China, the world's third-largest fuel ethanol producer, will gradually shift away from grains as feedstock for its ethanol facilities but still needs the plants to mop up excess production, a senior government official said on Monday.
Whether the shift is permanent would depend in large part on whether the country has a grain surplus, Xiong Billion, deputy director with the National Development and Reform Commission (NDRC), told Reuters. He denied that the shift would have to take place within five years, as reported by state media.
"What I said was a gradual replacement with non-grains," said Xiong, who heads the industry department at NDRC, the government's top economic planner. "But I personally think grain-based fuel ethanol can help support grain prices in some cases." China has four authorised fuel ethanol plants, which together produce 1.44 million tonnes of ethanol a year from corn and a small amount of wheat.
They consumed about 2 percent of the country's total corn production last year. Skyrocketing food prices pushed China's annual consumer inflation to a 33-month high of 4.4 percent in June, raising concerns among central planners over whether ethanol demand for corn will exceed the country's ability to produce all the grain it needs.
Chinese President Hue Joint said that China would rely on itself to secure grain supplies for an increasingly wealthy population, in a rare comment on the sector last week.
Beijing has stopped approving new grain-based ethanol projects since the end of last year. But it has not approved any non-grain projects either, except for a 200,000 tonne-per-year cassava-based plant in the southern region of Guangxi.
"The government just voiced its concerns that it has to assure grain security as determined by the country's situation of less farmland but more population," Xiong said. Ethanol plants can still serve a valuable function of soaking up surplus corn production, he said, thus supporting farmers' income.
"What will you do with the surplus corn, if it doesn't go into the processing industry?" he asked. "Going back to the original solution of offering subsidies to export corn is not the right direction." Xiong expected the country could produce 150 million to 160 million tonnes of corn this year, higher than other state-backed analysts' expectations of about 149 million tonnes. China produced 144 million tonnes of corn last year. Its feed industry consumes less than 100 million tonnes, Xiong estimated.
"When there is less grain supply, ethanol producers can shift to non-grain feedstock's and their facilities have that flexibility," he said. Two of the existing fuel ethanol plants are located in major corn-producing areas and their use of corn would help to keep prices from sliding too much in case of a bumper harvest.
Neither China's policy or its research and planning apparatus is ready to fully shift to non-grain feedstocks for ethanol, industry officials said. "Right now, it seems Beijing is in an awkward situation," said an ethanol trader with an international trading house.
"It encourages plants to shift to non-grains feedstock's, but has not offered any incentives to secure the raw materials." Tianguan Group, located in the country's largest wheat province of Henna, has shifted part of its fuel ethanol facilities to use cassava and sweet potatoes.
"Supplies of the raw materials are still a problem," said Du Fengguang, Tianguan's chief engineer. Tianguan has to import a majority of its cassava supplies, while local farmers were unwilling to grow sweet potatoes since Beijing does not subsidise the crop as it does wheat. "The shift has to take time and has to be a gradual process," Du said.