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 Aventine, EOP Shares Slump on Concern That Biofuel Glut Looms

5/9/06 (Bloomberg) -- Ethanol and biodiesel use is soaring as record oil prices make the so-called biofuels more attractive. Stock investors say supply may be catching up to demand.

Shares of biofuel producers such as Aventine Renewable Energy Holdings Inc. in the U.S., Switzerland's Biopetrol Industries AG and Australian Renewable Fuels Ltd. have plunged in the past few months. Prices for ethanol, made from corn or sugar, and biodiesel, produced from rapeseed or palm oil, have fallen as production expands, even as crude holds near $70 a barrel.

``The biggest fears are that the price of ethanol will go down and that you'll have an early capacity glut in this industry,'' said Tim Flannery, who helps oversee $1.2 billion at Frontpoint Partners LLC in Chicago. His firm has bought and sold shares of Aventine, the fourth-largest ethanol producer in the U.S., and Archer Daniels Midland Co., the biggest in the world, and currently owns both.

Shares of Pekin, Illinois-based Aventine have fallen 34 percent since the company's June 28 initial public offering. Biopetrol, based in Zug, Switzerland, has declined 68 percent since peaking April 10 and Germany's EOP Biodiesel AG has lost 49 percent from its May 8 high. Australian Renewable, a Perth company that makes biodiesel from tallow, has dropped 55 percent since its May 29 peak.

Pacific Ethanol Inc., which has Microsoft Corp. Chairman Bill Gates as its largest shareholder, has plunged 59 percent since its high May 11. The company is building its first plant in Madera, California. Australian Ethanol Ltd., another Perth-based producer, is down 51 percent since April 24.

Rush to Market

Companies rushed to sell shares to the public and build fuel plants as crude soared toward a high of $78.40 in July from less than $20 five years ago. Ethanol prices in the U.S. at their peak July 5 had risen 150 percent in 12 months. More share sales may be coming.

Suedzucker AG, the world's biggest sugar processor, said Sept. 1 it plans to raise more than 200 million euros ($256 million) in an IPO of its ethanol unit. Hawkeye Holdings Inc., a U.S. ethanol producer controlled by buyout firm Thomas H. Lee LP, has filed with regulators to sell shares.

In the U.S., ethanol use is rising as the government enacts policies to help decrease reliance on imported crude oil. Production of corn-based ethanol jumped to 400.3 million gallons in June from 313.4 million a year earlier, according to the Renewable Fuels Association, an industry group. Imports increased more than 12-fold to 50.8 million gallons.

Government Role

A law signed by President George W. Bush in August 2005 requires refiners to almost double ethanol use to 7.5 billion gallons a year by 2012. At the same time, oil refiners have phased out a rival gasoline additive known as MTBE because it fouls groundwater.

There are 101 ethanol refineries in operation in the U.S. with the total capacity to produce 4.8 billion gallons annually. An additional 42 plants and seven expansions are under construction with combined capacity of more than 2.9 billion gallons, according to the association.

In Europe, the 25-nation European Union requires that 5.75 percent of all fuel for trucks and autos must come from renewable sources by 2010.

German biodiesel output will rise to as much as 4 million tons by the end of next year from 50,000 tons in 1998, according to an estimate from the Union for the Promotion of Oil and Protein Plants, a Berlin-based farmer lobby.

`Expansion Mode'

``The biodiesel industry is in an expansion mode, and while the market can ultimately absorb the anticipated supply, there may be temporary periods of oversupply or low prices over the next year or two,'' said Jens Kass, chief executive officer of Oelmuehle Hamburg AG, Germany's biggest producer.

Oelmuehle Hamburg is owned by Archer Daniels, whose shares have fallen 10 percent from their high of the past year, set May 11.

Germany, which according to the farmers' lobby is the world's biggest producer of biodiesel, last month began taxing the fuel, making it less competitive with petroleum-based products. The tax on pure biodiesel, used to power some trucks, tractors and municipal bus fleets, will increase gradually to 45 cents a liter by 2012. The government also mandated that oil companies blend biodiesel into petroleum-based diesel beginning Jan. 1.

``The gold rush is over,'' said Michael Schaefer, an analyst at Equinet Securities AG in Frankfurt. ``Compared to the best of all worlds we have been living in so far, the end of preferential tax treatment is a change for the worse.'' The firm arranged EOP Biodiesel's September 2005 stock sale.

Falling Prices

Ethanol prices have slumped 37 percent from a record on July 5. The U.S. average price of $2.5078 a gallon is still more than double its level from May 2005, when it reached its recent low. Biodiesel prices at the pump in Germany fell to 96.51 cents a liter at the beginning of September, excluding the current 9-cent tax, from 100.89 cents a month earlier.

The decline already is having an effect. Global Ethanol Holdings Ltd., an Australian producer of sugar-based fuel, scrapped its IPO on Aug. 10, a day before shares were to begin trading. The company owns an Iowa-based grain processor and planned to use the sale proceeds to expand in the U.S.

To be sure, shares of companies that produce the raw material for biofuels are holding near their highs, in part because of concern that there won't be enough corn to produce all the ethanol needed. Shares of Elstar Oils SA, a rapeseed processor in Elblag, Poland, have more than doubled this year. PT Astra Agro Lestari, the largest owner of oil-palm plantations in Indonesia, has jumped 95 percent, reaching a record last week. IOI Corp., Malaysia's biggest oil palm plantation company, has gained 43 percent and also is at a record.

Still, there may be too much production capacity to support biofuel stock prices, and companies are continuing to build more.

``The barriers of entry are not very high in this market,'' said Bozena Jankovska, who manages $422 million at Allianz AG's DIT in London. She doesn't own any biofuel stocks.

To contact the reporter on this story: Andreas Hippin in Frankfurt at ahippin@bloomberg.net .

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