Private equity firms lose appetite for US ethanol

By Lisa Haarlander

CHICAGO, May 10 (Reuters) - Private equity firms are not as eager to invest in new ethanol plants due to higher construction costs and lower profit margins, said a speaker at a conference on ethanol financing in Chicago on Thursday.

"We had much more appetite for constructing new facilities in early 2006 than we do today," said Kevin Kuykendall, managing director of American Capital Energy, part of American Capital Strategies Ltd. (ACAS.O).

"In private equity, you definitely see a pull back in the aggressiveness in which projects are being funded," he added.

American Capital invested $85 million in financing three ethanol plants in early 2006 in partnership with Cargill Inc. and others. American Capital is the second largest U.S. publicly traded alternative asset manager with about $11 billion under management.

U.S. ethanol plant construction boomed in 2006 due to high profit margins. Ethanol prices are currently around $2.25 a gallon but peaked at more than $5 a gallon last spring, which triggered a surge in investors announcing new plants.

The industry has cooled off in the last year as corn prices hit 10-year highs and oil prices retreated -- squeezing ethanol margins. In addition, the cost to construct a new plant has skyrocketed, mostly due to strong global demand for steel and equipment.

The cost to build an ethanol plant that can produce 100 million gallons a year has risen from about $145 million to between $225 million and $250 million, Kuykendall said.

The increased cost is mainly due to a strong global economy fueling construction of everything from ships to manufacturing plants in many countries.

"If you could build plants for less than you could today, you could see another rash of construction," Kuykendall said.

However, he also noted that given the fluctuations in the prices of corn, oil, natural gas and construction costs, the industry could see the number of new ethanol plants fall even further.

"In an industry this volatile, you could easily see a period where you don't build any plants," he said.