ST. LOUIS - Eager to build a plant that would turn corn into 108 million gallons of ethanol a year, Chet Perry got all of his ducks in a row.
His ITEC Refining and Marketing Co. got a site near Princeton in north-central Illinois labeled an enterprise zone to accommodate his plant. After months of waiting, it finally snagged the crucial state air-quality permit in July.
If only the timing were better.
Like many other would-be ethanol plants in the Corn Belt, Perry's venture is stalled at least for now, thanks to soaring construction costs compounded by high corn prices that have swelled operational expenses. The sliding price of ethanolsurely hasn't helped.
When it comes to moving dirt for new ethanol sites, "almost everyone is on hold," Perry said, still hoping to break ground early next year. "We definitely are going ahead with the project. It's a matter of timing."
Similar stories are playing out elsewhere. In Arkansas no construction has begun on any of the four ethanol plants proposed for Helena and Pine Buff.
Iowa, the nation's top corn producer, has seen only two new plant construction starts this year, the lowest number at this time of year since at least 1999, said Monte Shaw of the Iowa Renewable Fuels Association.
"There's no doubt the pace of new construction starts has slowed dramatically," Shaw said.
In Illinois the state environmental department has doled out 38 construction permits on 53 applications it received since the beginning of last year, the agency's Richard Breckenridge said. But just five of the plants are under construction, the Renewable Fuels Association trade group says.
On Monday, VeraSun Energy Corp., one of the nation's largest ethanol producers, said it would halt construction of a 110 milliongallon-per-year biorefinery in Indiana. The South Dakota-based company said it might resume construction next year if market conditions improve.
"Given the abrupt change in market conditions that have seen ethanol prices drop nearly 50 cents per gallon in the last 60days, it is prudent for us to adjust our current pace of expansion," said Danny Herron, VeraSun's chief financial officer.
The price of ethanol has slid by 30 percent in recent months and now stands about $1.60 on the Chicago Board of Trade. At the same time, the price of corn, ethanol's chief ingredient, remains high. Those two factors squeeze margins.
Prospects of a glut loom. U.S. ethanol demand now is less than 7 billion gallons, though the nation's ethanol capacity by next year could reach 12.4 billion gallons, said Eitan Bernstein, an energy analyst at Virginia-based Friedman, Billings, Ramsey and Co. That imbalance will hold down prices possibly through 2008, he said.
The slowdown likely won't affect projects already under way and those with financing in place. But it raises questions of whether the fuel additive touted by President Bush and lawmakers as way to cut the nation's dependence on foreign crude has been overplayed.
"For such a young industry, people sure want to write its obituary all the time," Shaw said. "I just find that humorous because it's completely nonsensical if you look at the economics of the industry, if you look at the public policy and the socio-economic concerns that are driving the industry. It's definitely headed forward full throttle."
Others offer grimmer assessments.
"I think this is a painful, difficult period for the ethanol sector. It doesn't mean a death knell for ethanol at all," said Neil Harl, an Iowa State University economics professor who lectures on ethanol and is a consultant for producers. "I don't think the ethanol boom will ever be viewed quite the same way."
Increasing scrutiny of ethanol, he said, "is certainly going to lead to a chilling effect on new investment," including construction of distilleries that create the fuel additive from mashed and fermented grain.
Across the country, the number of ethanol plants has ballooned to 129 today, up nearly 50 from 2005, the Renewable Fuels Association says.
U.S. ethanol production has swelled; the Renewable Fuels Association says 15 new refineries came online last year and, combined with other expansions, added more than a billion gallons of production capacity. More than 6 billion gallons of more capacity could come online by 2009, the trade group has said.
Perry, whose company has had its hands in ethanol since the 1980s, said the climate for building new plants began souring last fall, when sometimes breathless attention to what many considered ethanol's booming renaissance sent the price of corn soaring. Early this week ethanol plants were paying about $3.30per bushel of corn, down from last year's even loftier levels.
Perry said that when high production costs are coupled with the sliding price of ethanol, any possible cash flow vaporizes.
First put at $136 million last summer, the price tag of Perry's project swelled to nearly $200 million until it recently began to drop.
Partly to blame was the cost of nickel and steel - key ingredients in stainless steel, a component needed for ethanol production. The cost shot up because of demand from China, inflating Perry's budget for the product by $39 million. And the cost of dryers used to rip moisture from distiller grains - a byproduct of making ethanol used to feed livestock - has doubled from the $1 million to $1.2 million the equipment was fetching last year.
Construction of at least nine ethanol plants in Nebraska will continue and by the end of next year should double the state's capacity to about 2.25 billion gallons, said Todd Sneller of the Nebraska Ethanol Board.
Citing "uncertainty of the ethanol marketplace," Sneller said that moving the 45 other Nebraska ethanol projects beyond the blueprint stage will be achieved by those companies with experience in a "very cyclical" industry.
"We've seen this ebb and flow many times in the past, and in a large part it's based on public policy at the state or national level," he said.
Because of federal mandates requiring the use of ethanol, as well as prospects that Congress might significantly boost those demands, "it's not the end of ethanol," said Bernstein, the energy analyst.
But "I think it's the beginning of rationalization. In 2006, the economics looked so great that everyone jumped into ethanol, and unfortunately that's what sort of created this situation," he said.
Back in Iowa, Shaw thinks the industry will weather this lull just fine, especially if crude oil prices remain high.
"I don't have a crystal ball, but at some point in the future we'll probably look back to this time frame and say, 'Gee, why didn't we start building more plants?"' he said. "Sometimes the pendulum swings one way and sometimes it swings the other, but overall those market forces will lead you in the right direction."
Business, Pages 79, 80 on 10/07/2007