Abengoa: The Only Global Ethanol Producer (2)

AMSTERDAM – In August 2007, Abengoa Bioenergy announced that it would acquire Brazilian sugar and ethanol producer Grupo Dedini Agro (Dedini) for 216 million euros ($296.1 million). By doing so, Abengoa became the first and, up till now, only ‘global’ ethanol producer with significant production capacity in all three major ethanol markets: the United States, Europe and Brazil. Ethanol Statistics sat down with Javier Salgado, President and Chief Executive Officer at Abengoa Bioenergy, to discuss the strategic issues associated with Abengoa’s geographical reach. The European market is still in its infancy and lacks clear government support. The Brazilian consumer market is maturing, but its supply side is still consolidating. The United States is moving towards consolidation and it has logistical problems, but tremendous government support as well. Creating a cohesive strategy for all business units in such diverse markets is a challenge to say the least. In this second of two articles, Mr. Salgado focuses on the different strategies that are currently needed to cope with the differences in each geographic market; Brazil, Europe and the United States. He talks about the lessons learned in Abengoa’s Salamanca plant and the focus on flexibility that came out as a result.

United States: Size is needed to dilute fixed costs
Constrains in logistics are a pending problem for ethanol producers in the United States. The most important problem at the moment is however the extremely tight profit margin. Rising corn prices and low ethanol prices have made it difficult for ethanol producers to remain profitable. However, according to Mr. Salgado, its mainly the smaller plants that suffer from current margins. “For sure, the margins are hurting the industry. But if you analyze the composition of the industry, you will see that a significant part of the industry is running on 20 to 30 million gallon plants. The difference in running an 20 million gallons plant and a 100 million gallon plant is quite significant in terms of fixed costs; the difference can be as much as 35 cents per gallon. In today’s industry, you need a certain critical mass to dilute your fixed costs.” Mr. Salgado’s point seems to be substantiated by the news that E3 Biofuels filed for bankruptcy protection while it reorganizes its finances. The company stopped production in its 25 million gallons plant. Mr. Salgado said “In Indiana and Illinois we are replicating the size of our plant in Ravenna, which is 90 million gallons. We consider that a perfect balance in capital investment and capacity. I wouldn’t recommend anyone to build a plant below 75 million gallons anymore because of the reasons I mentioned.”

Europe: A lesson from the Salamanca plant
The European story is not much different in terms of size. But size is not the most important strategic issue in the European ethanol market; uncertainty is. Uncertainty in terms of government support and legislation, but also in terms of feedstock price levels. Abengoa recently suspended production in its production facility in Salamanca, Spain. The reported reason was that the plant was no longer profitable because of high wheat prices. But according to Mr. Salgado there has been a lot of misunderstanding and confusion about the decision to suspend production in Salamanca. “The primary reason to suspend production was the lack of regulation that provides us a long term sustainable market in the Spain. Salamanca was designed 5 years ago to sell all of its production on the domestic market in Spain, meant for direct blending. However, European oil companies are fighting direct blending and as a result, 100% of Spain’s ethanol demand is consumed through ETBE. Salamanca is located in the middle of Spain, for away from the coast and doesn’t have the logistics to facilitate exports to countries such as Sweden, Belgium, the UK or Germany.” Mr. Salgado said it was the combination of that situation with the unfavourable prices of coarse grains this year, that provided a situation in which Salamanca was no longer the cheapest option to cover its contracts. “Salamanca was never designed to compete for exports, it was designed to supply the domestic market. The Spanish government is currently discussing mandatory legislation for biofuels introduction in Spain between now and 2010. If that legislation is passed, Salamanca will have its own place in the market, as we originally thought.”