Sky-High Oil Prices Fuel Ethanol Mania in China

HONG KONG/BEIJING (Reuters) - Record crude oil prices are fuelling ethanol fever in China, the world's second-largest oil consumer, despite Beijing's reservations in allowing more food grains to be used to run cars.

Beijing is reluctant to expand ethanol production from food grains as China will face a shortage of grains like corn or wheat possibly as early as next year, due to rising domestic demand brought on by higher affluence.

China began its ethanol projects in early 2000 in a bid to get rid of its surplus grain reserves and partially convert them into the biofuel.

Fuel ethanol, which is blended into gasoline for use in cars, cuts greenhouse gas emissions that are held responsible for global warming. It can be produced from grains or sugar cane.

Industry officials and analysts said many more ethanol plants are planned, or have been built possibly illegally in areas where there is a surplus in farm products and the local government sees the need to support farmers.

In Jilin, China's top corn-producing province in the northeast, deputy secretary-general Feng Wei told Reuters last week it planned to expand its ethanol capacity to 1 million tonnes a year by 2010 from 300,000 tonnes last year.

Jilin Fuel Alcohol Co. Ltd., one of four government-sponsored plants and the only one in the province at present, expanded its existing production line in March to churn out 400,000 tonnes of the biofuel this year.

"It is our top priority to cut our heavy dependency on imported oil," Xin Zhanshi, assistant to the general manager of Jilin Fuel, told Reuters at its complex in the outskirts of Jilin city, about 120 km east of the provincial capital, Changchun.

China imported more than 120 million tonnes of crude oil last year, equivalent to more than 40 percent of its needs.

Jilin Fuel, now majority owned by Asia's largest oil and gas producer, PetroChina Co. Ltd. (0857.HK: Quote, Profile, Research), says it will soon add a new production line for 300,000 tonnes, raising its capacity to 700,000 tonnes.

Feng, the Jilin government official, said ethanol was a pillar for the province, which faces the daunting task of generating income for its 15 million farmers left behind by China's roaring economy.

CASSAVA

China is the world's third-largest ethanol fuel producer after the United States and Brazil, which make the fuel from corn and sugar cane, respectively.

Its four official plants -- in Jilin, Anhui, Henan and Heilongjiang -- had a total capacity of 1.02 million tonnes in 2005, accounting for 3.4 percent of the world's biofuels capacity of 30 million tonnes, including biodiesel, official data showed.

With crude oil prices <CLc1> skyrocketing to more than $70 a barrel from about $30 in 2003 when China's ethanol projects started operations, Beijing is likely to scrap subsidies for the four ethanol plants altogether.

But eager investors are unfazed by the prospect.

"Oil prices are so high that it's interesting to make ethanol from most raw materials at the moment," Simon Bentley, an analyst from LMC International Ltd. in Oxford told Reuters.

"With current technology, people start breaking even making ethanol at around $40 a barrel of oil," said the head of LME's Starch & Sweetener Research, who was in China last week.

Earlier this month, the National Development and Reform Commission, the country's top planner, said on its Web site (www.ndrc.gov.cn.) that biofuels should replace about 2 million tonnes of crude oil by 2010 and 10 million tonnes by 2020.

But it also said China would shift to non-grain raw materials -- such as sweet sorghum or cassava, also known as tapioca -- to make fuel ethanol. These alternatives can be used to churn out around 30 million tonnes of ethanol, the commission said.

Industry observers said that though there was as yet no efficient technology to convert sweet sorghum into fuel ethanol, it was possible with cassava as seen already in Thailand, the world's top cassava producer.

Sen Yang, a professor from China Agricultural University, told a conference last week that cassava alone could supply as much as 4 million tonnes of fuel ethanol in China.

China could grow cassava also on 1 million hectares (2.471 million acres) of barren land, which would add 21 million tonnes to the crop, she said. There was also scope to achieve another 7 million tonnes by raising yields.

An official from the Starch Association in Guangxi, China's top cassava producer, said the province was studying the feasibility of building a fuel ethanol plant which could have an annual capacity of 1 million tonnes.

Furthermore, grains traders said there already exists a black market for fuel ethanol produced from cassava in the southern provinces of Guangxi and Guangdong, where there is a strong tradition in producing food ethanol, or ethyl alcohol, for Chinese liquors.

The black market also explains the surge in China's imports of tapioca chips from Thailand, the traders said.

"China has good appetite for tapioca chips," said a trader at an international house. "Now, we have a new factor: fuel ethanol ... A black market has been formed."