July 22, 2008

Barrons is a highly valued source of information on major companies and the stock market in the US. The article of interest to Mantra, Ethanol Stocks Are Poised to Refuel, is written by Andrew Bary, June 2008. (The reader should know that Mantra has been investigating cellulosic ethanol, an attractive and economic alternative to corn-based ethanol – the current US technology. Because it uses waste wood as feedstock, not corn, it makes ethanol at a lower cost.)

Here is what Barons had to say on the economics of ethanol and its impact on gasoline refiners (which blend in ethanol with gasoline usually at 10%) and its impact on the general consumer. “Refiners are blending ethanol with gasoline not because of government edicts but because it makes economic sense. Ethanol now costs $2.50 per gallon -- or about $2.00 a gallon to refiners after the federal subsidy. The wholesale price of gasoline is above $3.30 a gallon.

This means that refiners save about $1.30 per gallon by using ethanol rather than pure gasoline. The savings per gallon of a 90/10 blend of gas and ethanol relative to pure gasoline is about 13 cents (10% of the $1.30 differential between ethanol and gasoline). Much of that gets passed on to consumers.

Then there are the savings to motorists due to the fact that gasoline demand is reduced by nine billion gallons annually. It's estimated that ethanol may reduce gas prices by a total of 35 cents a gallon. It may not feel like anyone's getting a deal at the pump right now, but in fact, a typical American family using 1,000 gallons of gas annually may be saving $350 a year thanks to ethanol.”

A later part of the same article describes the situation in the industry for the period beyond 2009 and why few corn-based ethanol plants will be built. “Wall Street fears that ethanol profit margins, now 40 to 50 cents a gallon, will narrow in late 2008 and 2009 as annual industry capacity rises -- from 9 billion gallons now to 13 billion gallons in early '09. This could cause a glut of ethanol on the market. The good news is that little new supply is expected to come on after 2009 due to the depressed valuation of ethanol producers and tough conditions in the credit markets. Plans for new plants are being scuttled, although those under construction likely will be completed.”

From the Mantra perspective, what does this mean? It means the market demand for ethanol will continue into the future, while competition from corn-based ethanol will be constrained. The future situation is beneficial to Mantra as is explained below.

Mantra, because it will be commercializing a practical, more economic cellulosic ethanol process, is likely to find both a strong welcome from the market for the basic product and at the same time, a decline in competition. This is a very attractive setting into which to launch a new poduct.

END: John Russell