Declining ethanol demand in the US is one of the factors behind the projected decline in ethanol production and related US corn consumption expected by our Oil & Gas and Agribusiness teams respectively in 2014. We believe that ongoing improvements to the fuel efficiency of vehicles, coupled with the growth of alternative fuels, have contributed to this trend and will continue to pose a threat to ethanol producers, particularly with more stringent Corporate Average Fuel Economy (CAFE) standards for the US on the horizon.
Fuel Efficiency A Major Threat
Although the total ethanol used in Finished Motor Gasoline increased again in 2013 to just short of 13bn gallons, according to data from the Energy Information Administration (EIA), the growth rate has slowed considerably over the last decade, rising just 0.2% year-on-year (y-o-y). Other than a decline in 2011, this was the worst y-o-y rate for the 11 years recorded. Unsurprisingly, this coincides with another record year for fuel efficiency in the autos sector as carmakers continue to make improvements before the next set of CAFE standards are implemented in 2016.
| Ethanol Use Plateaus |
|Ethanol Used In Finished Motor Gasoline (bn gallons)|
This is bad news for ethanol producers as ethanol is present in E10 gasoline (a 10% blend of ethanol), one of the most widely used fuels in the country. Therefore, it is not just developments in the ethanol-heavy flex-fuel vehicle segment that will impact the industry, but most gasoline consumption trends too. For the most part, these are not positive trends for ethanol suppliers as the average fuel economy of all cars sold in the year improved again in 2013 to 24.8 miles per gallon (mpg) according to the University of Michigan's Transportation Institute. When the institute's records began in 2007, the average was 20.8mpg. By 2016 the CAFE target is 35.5mpg for combined cars and light trucks.
Although considerable investment has been made by carmakers to improve the fuel efficiency of their traditional gasoline engines, the growth in uptake of alternative fuel vehicles will be one of the quickest ways to ramp up average fuel economy. This poses another threat to ethanol use, although somewhat longer term. Sales volumes of alternative fuelled vehicles are still relatively small compared to the total market, but growth levels are encouraging.
What Are The Alternatives?
Although the take-up rate for vehicles powered by alternative fuels, as reported by HybridCars, is still relatively small at 5% of total light vehicle sales, it is a growing area. Hybrids account for the biggest sales volume, with the most models on offer. In 2013, sales reached 495,685 units, up 14.1%. Hybrid technology still represents one of the easiest moves toward alternative fuel for many consumers, as the gasoline engine can still be used if required representing less of a departure to adjust to.
The next biggest segment in volume terms is diesel, which has traditionally been far less popular in North America than it is in Europe. With that in mind, it is still very much European brands leading the charge, with models already developed to bring to market. Volkswagen has long dominated the segment and continues to do so with a 67% share of all diesel sales in 2013, as just the top two models, the Jetta and Passat, accounted for over 40% of sales.
New models have been arriving, however, as General Motors Company and Chrysler joined the fray in 2013 with diesel versions of the Chevrolet Cruze and Jeep Grand Cherokee respectively, representing an acceptance by the domestic brands of the growing demand for the fuel economy offered by the technology ( see 'German Brands Prepare For Diesel Challenge', February 12 2013). All said, the new models and gradually changing perception of diesel, mean that sales grew 9.6% in 2013.
| Small Volumes But Solid Growth |
|US Sales Of Vehicles By Fuel Type 2013 (CBUs)|
The highest y-o-y growth came from the plug-in electric segment, as sales rose 80.9% to 96,602 units. This is from a low base, however, and has been driven by more new models being made available. That said, the market is still very much dominated by the Chevrolet Volt and Nissan Leaf, which have been boosting the segment through their rivalry since the technology was introduced. However, they have since been joined at the top by the Tesla Model S, which saw its sales grow more than sixfold in 2013.
Downside risks to take-up still centre on range anxiety, the expensive technology and required charging infrastructure, although the technology is continually being developed to overcome these hurdles. Tesla has taken big strides in addressing the latter with its coast to coast network of 'supercharger stations'. There are also thousands more publicly available chargers in communal parking areas, although infrastructure development needs to keep pace with take-up and this is where we could start to see bottlenecks if the segment continues its rapid sales growth.
The smallest volume segment, but perhaps one with the most potential is compressed natural gas (CNG). For 2013, only one model had sales reported, the CNG-powered Honda Civic. Sales grew 50.3% to 2,198 units. However, BMI has previously highlighted the advantages of CNG in the US, not least the country's gas reserves ( see 'Is Gas The Natural Alternative For Vehicles', October 23 2012). The next year should prove a turning point for the segment, as both Ford and GM are launching CNG versions of some of their most popular pick-up trucks.
What Of Flex-Fuel Vehicles?
Flex-Fuel Vehicles (FFVs), which can run on blends of ethanol up to E85 (85% ethanol to 15% gasoline), reportedly constitute around 7% of total light vehicle sales. There is an argument that in order to help ethanol producers, there needs to be an effort to increase sales of FFVs. However, it may not be that simple, as even owning an FFV does not guarantee using the higher ethanol blend, as they are capable of running on regular E10. Indeed, yellow filler caps were introduced on FFVs in 2008 to make consumers aware that these were not traditional gasoline models and could use E85.
Consumer awareness aside, another barrier to take-up is that filling stations for E85 can be scarce. According to the EIA, there were just over 2,600 E85 stations in the US in 2013, compared with around 140,000 gasoline stations. They are also highly localised, with the Midwest accounting for the highest concentration of stations. This makes a nationwide effort to increase uptake even more difficult.
Another argument is that fuel economy from E85 is not as high as gasoline, which means alternative fuels that are more fuel efficient than gasoline have even more of an advantage over E85 if consumers are choosing with this as a criteria. All of which adds up to a long way to go in trying to increase demand for higher ethanol blends.