Ethanol Potential in China

BEIJING (DTN) -- New government policy recently set a target to roll out the use of ethanol in gasoline nationwide in China, according to a plan jointly released by 15 ministries, such as the National Development and Reform Commission, the National Energy Administration, and the Ministry of Finance.

To meet its goals of implementing 10% ethanol nationwide by 2020, China would need to import ethanol, at least in the short term. Agrimoney reported comments last week from Juan Luciano, CEO of ADM, anticipating China would need to import roughly 254 million gallons of ethanol annually.

Reuters reported this week that China plans to build an ethanol plant in the Heilongjiang province that would produce 4 million metric tons (127 million gallons) to 5 mmt (159 million gallons) of ethanol annually. The facility would use about 1.85 mmt tons of corn, or about 728 million bushels, annually.

"China started to promote biofuel ethanol in 2001, but the productivity did not expand, because of the lack of corn supply," said Guanghui Xie, professor and deputy director of China National Energy Research and Development Center for Biomass (NECB) based in China Agricultural University, Beijing.

"So far, ethanol-added gasoline is only available in 11 provinces in China, total ethanol-added gasoline is only 20% of gasoline consumed in the country," said Xie.

The new policy is to let all 31 provinces, autonomy regions, as well as municipal cities, use E10, which means 10% of the gasoline is ethanol.

There are 205 million cars in China consuming 3.8 billion gallons of gasoline annually. With 10% ethanol added, the country will open a biofuel ethanol market of 380 million gallons, not considering the increase of gasoline consumption in the following years. With a corn/ethanol production rate of 3 to 1, the ethanol industry in China will need to use 36 million tons of corn (1.4 billion bushels).

"Only 70% of the ethanol produced in China is from corn, the rest is from wheat, sorghum, cassava and other starch materials," said Xie. "So the total demand for corn will be around 25 million tons, (980 million bushels) as calculated."

So far, the Chinese government allows only five state-owned ethanol plants to produce 73 million gallons per year. The products will be purchased by two state-owned gasoline companies -- China National Petroleum Corporation (PetroChina) and China Petroleum and Chemical Corporation (Sinopec) -- for a price that is 91.1% of the gasoline price, and marketed through their gas stations. Ethanol production and distribution is strictly controlled by the government.

Despite the announcement of the new ethanol plant in China, Xie said that there is still some fighting inside the government on how to increase ethanol supply.

The huge corn stockpile is one of the main reasons for the government to advance ethanol production, said Dongping Lu, purchasing manager of Yangxiang Feed in Guangxi province, south China. "The aging corn in the storage is not good for feed anymore. Producing ethanol may be the only way to use it."

It's estimated that there are 90 mmt (3.5 billion bushels) of corn aged or deteriorated in government storage. Corn in storage for more than three years is considered to be aged, Lu said.

According to China Corn Network, China will produce 204.9 mmt (8 bb) of corn in the year 2017/18, while the demand for feed will be 127 mmt, (4.99 bb) and demand for industry processing (include ethanol production) will be 66 mmt (2.6 bb).

Total Chinese consumption, including food, seed and others, will be 207.2 mmt (8.16 bb). Production will be less than demand. However, with a carry-in of 298.4 mmt (11.7 bb), total corn supply is 504 mmt (19.86 bb) -- much higher than demand.

"This is a clear signal from the government to cut the high stockpile. But, the process may need a long time, as ethanol industry productivity will not be able to increase in a short time," said Xie. "Even with production capacity running at 12 million (metric) tons, facing this huge stockpile we still need more than five years to cut the storage to a reasonable level."

However, the trading industry is more optimistic as it looks at the impact of this policy. "This policy is bullish to U.S. corn in the long run," an expert, who does not want his name to be disclosed, told DTN. "China may need to import corn in the future for feed, or even for ethanol after the stockpile is diminished. The expert added it may not take a long time for this happen.

China has a corn import quota of 7.2 mmt per year (283 mb), for food and feed, because of the food security (self-sufficiency) policy in China. If corn is imported for the ethanol industry, it may get across the quota policy, or the government will release a "temporary quota" to allow more imports. Cotton imports, for example, have an import quota of 0.89 mmt per year. But, China imported 5.13 mmt of cotton in 2012 when market demand increased for imported cotton.

Importing ethanol directly, or importing corn for ethanol production, will become a new business of the energy industry, and hence will not be against China's food security program.

In any case, this policy will stimulate corn demand in China and eventually create opportunities for U.S. corn.

The Chinese government normally releases a policy change and then takes a while to release another document of how to practically approach the goal of the policy. Xie said that there will be more information from the government after the dust of the inside fighting settles down.

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