs, as opposed to the removal or reduction of those on sugar."

(Source: http://www.platts.com/RSSFeedDetailedNews/RSSFeed/Petrochemicals/7214930)