OFFICIAL-CORRECTED-UPDATE 1-INTERVIEW-Pacific Ethanol

(Company corrects to clarify CEO statement on discussions, changes paragraphs one through three, adds company statement paragraph 4. Changes headline for space considerations: Pacific Ethanol sees need for consolidation)

By Matt Daily

NEW YORK, Oct 1 (Reuters) - Pacific Ethanol Inc (PEIX.O) Chief Executive Officer Neil Koehler said on Wednesday the U.S. ethanol industry was too fragmented and needed to consolidate.

Koehler said he was focused on running the West Coast ethanol maker and distributor in order to build shareholder value and would evaluate any overtures if a potential suitor approached it.

"We would take a look at any legitimate offer and do what's best for the shareholder," he told Reuters in an interview.

"We have had no discussions with any potential buyer of PEI," the company said later in statement to Reuters.

Ethanol production capacity has climbed sharply in recent years, reaching 11 billion gallons, as distillers such as Pacific Ethanol, VeraSun Energy Corp VSE.N, Aventine Renewable Energy Holdings AVR.N and privately held Poet have rapidly added plants to meet U.S. mandates for growing use of the fuel.

That has created a network of plants, mostly in the Midwest corn belt, that are exposed to volatile swings in both the grain and gasoline markets. Many of those plants are also owned by farming cooperatives or small companies.

"I think we need to have some rationalization in production, ownership. We are too fragmented as an industry ... I think everybody's been so focused on their own issues and survival that it's sort of retarded some of those (consolidation) efforts," Koehler said.

Earlier this week, Poet, the largest U.S. ethanol maker, said distress in the credit markets had made it the best time in "in at least five years" to buy cheap assets, and that it was looking at various opportunities.

Last month, VeraSun said it had suspended a previously announced equity offering and had hired Morgan Stanley to evaluate its strategic alternatives.

"VeraSun will be very interesting because it is an opportunity to see some new strategics maybe get into the game, whether it be an oil company or and an (Archer Daniels Midland)," Koehler said, referring to the agriculture giant.

Pacific Ethanol, which started production at its new Stockton, California facility on Monday, has also been approached by plant owners about acquiring smaller assets, Koehler said.

"We're certainly getting lots of calls about distressed assets out there," he said.

MARGIN EROSION

High corn costs have eroded ethanol margins, making many producers barely profitable, even as gasoline prices have risen and with the subsidies the federal government provides to companies that blend ethanol into the gasoline pool.

With margins near break-even and expected to stay soft for the coming months, producers have little incentive -- or cash -- to expand production.

That will create a shortfall in supplies by 2010, he said, since demand next year will increase at a faster rate than production capacity. That is unless, he added, producers can earn 50 cents per gallon for ethanol.

"Margins need to get to that level pretty quickly because of the capital markets not wanting to participate in much of anything," he said, referring to the credit market crisis that has locked up most traditional options for raising cash.

Like other ethanol companies, Pacific Ethanol is trying to squeeze efficiencies out of its plants, including new measures it could roll out next year that would increase its ethanol yield by as much as 5 percent. That would add $20 million to $25 million per year in profits.

In the second quarter, Pacific Ethanol posted a loss of $10.5 million, or 23 cents per share, well below the 13 cents per share loss analysts had expected.

Its shares have also suffered, like others in the sector, sliding more than 80 percent so far this year. Pacific Ethanol shares closed up 1.4 percent to $1.41 on Wednesday.

The company had about $35 million in cash and available liquidity at the end of June, an amount that Koehler said should be adequate. But, he warned, that could change.

"If negative (earnings before interest, taxes, depreciation and amortization) margins were to be the situation, then obviously that's very different than if they were positive," he said. (Reporting by Matt Daily, editing by Richard Chang)