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Euro’s Destiny Depends On More Than Merkel’s Mindset
http://www.ft.com/cms/s/0/96c15af4-148c-11e3-a2df-00144feabdc0.html#ixzz2dv27PMGS By Ralph Atkins in London Federal Reserve, not German election, will determine interest rates Since the eurozone debt crisis erupted almost four years ago, national elections have proved cathartic moments – and often buying opportunities for investors. The contest for Germany’s chancellorship between Angela Merkel, the incumbent, and Peer Steinbrück, her Social Democratic challenger, may be short on daily, market-driving dramas (this is a German election). Polls suggest Ms Merkel is sure of re-election. But the September 22 vote will be long on significance for the eurozone and financial markets – even if, depressingly for German politicians, the world’s central banks ultimately prove more important in determining the eurozone’s destiny. Ahead of François Hollande’s election as France’s president in May last year, French stocks were falling sharply but within a few weeks were on a sustained rally. The CAC 40 index is 25 per cent higher than the day Mr Hollande was elected. More remarkably, inconclusive Italian elections earlier this year marked a turning point for southern eurozone sovereign bond markets. Italian yields, which move inversely to prices, fell sharply after February’s poll as the extended political stalemate in Rome failed to become the disaster investors feared. The case for Germany’s election proving an inflection point rests on the idea that a re-elected Ms Merkel will be less hawkish on the eurozone: that she softens her stance on fiscal austerity and becomes more like Helmut Kohl, her Christian Democrat predecessor and erstwhile mentor, in driving forward Europe’s economic integration at German taxpayers’ expense. Ms Merkel wants to govern again with the centre-right Free Democrats, her existing coalition partners. The case for expecting a sea change in German thinking might appear more compelling given that a weak FDP vote could force her into a “grand coalition” with the centre-left SPD, which is keen to express solidarity with weaker eurozone neighbours. On such rosy assumptions, yields on eurozone periphery debt could have further to fall. True, German yields would rise as capital flowed into weaker economies and European growth prospects brightened, inflicting losses on German bond holders. But as a nation of savers, Germans would cheer higher domestic interest rates. Historically, the Dax share index has rallied on Christian Democratic victories; this time equities might surge across Europe. But there are a lot of snags with such conjecturing. For a start, Ms Merkel’s strong personal poll ratings owe a lot to her handling of the euro crisis and insistence on a quid pro quo in terms of deep structural reform from countries benefiting from German munificence. A change of character after September 22 seems unlikely. The risk remains that Alternative für Deutschland – the fledgling eurosceptic movement which wants to dissolve the euro – wins representation in the Bundestag, gaining an important public platform. If the AfD did jump the 5 per cent voting threshold, the parliament’s arithmetic would make a “grand coalition” more likely. But even a grand coalition could disappoint markets; for all its sympathy with weaker eurozone economies, the SPD is as keen as others to reduce Germany’s debt burden. Once the elections are over, a host of eurozone issues on hold during the campaign will resurface, whether the strains in the bailout programmes for Greece, Cyprus, Portugal and Ireland, or the restructuring of Europe’s banks. With an emboldened, freshly re-elected Merkel, the potential for eurozone upsets may simply rise. As crucially, Germany is voting at a time when the US Federal Reserve is turning the tides in capital markets. Until May, French and Italian financial assets were riding the waves created, first, by the European Central Bank’s pledge last year to prevent a eurozone break-up, then by the Fed’s unlimited “quantitative easing”. Since the Fed announced plans to scale back, or “taper” its asset purchases, however, bond yields have risen globally. The risk in Europe is of monetary conditions tightening prematurely – and dangerously in the eurozone periphery. What happens next to borrowing costs will probably depend more on the outcome of the Fed’s two-day policy meeting starting on September 17 than the German elections five days later. All the above does not mean markets are wrong in turning more optimistic on Europe. Bunds have decoupled a little from US Treasuries – the rise in 10-year German yields has not been as steep since May. Mario Draghi, ECB president, is attempting to use “forward guidance” on official interest rates to keep the recovery on track. Strong purchasing managers’ indices this week show growth becoming established. The recent sell-off in emerging markets has increased the attractiveness of European assets. But Ms Merkel’s mindset will be only part of the story. Continue reading
Building A New Biofuels Industry
