The biofuel industry is reaching a major inflection point with the continued consolidation in the ethanol sector and petroleum refiners and biofuel producers alike leading a boom in new renewable diesel projects. Ocean Park, a leading mergers and acquisitions (M&A) adviser in the biofuels industry, says the activity in the ethanol sector was the most intense in five years, with four of the five top ethanol producers involved in a transaction in 2021. Meanwhile, at least 12 renewable diesel plants are either under construction, expanding, or have been completed, setting up a battle for feedstock supplies. Below are more details from the annual report, titled “Behind the Hot Year for Biofuels M&A: 2021 Review and Outlook.” I encourage everyone to take a look at the report in its full entirety HERE.
Ocean Park says total of 7 M&A transactions closed in 2021, the most since 2013 and breaking a two-year streak where no large-scale operating plants traded. These transactions involved 12 plants with 1.2 billion gallons per year (BGPY) of capacity, representing 7% of total U.S. ethanol capacity. Of those, seven were large-scale operating plants, comprising 78% of all the capacity sold.
Poet LLC’s purchase of six ethanol plants from Flint Hills in the Midwest and two ethanol terminals in the South and Southeast. The acquisition, which gives POET +800 million gallons per year (MGPY) of additional capacity, was the single-largest ethanol transaction on record. POET was already the largest U.S. ethanol producer. With Flint Hills’ ethanol business, previously the 5th largest producer, POET now controls 17% of the industry capacity.
Ocean Park expects ethanol margins will remain volatile, the result of overproduction since Q4 2021 that has swollen inventories. The firm predicts continued shifting of assets to new ownership that is willing to invest in transformation of the traditional ethanol business model. Examples of required transformation include decarbonization and diversification of product streams.
Biodiesel & Renewable Diesel
In contrast with ethanol, Ocean Park says biodiesel and renewable diesel M&A remained sluggish in 2021. Ocean Park blames the lack of merger activity on the rapid growth of renewable diesel, which is taking market share away from biodiesel and set off a battle for feedstock. In 2021, biodiesel plants lost money because renewable diesel plants coming online boosted feedstock prices and made biodiesel production unprofitable, and unclear policy direction created more risk. U.S. renewable diesel capacity in 2021 more than tripled to 1.3 BGPY while biodiesel production declined by -8% to 1.7 billion gallons. Meanwhile, 12 companies announced or began construction of 2 BGPY of new renewable diesel capacity in 2021, many of which are expected to start up in 2022.
Ocean Park warns more biodiesel plants could idle or shut down, with liquidations or distressed sales becoming common in 2022. Perhaps the greatest near-term pressure will be on independent, non-feedstock aligned biodiesel producers in a feedstock short environment dominated by the largest energy and agricultural companies.
The entry of integrated petroleum firms into renewable diesel has opened a new chapter in the renewable fuel story, according to Ocean Park. The largest soy oil producers are also the largest biodiesel producers, many of which struck deals with major oil companies to supply them with feedstock. Ocean Park notes that in some cases, it is more profitable for veg oil producers to sell their oil to renewable diesel producers than to produce biodiesel themselves.
Ocean Park notes that the scarcity of feedstock has made its sourcing and control as important as owning processing plants. Longer-term, factors that could potentially limit renewable diesel growth and investment include relatively static mandated volumes, limited feedstock, and the size of the California and Oregon mandated markets.