Ethanol growth tied to efficient rail terminals

By Karl Plume

CHICAGO (Reuters) - As U.S. ethanol production and demand steadily climb, construction of new rail terminals that can quickly and efficiently unload unit trains is critical to sustained growth in the biofuels sector, a transportation industry specialist said on Tuesday.

The majority of ethanol produced in the United States is shipped via railcar, much of it from major production areas in the Corn Belt to blending facilities near large cities along the coasts.

Unit trains, seen as the most efficient and cost effective method of shipping the biofuel, can haul about 1.5 million gallons to 3.25 million gallons at a time.

"Most of the ethanol plants that are being built currently have the ability to ship unit trains, but we have very few destination terminals that can receive trains," said Thomas Williamson, founder and principal of Kansas City-based Transportation Consultants Co.

"When you have 100-some ethanol plants, probably 75 of which can ship unit trains, and you've only got seven destinations, it's a problem," he said, speaking at the Reuters Global Agriculture and Biofuel Summit.

Those terminals can unload unit trains from 50 to 110 cars long in under 24 hours, Williamson said. Some smaller terminals can unload trains that long, but only in multiple phases, he said.

U.S. ethanol capacity increased more than 40 percent in 2007 to nearly 7.6 billion gallons a year.

There are currently 137 ethanol plants operating, with another 62 plants under construction and eight undergoing expansion. If all those plants and expansions come on line, the total U.S. capacity would rise to about 13.3 billion gpy.

The high cost of adding infrastructure has thus far limited investment in new terminals and formed some bottlenecks in the system, but tax breaks or state mandated minimum blending requirements could spur additional infrastructure investment.

An executive at CSX Transportation, a unit of CSX Corp. (CSX.N), told Reuters that it plans to build three ethanol terminals this year in the southern United States, which is seen as the next likely growth area for the U.S. ethanol market.

Union Pacific Corp (UNP.N), which runs the largest U.S. railroad, views expansion of destination terminals as "one of the key pieces of our strategy," Paul Hammes, UP's vice president and general manager for Agricultural Products, said at the summit on Monday.

"I see it as a very gradual ramping up of terminals and I think we will have a lot of inefficient moves in the interim, but it's not unlike what happened in the coal industry or the grain industry," Williamson said.

"Mandated blending is certainly going to draw the investment because the petroleum companies will pay whatever it is that they have to pay to get the ethanol in order to meet that requirement," he said.

Fuel blends in the enormous California market are set to increase in late 2009 to include up to 10 percent ethanol, while Florida, another key fuel demand market, is poised to begin blending more ethanol into its fuel supply.

(For summit blog: summitnotebook.reuters.com/)

(Reporting by Karl Plume; editing by Jim Marshall)