Volume 91 Issue 4 | pp. 20-22 Issue Date: January 28, 2013 Building A New Biofuels Industry After years of delays, the first commercial-scale cellulosic fuel facilities are nearing completion By Melody M. Bomgardner Poet-DSM Advanced Biofuels, KiOR , Beta Renewables , and other firms will validate the technologies, confirm financial returns, and draw additional investment. “If you look at these projects, they show that the industry has come a long way,” says Jim Lane, editor and publisher of Biofuels Digest, an online newsletter covering biofuels. He’s not dwelling on past proclamations. “Sure, we could rerun the tape, but there were many things the companies were not in control of. The good news is they are here.” Cellulosic fuels are intended to be an alternative to petroleum-derived fuels and first-generation biofuels made from corn. The barriers to commercial success have been technology, the ability to scale up, and project financing. By 2008, after five years of laboratory work and pilot successes, several biofuels firms thought their technology was ready to go. But when the recession hit, the capital markets dried up, and the industry spun its wheels. “What we view as the dominant factor behind the slow scale-up is constrained availability of capital,” asserts Pavel Molchanov, research analyst for investment bank Raymond James in a note to investors. “Second-generation commercialization is a highly capital-intensive undertaking—much more so than the prior decade’s build-out of corn ethanol plants.” [+]Enlarge Molchanov says facilities based on technology that uses dense but cheap cellulosic feedstock such as timberland wastes or municipal waste come with the highest price tag. KiOR’s $222 million plant will make 13 million gal per year of its biocrude from forestry residuals. That works out to a capital cost of $17 per gal. Cellulosic ethanol plants that run on corn-farming leftovers, like the facility run by a joint venture of Poet and DSM, will carry capital costs of $10 per gal and up. In contrast, modern ethanol plants that run on corn sugar are built for close to $2.00 per gal. However, corn ethanol producers face high and volatile feedstock costs, and that is why cellulosic fuel producers are confident that their more expensive plants will still be profitable. “We wouldn’t be making the investment if we didn’t think it was an opportunity to generate good business for the joint venture,” says Wade Robey, a member of the Poet-DSM board. Robey says he is “very bullish” about Project Liberty, the venture’s first facility, located in Iowa, as well as plans to expand to other Poet locations that currently make corn ethanol. Expanding may bring new hardships, however. For companies that use agricultural waste, Lane points out, each new facility will be increasingly difficult to site because of what he calls the “biomass radius problem.” A typical facility consumes 285,000 tons of biomass per year, requiring a reach of 40 to 50 miles of cropland. The next plant must find its own untouched radius of land. All the more reason why it’s good to be first. Access to capital is the key reason why Beta Renewables’ plant, in Crescentino, Italy, will likely be the first to start commercial production. Beta’s parent company, Mossi & Ghisolfi, the world’s second-largest producer of polyester resin for bottles, has heavily invested in cellulosic ethanol research and development. Beta’s sister company, Chemtex, M&G’s engineering division, built the plant. “It was a gutsy decision to invest hundreds of millions of M&G’s own money to be first—to put their money where their mouth is and slash through the chicken-and-egg problem,” says Kevin Gray, vice president of biobased chemicals for Chemtex. Although the Italian plant will be built without any government assistance, Beta’s first U.S. facility, in Sampson County, N.C., will benefit from a $99 million loan guarantee and a $4 million biomass crop assistance grant from the U.S. Department of Agriculture. Other projects have been similarly blessed. Abengoa can take advantage of a $133 million loan guarantee from the Department of Energy for its cellulosic ethanol plant near Hugoton, Kan. Ineos Bio has been awarded a $50 million DOE grant, a $75 million USDA loan guarantee, and a $2.5 million grant from the state of Florida. The more important government assistance, however, comes from the Environmental Protection Agency’s RFS, which requires fuel blenders to use cellulosic fuels in their product or pay a fine. By guaranteeing that all production will be bought, RFS drives investment in new capacity. Petroleum and fuel blenders are pressuring EPA to waive the requirement or even do away with it. “Congress foresaw that the aggressive renewable fuel standards might be unattainable and established several waiver provisions in the Clean Air Act, including for inadequate domestic supply,” Charles T. Drevna, president of the American Fuel & Petrochemical Manufacturers, recently said. “If zero production doesn’t meet the definition of inadequate, then it is time for Congress to reexamine the entire RFS and its failure to produce their desired results.” So far, challenges to RFS have hit a brick wall at EPA. The agency has not yet set the amount of cellulosic biofuel that blenders must use in 2013, but the Energy Information Administration has told EPA that it expects 9.6 million gal to be produced this year. In 2014–15, capacity will expand again as the first facilities from BlueFire Renewables, DuPont, Fulcrum BioEnergy, LanzaTech, Mascoma, and ZeaChem come on-line. Not every company is likely to succeed, but the scattershot approach will uncover technologies that work, Lane predicts. “You don’t need more than three if they work,” he says. “If you have a growing technology and you take the corn ethanol boom as an example, there is no reason you can’t build 100 or 200 of these plants a year.” Chemical & Engineering News Continue reading
