Inflation fears smother China's ethanol drive

By Niu Shuping, Nao Nakanishi - Analysis

BEIJING/HONG KONG (Reuters) - Beijing is putting the brakes to China's ethanol production drive after increases in corn prices worldwide rekindled worries over inflation and food security.

A shortage of raw materials -- because of dwindling arable land, difficulties in importing and a rush enmasse by state firms into the once Beijing-sanctioned arena -- is pushing up grain prices and could throw a spanner in the works of one of the world's largest ethanol production campaigns.

A recent climb in pork prices -- blamed partly on swelling corn feed costs -- served as a wake-up call to Beijing, which had promoted biofuels as a means to wean the country off imported oil and secure income for hundreds of millions of farmers.

Now, industry officials and traders say the National Development and Reform Commission (NDRC), the country's top economic planning body, was revising downwards China's 2010 target for fuel ethanol output to 2 million tonnes from 5 million tonnes.

And the government has put on ice a plan to expand a list of cities and provinces where it mandates the blending of ethanol into car petrol from 11 at present, they said.

The new, substantially lowered target would jeopardize a number of projects in the pipeline, including many by the state-owned grains trader COFCO, which has embarked on an aggressive expansion with plans to invest more than $1 billion on fuel ethanol over 3-5 years.

"They have reduced the 2010 target from 5 million tonnes to 2 million tonnes. They want to cool down the expansion," said a trader of ethanol, known also as ethyl alcohol.

"Maybe there's a conflict between energy and food."

No comment was immediately available from the NDRC. But Beijing has so far failed to release a blueprint for the country's policy on biofuels, including biodiesel, for the next five years. It was due early in 2007.

Ethanol, a form of biofuel touted as an alternative to rapidly depleting or polluting hydrocarbons, can be produced from a broad swathe of organic material, from grains to potatoes.

China is now the world's number-three ethanol producer, after the United States and Brazil. Its four authorized plants manufacture 1.2 million tonnes a year from corn and wheat.

"The rapid and blind expansion of the corn processing industry will have a series of negative impacts on the country's grain security, which is a worry for government leaders," an NDRC official told a grain conference this week.

"We have far more population than farmland. We cannot reverse the trend of declining water and land resources, which means China's grain supply will stay tight in future."

The official said China would not be able to buy enough corn from the world market either, with the United States, the world's largest corn exporter, hoarding more grain for its own ethanol program.

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