Sharp ethanol price drop adds to transportation woes

September 13, 2006

By Edgar Ang, Reuters 

The recent sharp drop in U.S. ethanol prices caused more headaches for some gasoline retailers in the Northeast already facing logistics problems transporting the new additive, some retailers said Tuesday.

Ethanol prices skyrocketed in summer when the oil industry replaced a gasoline additive called MTBE, banned in several states for polluting groundwater, with ethanol, renewable fuel that can’t shipped via existing gasoline pipelines because it absorbs water that condenses in the pipeline.

Ethanol spot prices in the New York Harbor jumped to a record high of $5.75 per gallon in late June, mainly due to supply shortage and logistics problems.

However, spot prices had fallen sharply to about $2.15-$2.17 per gallon this week from the high as more supply was made available.

“We have to be a lot more creative with how we deal with our logistics problems, especially when the prices are falling fast,” a retailer in New Jersey said, adding that the rapid fall in spot ethanol prices discouraged retailers from stocking up expensive supplies.

In the recent months, retailers in the U.S. Northeast have learned to develop truck, rail and barge capabilities as well as develop relationships with co-tenants at storage terminals buy ethanol and other products together because no one has storage space for minimum shipments, he said.

While the supply shortage disappeared in the past month, the logistics problems persisted in New Jersey, Maryland and Dallas where there was a limited pipeline and rail access, and a lack of storage space.

The ethanol industry is also squeezed by a tight truck supply problem due to a strong demand in other sectors as well.

Ethanol is transported by ethanol-exclusive trucks, rail cars and barges.

“One big problem is the transit time on rail is so long that while you are waiting for your spot ethanol deliveries, the ethanol prices are dropping,” another mega-chain retailer said. “No one wants to catch a falling knife. This is a lot of work for 10 percent of our supply.”

Some counties in the United States require gasoline sold for road use to contain at least 10 percent of ethanol to burn cleaner.

“Life is great if the prices are going up, but it has been really bad when prices fell sharply,” he said.

Also, with the gasoline demand coming off the summer peak, some retailers are stuck with its ethanol term purchases.

“Some retailers would need to pay a storage fee for the unused ethanol or deliver the extra supply to their own storage tanks,” the retailer said.

“Right now, there is a lot of double and triple handling of ethanol because of the logistics problems.”

To make up for the lack of trucks, some ethanol buyers use railcars as a storage facility, he said.

“It is a real pain, but everyone is getting used to it now,” the retailer said.

The supply problems are gone now, but the distribution and storage capacity problems will take months if not years to solve, the first retailer said.

Some parts of Dallas receive ethanol all the way from the Midwest region because of the distribution problem in that area, he said.

SOURCE:  Yahoo

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