July 4, 2007 / 2:33 PM / 10 years ago

Inflation fears smother China's ethanol drive

6 Min Read

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.

On Ice

A COFCO official said on Monday that Beijing had stopped approving new fuel ethanol projects regardless of the raw material used, freezing its plan to build a sweet-potato-based ethanol plant in the northern province of Hebei.

He would not comment on others. Yet, his remark cast doubt on similar projects proposed by China Agri-Industries Holdings Ltd. (0606.HK), COFCO's listed arm in charge of biofuels.

Asked about the projects, including one in Jiangsu, a spokesman at China Agri said: "We will follow what we have planned ... unless we receive a formal notice from the government. We have not received any formal announcement."

Still, the spokesman believed Beijing had yet to approve the company's plan to build a 300,000 tonne per year, sweet sorghum-based plant in northeastern Liaoning, and another 100,000 tonne per year, sweet potato-based plant in central Hubei.

Beijing has yet to give the green light also to its sweet potato project in Jiangsu, which China Agri had agreed with the Xuzhou municipal government. <ID:nHKG144626>.

Officials at a biofuel conference last week warned that China would face raw material shortages for an increasing number of ethanol plants -- at least until the technology matured enough to enable the conversion of agricultural waste.

China would not be short of just corn, but also of other farm products, such as sweet potatoes, because investors like PetroChina (0857.HK) (PTR.N) planned to shift away from food grains for manufacturing fuel ethanol, they said.

Among China Agri's new ethanol projects, the only one to have earned Beijing's blessing at present is one in the southern region of Guangxi, expected to start producing 200,000 tonnes of the fuel from cassava in December.

Some officials were skeptical even on that project, with cassava supply tightening due to demand from the starch and feed industry. Thai cassava chips prices were up by nearly 50 percent in a year to about $150 a tonne, delivered to China.

Meanwhile, Beijing has begun clamping down on small, polluting corn processors, including food-grade ethanol producers. The NDRC said on its Web site (www.ndrc.gov.cn) it would phase out outdated capacity totaling 1.6 million tonnes in ethanol in the next five years.

For a package of stories on the intensifying conflict between food and biofuel needs, please click on <ID:nL1686493>

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