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07 Apr 2020 | 17:09 UTC — Houston
By Wesley Swift
Houston — The US ethanol industry, already battered by plummeting demand and cratering margins, now faces another challenge: Where do you put a product that no one wants to buy?
As governments combats the coronavirus pandemic, stay-at-home orders and guidelines are siphoning off demand for motor gasoline and its blendstocks such as ethanol as residents eschew driving.
An ethanol broker based in the Midwest told S&P Global Platts this week that demand for ethanol has dropped anywhere from 40% to 70% in various markets. At the same time, ethanol inventories, already swollen before the pandemic, are building to record levels.
During typical supply gluts, ethanol plants could dial back production, keeping prices afloat and forcing the market to tap into stocks. But the coronavirus pandemic creates a conundrum not seen before by the industry -- namely, how does the industry handle massive inventories when there's so little demand?
"You could give away gasoline, and people might top off their tanks," the broker said. "But where are they going to go?"
And where does the ethanol go? Right now, it's going into storage tanks. But that space, sources say, is rapidly filling up.
According to the latest data from the US Energy Information Administration, US ethanol stocks for the week ended March 27 rose 1.577 million barrels, to 25.717 million barrels, the highest level since the agency began monitoring stocks in June 2010.
While it is unclear just how much ethanol storage capacity exists in the US, market sources estimate put that number somewhere between 26 million and 28 million. If that's true, inventories already are approaching the low bound of ethanol capacity.
Many plants have already filled their on-site storage, market sources have told Platts. Now industry eyes are keeping an eye on storage at ethanol terminals at trading hubs around the country.
"Unless production continues to slow and demand somehow picks up, it's going to be a problem," a Texas-based trader told Platts. "The other solution is don't denature it and start drinking it."
The East Coast is particularly being hard hit. EIA data showed that stocks for the East Coast region were 8.976 million barrels, the highest level for the region since reaching 9.270 million barrels on the week ended March 30, 2012.
In New York, the epicenter of the pandemic in the US, demand has shriveled to just a pittance. A New York City-based trader told Platts last week that streets in the biggest city were barren, resembling "midday of Christmas Day."
Liquidity for FOB New York Harbor barges has been at a standstill for much of the last three weeks. Recently news began to circulate that Kinder Morgan's Linden, New Jersey, ethanol terminal was full and had stopped accepting rail cars.
While Kinder Morgan declined to comment, saying the company "does not comment on customer inventory levels," a source with storage space at the terminal confirmed that the facility was no longer accepting rail cars for unloading.
Ethanol producers have been cutting production sharply in the last two weeks. Some plants have partially curtailed how much of the biofuel they churn out. Several other plants have shuttered completely and furloughed employees.
Production in last week's EIA report fell to 840,000 b/d, the lowest level since 2013. The market expects the next two reports should show a decline to as much at 650,000 b/d.
But if production doesn't decline fast enough, plants could see requests from customers to delay shipments or cancelled altogether if the buyers don't have anywhere to stash the product.
At some point, the infrastructure just can't take any more ethanol. And producers will be out of options, according to the Midwest broker.
"If there's nowhere to put it, the plants that are still producing are just going to have to shut down," he said.
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