Seeking Biomass Feedstocks That Can Compete
Biofuels and biobased chemical makers hope to win with cellulosic sugars By Melody M. Bomgardner On the hot, dry agricultural land of California’s Imperial Valley, 17 new varieties of an unusual crop are being tested on a 100-acre plot. If the tests are successful, the valley’s bounty of lettuce, cantaloupes, and broccoli may someday be joined by plants that are converted into fuels and chemicals. The crop, energy cane, is a less sweet cousin of sugarcane. It is a perennial grass that was developed by plant scientists to create a large amount of biomass quickly. Canergy , a biofuels start-up, plans to grow enough energy cane to power one or more commercial-scale fuel ethanol plants starting in 2016. Although the valley is known for producing fruits and vegetables, more than half of its 450,000 acres are actually devoted to crops such as Sudan grass, used for hay. If enough farmers decide to add energy cane to their crop rotation, the region would produce a huge amount of biomass. “It grows extremely well there—we’re expecting phenomenal yields,” says Timothy R. Brummels, Canergy’s chief executive officer. He estimates that 1,800 to 2,200 gal of ethanol per year can be made from 1 acre of energy cane, compared with about 400 gal from 1 acre of corn. Energy cane is a dedicated energy crop, a category of plants that also includes the giant reed Arundo donax, napier grass, switchgrass, and hybrid poplar. Investments in energy crops are one part of a larger push by the biobased fuel and chemical industry to secure cheap, abundant feedstocks. Chemical companies can use the material to produce acrylic acid and butadiene, for example. Genomatica, Gevo , and Myriant have built their processes to take in sugar from corn or sugarcane. Those sources carry downsides. For instance, prices rise and fall along with other commodities such as petroleum, and the supply of sugar may not be ample enough to meet the needs of high-volume chemical makers. To ensure the viability of their industry, they are eager to replace those food sugars with a cheaper, more stable cellulose-based raw material. Executives say they are watching the growth of the cellulosic ethanol industry closely. Its success would pave the way to securing new cellulosic feedstocks for chemicals, they believe. “Just about every one of our chemical partners is interested in the potential for using biomass feedstocks,” says Christophe Schilling, CEO of Genomatica. “The motivation comes from a couple of different potential advantages—the first one is the potential for lower-cost feedstock. It still needs to be proven, but that is the hope. Then it is the stability of a secure supply of feedstock that doesn’t have the volatility of hydrocarbons or commodity agriculture.” Schilling adds that getting feedstock from nonfood sources is also important. Thanks to a half-decade of effort by the ethanol industry, clues are now emerging about how a cellulosic feedstock supply chain for chemicals would take shape. One thing is certain: The route is more complicated than for fossil-fuel feedstocks. “Part of the challenge is that shale gas is shale gas no matter where on Earth it comes from. But biomass is different with each crop,” says Brian Balmer, chemical industry principal at the consulting firm Frost & Sullivan . For that reason, making inexpensive sugars from plant-based feedstocks has become its own specialty. Canergy, Genomatica, and Gevo have partnered with Beta Renewables , which is a joint venture between the engineering firm Chemtex, owned by Italian chemical maker Mossi & Ghisolfi; private equity firm Texas Pacific; and enzyme maker Novozymes. The biobased chemical makers are interested in Beta Renewables’ process for breaking down cellulose with steam and enzymatic treatment to release sugars. Beta Renewables is already using the process to produce ethanol from wheat straw and A. donax at its commercial-scale biorefinery in Crescentino, Italy. Chemtex plans to build a facility in Clinton, N.C., that will run primarily on a mix of energy crops that includes A. donax and use the Beta Renewables technology. Beta Renewables says its process can deliver sugar from biomass for 10 cents per lb, a substantial discount from today’s corn-derived sugars, which cost around 18–20 cents per lb, notes Michele Rubino, the company’s chief operating officer. That is a price that pleases Gevo’s CEO, Patrick R. Gruber. “I hope he’s right. To make it big we will want cellulosic sugar,” he says. “To get more carbon per unit of land is better for everyone.” Gevo makes isobutyl alcohol from corn-based sugar. The output of Gevo’s first plant, in Luverne, Minn., is being used as a solvent and in jet fuel for the U.S. Air