Marathon sees ethanol profits tough until 2010

By Timothy Gardner

NEW YORK (Reuters) - Explosive growth in U.S. ethanol capacity should weigh on margins for distilling the renewable fuel until as far out as 2010, a Marathon Oil Corp (MRO.N: Quote, Profile, Research, Stock Buzz) official said on Tuesday.

"You're seeing so many new plants coming on this year that it's going to be difficult for the market to keep up with all this supply," Cliff Cook, Marathon's head of supply, told the Reuters Global Agriculture and Biofuels Summit in a teleconference.

U.S. ethanol capacity has jumped more than 40 percent in a year as the government offers millions of dollars in incentives to make domestic sources of fuel. A new energy law signed by President George W. Bush last month mandates a five-fold increase in ethanol blending to 36 billion gallons a year by 2022.

But the jump in capacity has helped lead to a doubling in corn prices above $5 per bushel, a factor that makes it hard to profit from making ethanol.

"There's a lot of pressure on corn prices right now ... and that does raise the break-even point on these plants," said Cook.

"There's going to be a rough spot for ethanol plants for probably the next 18 to 24 months and then we see the supply and demand getting more in balance and you'll see a more rational market."

Marathon's less-than-rosy outlook does not keep it, the fourth-largest U.S. based integrated oil company, away from dabbling in ethanol production. Marathon will open a joint-venture, 110 million gallon-per-year ethanol plant in Ohio next month, co-owned by The Andersons Inc. It will be the joint venture's second ethanol distillery.

Cook said Ohio-based Marathon is especially suited to take advantage of ethanol because all its terminals are geared to blend the alternative fuel into gasoline. It can also sell the blends at its Speedway SuperAmerica gas stations, so it does not have to go looking for buyers.

He said the ethanol industry outside the Midwest lacks terminals that are ready to blend ethanol and have to invest in unloading, storage and blending operations. "All that takes time, money and engineering," he said.

Not everyone shares Marathon's view on the near future for ethanol profits. Citibank said in a research note on Tuesday that the new energy law is a "major catalyst" for the ethanol industry that "should serve to bring ethanol supply and demand back into balance, thereby strengthening ethanol's pricing fundamentals."

But average ethanol margins have slipped 10 cents to about 30-35 cents a gallon since just after Bush signed the energy law. In coming months they could return to lows seen in October, when many producers were operating in the red, Cook said.

"In the short run, we feel like there will be a glut and there will be ethanol plants that very well may get shut in," he said.

(For summit blog: summitnotebook.reuters.com/)

(Editing by Matthew Lewis)