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Ethanol production suspended

Published:Wednesday | July 7, 2010 | 12:00 AM
Chris Levy, chief executive of Jamaica Broilers Group, walks by the JB Ethanol plant at Port Esquivel, St Catherine. - File

Jamaica Broilers Group has locked down production of ethanol, but said Tuesday that the company has sufficient supplies in inventory to fully service its contractual obligations, and that it expects the closure to be temporary.

The poultry company, which two to three years ago entered the biofuel market in a big way, eventually growing its production capacity to 120 million gallons, is the victim of a competing supply market in which the food trade is winning.

The feedstock for ethanol is derived from agricultural crops, mostly sugar cane and corn.

"The plant is currently not in operation," Ian Parsard, the company's vice-president for energy and finance told Wednesday Business. "The reason is that the price of raw material in Brazil, compared to the price of ethanol in the USA and Europe, does not lend for profitable processing through the CBI operations to date."

Ethanol now sells at US$1.54 per gallon, a more than one-dollar slide in a two-year span.

Sales plummeted

Broilers built its first 60-million-gallon plant in the summer of 2007 - reporting J$6 billion of revenue in 10 months at the close of its financial year on May 3, 2008. The next year, it made J$7.37 billion, but sales have now plummeted 50 per cent to J$3.6 billion, according to the company's 2010 annual results.

Last year, the company in a bet that the ethanol market would continue to pay big returns, added another 60-million gallons of capacity. The two projects represented combined investment of US$42 million, said Parsard.

The finance director said the group still owed about US$12-US$16 million (J$1.03b-J$1.37b) on the plant, but was confident the debt would be serviced according to schedule.

"We are on target to repay our debt," Parsard told Wednesday Business.

"The expansion put some extra debts on the books, but we are on target to repay that within a four-year period."

Lost supply source

Broilers, whose biofuel business is operated under subsidiary JB Ethanol Limited, is the second of three operations in the Jamaican market to have ramped down in recent months. Petrojam Ethanol Limited confirmed in May that it too had lost its supply source in Brazil, Jamaica's main market for hydrous ethanol, which is converted here to fuel grade or dry ethanol, and sold mainly to the United States.

The company, to limit its market risk, produces to order on a month-by-month basis from feedstock that is supplied by the buyer. If the orders fall below contracted volumes, the company negotiates compensation, Parsard said back in May.

He now says that as the summer extends, business is likely to pick up.

"Generally, summer months are the best time for ethanol, because at this time in Brazil the cost of raw material in particular is relatively low compared to other times of the year," he said. "Because that is during the time of their harvest for sugar cane and it also coincides with the time in the United States that demand is very high."

The poultry company is also attempting to telegraph that it is undaunted by the current market directions, saying the long term forecast for the market shows a very positive outlook on ethanol, and, specifically, sugar-based ethanol, for years to come.

"The fundamental benefits of ethanol has not changed, it is environmentally friendly, especially considering what is happening with the oil-leak situation at this time."

"So, we are in for the long haul," he added, "Markets is something that goes up and down. There are times when it is not going to be profitable to do processing, but there are times when it will be profitable, and so we try to make a lot of money when the window allows it."

Ethanol has been very profitable for the Broilers group. The first year produced a $321-million surplus on operations; the second added $443 million; while the third, notwithstanding the erosion of sales, was even more lucrative at J$716 million in operating profit at yearend May 1, 2010.

Within the same period, ethanol's contribution to group operations has risen from 26 to 34 per cent.

The group reported substantially higher profits than a year ago, netting J$1.3 billion compared to J$828 million in 2009, though revenues dropped to J$20 billion from J$24 billion in the relative periods.

The company now says it is trying to negotiate long-term processing contracts that will guarantee income, even in the slow periods, but the focus continues to be on its main destination markets, the US and Europe.