CHINA'S demand for ethanol is substantial, and it could look to the U.S. to supply its fuel needs as well as improved environmental oxygenates, according to members of a recent U.S. Department of Agriculture-sponsored trade mission to China.
USDA officials, including undersecretary for farm and foreign agricultural services Michael Scuse, as well as representatives from nine state departments of agriculture, 28 U.S. agribusinesses and the ethanol industry, visited northeast China. They met with Chinese officials and businesses to help build relationships, open doors and establish contacts to further the dialogue for eventual ethanol trade.
Currently, China produces approximately 600-700 million gal. of ethanol per year, which amounts to less than 1% of the current fuel supply, explained Kelly Davis, director of regulatory affairs at the Renewable Fuels Assn. Gasoline demand is estimated at 30 billion gal. and is expected to rise as urbanization continues.
Corn, wheat and cassava are the main feedstocks used in ethanol production in China. Use of corn cobs and stover is also picking up as second-generation ethanol begins to develop. Questions about U.S. progress on cellulosic ethanol came up at nearly every meeting the members of the trade mission attended.
Davis said the Chinese officials stressed the need for technology exchange to move forward on increasing market share. They said the biggest obstacle to ethanol production in China is the availability of feedstocks.
"Nonetheless, they have a target to produce 3 billion gal. of ethanol by 2020," Davis said.
Jim Miller, former USDA undersecretary and now vice president and chief economist at Growth Energy, said he believes there are greater possibilities to export ethanol to China as it tries to increase ethanol usage, but it's going to require persistence in reducing a number of trade barriers.
He explained that China has policies in place that prohibit fuel ethanol imports. Chinese officials said they're willing to relax the policies somewhat if they can find a reliable supplier of ethanol.
Miller said China fears that Brazil won't be a reliable supplier because of the seasonality of sugar production and the decision each year between whether to use sugarcane for food or fuel.
Ethanol is blended in only six Chinese provinces, and production is restricted to five state-owned plants with strict limits on production volumes. Some of these plants don't plan to export south, which makes it cost competitive for the U.S. to export ethanol there versus shipping domestic ethanol from far-away provinces, Miller added.
"The Chinese are very aware of the growth path they're on for the next five to six years, with rising fuel consumption and gasoline demand increasing at a rapid rate. We feel five to six years is feasible for us to establish a strong commercial trading relationship for ethanol," Miller said, adding that China already has established itself as a significant importer of dried distillers grains (DDGs).
National Farmers Union president Roger Johnson said exporting DDGs to China will likely continue to be "difficult and sporadic until China modifies its biotech approval process so it is comparable to that of the rest of the world."
Davis said she and Miller stayed an extra day to have discussions regarding quarantine, registration and audit processes that have held up cargoes of DDGs. A Chinese audit team plans to visit the U.S. this summer.
DDGs have gained popularity in world markets as an animal feed co-product. In 2013, the U.S. exported a record 9.7 million metric tons to more than 45 countries (Figure). China was the leading destination, followed by Mexico and then Canada.
Johnson added that China is recognizing that it has some very sizeable environmental issues to address and expects that, as time goes on, the Chinese government will want environmentally cleaner fuel alternatives.
China has chosen methanol and MTBE as the oxygenate component to counter air quality issues. Methanol has captured 8% of the market through MTBE and low-level methanol blending.
Local governments are also under increased pressure from citizens to improve air quality.
Recently, China delegated investment approval to local governments for a range of projects, including ethanol plants.
Current provincial regulations allow the blending and use of ethanol only from designated domestic producers. However, these restrictions could potentially be removed at a provincial level, making it possible to find a location that is willing to change policy or start a new program that allows imports, Davis said.
The U.S. delegation met with the National Energy Administration, which is responsible for China's overall energy strategy.
"They recognize the need to move from coal and are currently investing in nuclear, hydro, natural gas, wind and solar" energy, Davis said.
The trade team also met with many other influential players in the discussion of China's energy policies, including PetroChina and Sinopec, which historically have resisted growth of the biofuel industry due to an MTBE overcapacity.
"These companies own the refinery capacity and distribution systems in China, giving them effective control over imports. We delivered an informational handout ... about the U.S. ethanol industry, including our capabilities as a supplier, environmental and human health benefits and low-cost octane," Davis said.