Force, but isobutyl alcohol is also a candidate to be an intermediate for p -xylene in Coca-Cola’s project to make 100% biobased soda bottles. Biobased chemical maker Myriant is working to adapt its organisms to squirt out succinic acid on a diet of cellulosic sugar, which contains both five- and six-carbon molecules. However, Alif Saleh, Myriant’s vice president of sales and marketing, says chemical industry customers have not yet demanded a switch away from corn sugar. Poet-DSM is contracting with farmers to obtain 285,000 tons of corn stover for its 25 million-gal-per-year plant. The companies need lots of local growers, so they have started a major outreach campaign , including advertising on local radio stations . DuPont plans to collect stover from a 30-mile radius for its similarly sized facility in Nevada, Iowa. Neither firm has disclosed its cost to make sugar. An alternative is to grow biomass on purpose by planting energy crops on agricultural land that cannot be economically used for food crops. That so-called marginal land may be ideal for some types of energy crops, particularly perennial grasses. By not shifting land use away from food production, companies can also defuse much of the concern about the impact of biobased fuels and chemicals on the food supply—the crux of the food-versus-fuel debate. “For us, having a base load of a dedicated energy crop is a pretty nice way to set up the supply chain,” Rubino argues. “It gives us high density, high yields, and requires less land. We base the facility off of that and take additional locally available residues from agriculture or mills.” The relatively modest amount of land needed to grow dedicated energy crops is appealing to biobased chemical makers. According to the Environmental Protection Agency, A. donax should produce as much as 15 dry tons of biomass per acre. In contrast, DuPont estimates it will collect 2 tons of corn cobs, leaves, and stems per acre. Of course, that land also produces corn. Obtaining feedstock can be further simplified by contracting with companies that control large amounts of land or biomass. In July, Beta Renewables signed a long-term agreement with Murphy-Brown, a livestock subsidiary of Smithfield Foods that is arranging for energy crops to be grown on land where hog farmers spray animal waste. The high-yielding perennial grass crops will help take up the excess nitrogen in the waste. Similarly, cellulosic sugar firm Renmatix has signed a development agreement with UPM, a pulp and paper firm, to develop sugars from UPM’s woody biomass. Renmatix CEO Mike Hamilton says the most cost-effective biobased chemicals will be manufactured on a site near the feedstock, perhaps at a pulp and paper mill. “If people are planning to ship low-value biomass around the country, that is not an effective process,” Hamilton says. “If you can assemble the end-to-end value chain, that is where the economics are optimized to compete with fossil-fuel chemicals.” Hamilton and other biobased chemical makers know that newly abundant natural gas is challenging the economics of their business. Indeed, the rise of shale gas will create biobased winners and losers, experts say. “What biobased chemical makers should focus on is the higher carbon chain lengths that you don’t get in natural gas,” Frost & Sullivan’s Balmer advises. Two- and three-carbon biobased chemicals, in contrast, will struggle to be competitive because petrochemical versions can be made from natural gas. “The rise of natural gas is a fascinating situation,” Genomatica’s Schilling says. “In our case, we benefit because of the products we make.” The firm has developed sugar-based routes to butadiene, which is used to make synthetic rubber, and to 1,4-butanediol, a raw material for urethanes, plasticizers, and coatings. The petrochemical industry has historically made 1,4-butanediol, butadiene, and other four-carbon chemicals by processing by-products from ethylene facilities that consume crude-oil-based feedstocks. But ethylene plants that run on ethane and propane extracted from natural gas produce a much smaller C 4 stream. In the past few years, experts say, prices for 1,4-butanediol and butadiene have significantly increased, and the trend should continue for the foreseeable future. Still, traditional companies aren’t going to cede territory to biobased chemical makers without a fight. For example, one company, TPC Group, is planning to make butadiene via butane dehydrogenation at a plant it owns in Houston. And the seven giant shale-gas-based petrochemical plants that have been announced for the U.S. are going to flood the market with chemicals of all sorts. At Renmatix, competing with chemicals made from shale gas has been on Hamilton’s mind lately, but he believes he is on the right side. “First, natural gas is not renewable. Second, it is also a volatile commodity, whereas biobased materials are significantly more reliable. Where there is competition, the least volatile, more long-term option will win.” [+]Enlarge Credit: POET-DSM (corn stover), Wikimedia Commons (grain sorghum), Beta Renewables (Giant reed), GreenWood Tree Farm Fund (hybrid poplar), USDA (energy cane, napier grass), Shutterstock (switchgrass) Chemical & Engineering News Continue reading
