The global credit pinch could prove particularly painful for the biofuel sector, says an industry analyst.
Traditional lenders have limited experience with ethanol and biodiesel plants, making them among the first sectors of the economy likely to be placed under the credit microscope.
“When cash starts to get real short, the financing for those (plants) is either going to be very expensive or literally not available,” said Al Mussell, a researcher with the George Morris Centre in Guelph, Ont.
Banks don’t want to be stuck with assets they don’t understand, so if they’re scouring their loan portfolios looking for ways to scrimp, the biofuel sector may jump off the page.
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“Where do you go? Do you go to the old faithful lending opportunities that you know a lot about or this new-fangled thing called an ethanol plant?” said Mussell.
Gordon Quaiattini, president of the Canadian Renewable Fuels Association, said plants under construction and those that have recently opened for business are all proceeding as planned.
But he acknowledged the credit crunch could present some short-term challenges for the industry.
“Like everybody else, we are looking forward to having some certainty back in the marketplace for the other projects that we want to see go forward,” he said.
Dave Nelson, chair of the Midwest Grain Processors Association, says the credit crunch could have a devastating impact on the U.S. ethanol industry.
He told Hoosier Ag Today, a broadcast network in Indiana, that most of the plants built in the last 10 years have been undercapitalized and that one-quarter of the industry is in jeopardy of running out of cash.
Mussell said many U.S. plants were long futures on corn, which means they were hoping prices would rise. For instance, VeraSun Energy, one of the largest manufacturers of ethanol in the U.S., locked in prices when corn was $7 per bushel. Cash prices are now half that.
Already cash-strapped plants were forced to cough up more cash to make up for the lost equity in their long positions.
“Apparently that proved to be very, very difficult,” he said.
Quaiattini said in Canada the challenge is more immediate on the biodiesel side of the industry than for ethanol.
Provincial mandates have been in effect for some time on the ethanol front, providing investors with a fair degree of certainty. That is not the case for biodiesel.
Because of the lack of interest from lenders, biodiesel plants have been forced to raise money through private equity.
But tight credit doesn’t mean everything has come to a halt. For instance, the U.S. market meltdown doesn’t appear to have deterred Riverstone Holdings LLC, a New York private equity firm, from proceeding with its $400 million biorefinery project near Innisfail, Alta.
Construction is expected to begin in the spring of 2009. The first phase will be a canola crushing facility and ethanol plant with annual capacity of 189 million litres. Subsequent phases will double the size of those plants and add 379 million litres of biodiesel.
