Pacific Ethanol reports first quarter results. Demand is
picking upon a seasonal basis
Ian Gilson, CFA
Pacific Ethanol (
reported its first quarter earnings on May 10, 2012. Due to the
seasonal decline in volumes of gasoline sold in California, excess
inventory of ethanol statewide and some ethanol pulled into 4Q11 to
take advantage of the tax credit, the price of ethanol declined
significantly in the start of 2012.. However, the cost of corn, the
major raw material, did not decline as farmers held back on selling
some of their inventory. Ethanol producers did not reduce
production rates and the combined effect of excess production and
declining demand continued to have a very negative impact on
Due to the increase in the USDA forecast of the 2012 corn crop to a
new record the price of corn has declined slightly from the highs
earlier in the year. However, the USDA is also forecasting an
increase in the volume of ethanol produced in the USA, despite a
decline in US production of about 10% in the first quarter.
The California Low Carbon initiative that was found to discriminate
against out of state ethanol and crude oil has been appealed by the
State of California. As such the initiative may be enforced until
the appeal is heard.
Refineries are currently blending ethanol into gasoline at below
the mandated level and are using their RINs to maintain
profitability. In 2013 the E15 (gasoline with 15% ethanol) blend
should be introduced into the market and this should have a
positive impact on ethanol demand in the second half of 2012.
The excess ethanol inventory continues into the second quarter of
2012. We expect a decline in ethanol production by Pacific Ethanol
in the second quarter and then increasing sales for the rest of the
year. If the excess ethanol inventory is consumed as E15 is
introduced and gasoline consumption increases on a seasonal basis
we would expect the company to restart the (currently idled) Madera
Pacific Ethanol will probably continue to increase its ownership
New PE Holdco LLC as a low cost way of adding to its owned ethanol
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PAC ETHANOL INC (PEIX): Free Stock Analysis
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