COPENHAGEN Enzyme makers Novozymes (NZYMb.CO) and Danisco DCO.CO are likely to step up a research battle to be first with a key technology to free bioethanol from its dependency on food and create a new billion-dollar industry.
The two Danish companies, market leaders in first generation bioethanol enzymes, are racing to develop a next-generation product to allow ethanol production from food waste inedible by humans, such as corn cobs, sugar cane leftovers and straw.
The global market for so-called cellulosic ethanol enzymes could be worth some $8.8 billion (42 billion Danish crowns) by 2020, according to analyst Martin Sikorski from Cheuvreux -- a huge sum given that the global market for all types of enzymes is now only worth around 15 billion crowns.
"So there is a reason for all this hype and excitement," Sikorski said.
He bases his estimate on Danisco's expectation that global demand for cellulosic ethanol will hit 35 billion gallons in 2020 and Novozymes' forecast that the enzyme price will fall to 20-30 U.S. cents a gallon of cellulosic ethanol in 2020 from 40-50 cents per gallon in 2010.
Commodity analyst Alan Bullion from F.O. Licht expects cellulosic ethanol to be produced on a commercial scale in three to four years and to reach the politically set goal of 21 billion gallons annually in the United States in six to seven.
Brazil is also expected to be a major producer of the new biofuel, primarily from sugar cane bagasse -- the remains of the plant after the sugar is removed.
Novozymes, with a market share of 45-60 percent, and Danisco, with an estimated share of 10-20 percent, dominate the current market for first generation bioethanol enzymes, and are expected to rule the second generation as well.
"They will probably still be the largest and most important players in the market in the next 10 to 20 years," said Claus Felby, enzyme scientist and professor at Copenhagen University.
"I cannot see anyone else on their way who can really challenge them."
On May 14, Danisco's enzyme arm Genencor and DuPont Co (DD.N) announced a new joint venture aimed at developing a complete technology package for cellulosic ethanol, including pre-treatment, enzymes and fermentation technology.
"The question is whether Danisco can convince the customers that their complete package is the best and cheapest. That is where the real battle will be," Sydbank analyst Rune Dahl said.
Danisco Chief Executive Tom Knutzen told Reuters the venture aimed for a leading position in the cellulosic ethanol market.
But rival Novozymes has said it expects to have a commercially viable technology in 2010 -- two years before the Genencor and DuPont venture expects to launch its offering.
Felby said it is hard to tell who will prevail in the race.
"They both have the knowledge that it takes for this to become commercially viable. You cannot say that one of them has a huge advantage because they each have their own strongholds," Felby said.
According to Cheuvreux's Sikorski, financial markets for now seem to be betting on Novozymes, since its shares trade at far higher price-earnings multiples than those of Danisco.
Which company gets out of the starting gate first will prove crucial since it is difficult for an ethanol plant to shift from one producer's enzymes to another midstream, Dahl said.
Still, the market may be big enough for both, particularly since bioethanol producers like to have more than one enzyme supplier to choose from, Sikorski said.
Felby believes that the cellulosic bioethanol push will be led by multi-year partnerships between ethanol producers and enzyme makers. Once the technological challenges are surmounted, he expects a more unbound market.
One of the main drivers of the market could be the new U.S. farm bill, which offers a $1.01 a gallon tax credit for cellulosic ethanol through 2012.
However, should oil prices start to weaken sharply, it could slow development of the cellulosic ethanol industry.
The two players may also face threats from alternative technologies such as the high-temperature oxygen treatment gasification and genetically modified commodities that contain enzymes. But Copenhagen University's Felby dismisses this risk.
"The technologies are not mutually exclusive but complement each other. They add value to one another," he said.
(By Teis Hald Jensen, Editing by Peter Blackburn)