Standard & Poor's: US ethanol industry booming but risky

By OGJ editors

HOUSTON, Nov. 15 -- US ethanol production is climbing in response to strong demand that is expected to continue, Standard & Poor's Ratings Services said.

But ethanol producers face challenges. S&P credit analyst Elif Acar said, "The industry is a relatively capital-intensive, commodity-based industry with thin margins that are subject to price volatility."

He noted the industry's dependence on uncertain government policy decisions for viability and also its reliance on project finance sponsors that are not rated. S&P has not rated any ethanol projects but issued a research report on the industry's fundamentals.

"To what extent the industry can tap the high-yield market for its large capital needs to finance the 'boom' will depend on investors' risk appetite," Acar said.

The Renewable Fuels Association said the US ethanol industry is expected to produce more than 3.3 billion gal in 2004, up from 2.81 billion gal in 2003. Currently, 81 ethanol plants have the capacity to produce more than 3.4 billion gal/year. In addition, 14 plants are under construction.

The US ethanol industry set a monthly production record in August of 225,000 b/d, according to data released by the US Energy Information Administration. Production was up 25% from August 2003.

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