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When buying ethanol, the most important information considered is the ethanol type and price. But the ethanol market is highly volatile, with product prices depending on much more than just the demand from the different food and industrial sectors; previous political and economic developments, as well as current trends can affect pricing in ways that are more or less predictable by suppliers. Let’s dive into the most impactful factors for ethanol pricing and what developments to look out for in the next few months.
There are several factors affecting the pricing of ethanol, many of them being similar to other products’ supply chains and having strong interdependencies. The most important elements to take into account for the ethanol industry are…
Production costs of raw materials
Ethanol is produced from various feedstocks, such as corn, sugarcane, wheat, and grain. Their availability and price of production varies per country, which significantly impacts ethanol prices. The production of feedstocks can also be influenced by unusual weather fluctuations or climate disasters such as floods, heat waves, and droughts. This can lead to reduced crop yields and therefore diminish the supply of ethanol.
Supply and demand dynamics
As with any other commodity, supply and demand play a crucial role in the pricing of ethanol. On the one hand, consumer preferences in ethanol types and buyer willingness shape suppliers’ focus and scope of operations. On the other hand, the production capacity, competition, and global ethanol trade can affect the ways suppliers source their ethanol. Another supply and demand dynamic comes from ethanol producers since many of the same do not only produce ethanol, but also other products that can be made out of raw materials, such as sugar and starches. If the sugar or starch market becomes more lucrative, producers might consider producing less ethanol and focus their efforts on other materials, meaning less supply of alcohol.
Developments in the shipping industry
Same as the ethanol market, the shipping industry is influenced by current economic development and supply and demand of freight. As a product that is highly dependent on being shipped internationally, ethanol pricing takes a hard hit if the shipping capacity is low or transportation costs rise.
The availability of ethanol storage and inventory levels can influence its price. Adequate storage capacity allows for strategic inventory management and helps stabilize prices during periods of high demand or supply disruptions, while insufficient storage capacity leads to price volatility.
Ethanol production involves energy-intensive processes like fermentation and distillation. Higher energy prices can directly impact the cost of these processes, as energy is required for powering various equipment. When energy prices rise, it can lead to higher production costs, which can be passed on to consumers in the form of increased ethanol prices.
The price and supply/demand of oil and gas as fuel is a big factor influencing ethanol pricing. Next to using ethanol in food and non-food industries, the majority of ethanol is used as a fuel. Although not all ethanol is used as such, its significant role as a fuel additive means a high price dependency on fuel trade.
In order to get ahead of the competition, commodity traders may try to anticipate the market developments and impact short-term price fluctuations by buying or selling contract strategically.
Government policies and regulations
Government policies and regulations, particularly those related to biofuels, have a significant influence on ethanol prices. Subsidies, tax incentives, mandates for blending ethanol with gasoline, and trade policies can all impact the supply and demand dynamics of industrial ethanol and, therefore, its price.
State of world economy
One of the most important factors for ethanol pricing are economic conditions. Inflation rates, interest rates, and overall market sentiment can directly influence ethanol prices since they affect a consumers’ purchasing power and investment decisions.
After the loosening of COVID-19 regulations worldwide, the world economy has been seeing growing inflation rates and high investment uncertainty, meaning a decrease in consumers’ purchasing power and, therefore, demand. The Russian invasion of Ukraine contributed to that uncertainty with prices of wheat - a commonly used raw material for ethanol in Europe - skyrocketing. At the same time, the market has mostly recovered from the supply chain issues caused by the pandemic, meaning an overshoot of supply that results in dropping ethanol prices.
One sector in particular has been having a big impact on ethanol prices: the shipping industry. After a disruption in container distribution during the pandemic and the resulting congestion of shipping vessels, shipping companies have stocked up on vessels in preparation for a market boom after the pandemic. However, the current low demand results in crashing fright prices and therefore falling ethanol prices. In addition to low freight costs, other factors impacting the price of ethanol, e.g. raw material costs, also decrease as a result of diminished demand.
Looking at the months ahead, freight prices and demand are expected to stay low, which also means low ethanol prices. While this is an opportunity for consumers to buy quality alcohol at a lower price, it is expected that the market will wait for further price drops before securing their shipments of bulk alcohol. Ethanol and bulk alcohol suppliers require a high skill level when it comes to anticipating the market and looking for new opportunities to deliver ethanol, for example in niche industries or lower, more frequent quantities.
The ethanol distribution market and its prices are, as many other commodities, highly impacted by the current economic developments and the resulting low freight and raw material costs. These considerations require instant response and high flexibility from suppliers all over the world. At Nedstar, we see this situation as an opportunity to look even closer at our customers’ needs and continue our focus on supplying only the best quality alcohol.
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